For years, successful entrepreneurs were able to manage their family’s money, plus a smattering of friends, with minimal regulation through a carve out from adviser registration that essentially exempted most “family offices” from registration. Dodd-Frank changed all of that, but not all family offices have gotten on-board. Family office attorneys, who are adept at managing deals, negotiating purchase agreements and hiring fine-art appraisers, have never had a need to understand the ins-and-outs of investment adviser regulation, and they may have missed the news altogether or misunderstood it entirely.
A family office is a private entity that manages investments for a single family, wholly run and owned by that family. What’s changed – as with the world at large – is how one defines a “family.”
No longer can the gregarious billionaire manage money for his father and also his mother-in-law (or hire people to work for the family office who will look after a hoard of idle and dissolute cousins) without the SEC breathing down his neck. No longer can he help out a beloved nanny or childhood friend for free, out of the goodness of his heart.
One of the problems is that family offices are often complexly structured family businesses, whose interlocking entities stumble into “inadvertent investment company” territory, and before you know it, employees who one day were running a real estate empire (for example) are suddenly supervised persons of a registered investment adviser (or an unregistered investment adviser that should have been registered a few years ago).
So to make things a little simpler: the definition now it includes only descendants from a common ancestor, no more than ten generations removed, and the spouses of that common ancestor. This means that if you’re a billionaire running a family office with your wife, the two of you will have to choose between your parents and her parents, or face intrusive SEC scrutiny. Choosing between an angry mother-in-law and a nosy regulator is a tough predicament for any carefree billionaire.
If you decide to register, think about those employees – for years, they’ve been running your business, blissfully unaware of even the concept of a compliance manual. Now you’ll have to hire a CCO, or appoint one of your existing employees as CCO, to face the wrath of all the other employees, whom the new CCO will now have to but to kick around a bit. Indeed, any new CCO to a family office that’s suddenly required to register, or is registering late, will need your help and support to convince the other employees that, yes, they now need to preclear their trades political contributions, or all hell will break loose. As the SEC wrote when it first thought of the idea, “`T`he compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.” You can’t appoint the receptionist, and then tell him to shut up.
Indeed, a failure to take the change in law seriously can have serious repercussions for all involved.
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