(Dow Jones) Some ultra-rich families worry that proposed financial reforms could oblige them to close their single-family offices due to high compliance costs and diminished privacy, according to their advisors.
Bills now in Congress conflict on the matter of regulation for family offices. The reform package that passed the House late last year calls for family offices--non-commercial investment- and wealth-management outfits that typically serve the descendents and charities of a single individual--to register as investment advisors. But a proposal by Sen. Chris Dodd (D., Conn.) before the Senate makes no mention of them.
"It's not clear why the House is so intent on regulating family offices," said Christopher Uzpen, a family-office specialist and a partner of the law firm Withers LLP. "It may be to prevent them from being used as a loophole" for unregulated commercial activity. Multifamily offices, commercial entities that advise multiple wealthy families, generally come in for regulation, either as investment advisers or trust companies.
The Senate proposal's silence on family offices is widely interpreted as a willingness to let family offices conduct business as usual, a stance that harkens back decades to their specific exemption from regulation under the Investment Advisers Act of 1940.
"The sense from the Senate [proposal] is that there are much bigger issues to look at, like Goldman," said Uzpen, referring to proposed regulation of derivatives and the government's recent civil fraud charges against Goldman Sachs Group Inc. for allegedly defrauding investors in an investment vehicle linked to subprime residential mortgage-backed securities.
Because reform of family offices--which number a few thousand at most and typically cater to families with hundreds of millions of dollars--isn't viewed as urgent, their treatment under the law has the potential to remain in limbo, for a while anyway.
"At some point, they're going to have to reach a resolution," but it could go either way in the short run, said Uzpen. And for that matter legislators could reset the clock by "kicking it to the [Securities and Exchange Commission] for study," he added.
Faced with uncertainty and delay, family offices, many of them still hard pressed and demoralized by the market crisis, are "trying to figure out if it makes sense to stay in business," said Natasha Pearl of Aston Pearl, a New York-based firm that provides non-financial advice to ultra-wealthy families.
And though the added costs in time and money of meeting compliance requirements--a matter, perhaps, of hiring additional staff in addition to introducing new procedures and technologies--is sobering enough to some wealthy families, the notion of losing privacy is in some cases even more unsettling.
"It defeats the purpose of having a single-family office," said Pearl, adding that some families may turn to commercial providers as a result. "It's analogous to [wealthy philanthropists] moving to donor-advised funds in this environment because they don't want the interference that goes with having a foundation."