(Bloomberg News) Family offices in the U.S. are trying to avoid regulation that would force them to reveal financial details about their privacy-conscious clients.

Firms that primarily manage the wealth of a single family must register as investment advisers by March 30, 2012, unless they qualify for a new exemption from the U.S. Securities and Exchange Commission. Registering may entail initial fees of $50,000, as well as annual compliance costs of $50,000 to $100,000 or more, according to John Duncan, principal of Duncan Associates in Chicago, which represents family offices and private trust companies. Advisers that register must publicly disclose assets and identifying information about their businesses.

"Most of them will do almost anything to avoid having to register," said Martin Lybecker, a partner with Perkins Coie LLP who represents the Private Investor Coalition Inc., a lobbying group of family offices. "It's viewed as incredibly expensive and of no value to the office."

There are about 3,000 single-family offices in North America managing $1.2 trillion, according to estimates from Family Wealth Alliance LLC, a research and consulting firm in Wheaton, Illinois, which studies the industry. About 150 multifamily offices oversee an additional $450 billion. Both types of firms generally provide investment management and financial planning for their clients.

15-Client Rule

The registration requirement stems from the Dodd-Frank Act, a sweeping overhaul of Wall Street regulation that was passed in July 2010 with the aim of minimizing the chances of another financial crisis. The law removed a registration exemption for offices with fewer than 15 clients and instructed the SEC to come up with a definition of family offices that should be excluded from regulation as investment advisers. Hedge funds and private-equity funds that had formerly relied on the 15-client exclusion, and that manage $150 million or more, must generally register by the March deadline.

The agency approved a rule in June defining offices that are exempt as meeting three general conditions: They are owned and controlled by family members, they don't advertise to the public as advisers and they provide investment advice only to family clients who are generally linked by a common ancestor.

For single-family offices, complying with the definition may mean getting rid of nonfamily investors.

'Dutch Uncle'

"It may be the 'Dutch uncle,' someone who's close to the family but not technically part of the family," who has to be removed from the office, said Lybecker, who's based in Washington. "If he's dating grandma, it may be pretty hard to tell him he has to leave."

One office is considering options for ejecting nonfamily members from a collective fund that invests in private equity, said David Guin, a partner with Withers Bergman LLP in New York. The family, which he declined to name citing privacy, may buy out the investors at a premium or liquidate the fund.

Another office that had been managing a 529 college-savings account on behalf of the family's head of security told the employee he had to transfer management of the account to outside the office, according to Mark Selinger, a partner with McDermott Will & Emery in New York.

Multifamily offices that had met the previous 15-client exemption generally must either register or break up their businesses, said Eileen Foley, managing director of Bank of New York Mellon Corp.'s family offices services group.

Duties Under Registration

Advisers that register with the SEC must meet certain requirements on bookkeeping and on disclosures to clients about fees and conflicts of interest, and must act as fiduciaries, or in the best interests of the investors they serve.

The rule may drive more families to fire their in-house money managers and move investment decisions to an outside adviser, or a so-called outsourced chief investment officer, said Mindy Rosenthal, executive director of the Institute for Private Investors. The percentage of family offices that outsource their chief investment officer role has about doubled since 2005, to almost half, according to New York-based IPI.

"If your family office only performs back-office and concierge services then it's not an investment adviser," said Michele Ilene Ruiz, a partner with Sidley Austin LLP in Chicago.

One Brazilian family that's a client of Guin started a family office in the U.S. to house its analysis and recommendations on U.S. private-equity investments. The family doesn't want to register out of concern its security will be compromised by publicly declaring its assets, so it's moving the analysis and recommendation functions out of the U.S. office, which will now perform information gathering and provide no investment advice.

Noncompliance Option

Some offices may choose not to register even though they don't qualify for the exemption, said Duncan, of Duncan Associates.

"That's one of the big options out there: The noncompliance option," he said. "There's a lot of lack of knowledge out there or thinking that they can just keep their heads in the sand."

Family offices that manage small amounts of money for nonfamily members, such as $50,000 for a housekeeper or other domestic employee, in trusts that can't easily be dismantled, may decide not to register even though the relationship violates the SEC's definition, said Nathan Greene, a partner with Shearman & Sterling LLP in New York.

"The family office community is generally taking the view that if you've got some money in a particular trust that you can't unwind, then it's inappropriate to register the family office simply on that basis," Greene said.

Enforcement Penalties

When unregistered advisers are caught by the SEC they're generally told to register and don't have to pay a fine for the first offense, said Brian Hamburger, an attorney based in Englewood, New Jersey, and the founder of MarketCounsel, which consults with advisers on compliance issues.

"Our rules are clear on what constitutes a family office and we will enforce the law as appropriate," Kevin Callahan, an SEC spokesman in Washington, said in an e-mail. He declined to comment further on enforcement actions the agency might take against unregistered advisers.

"We are troubled by comment letters we receive by counsel to some family offices that appear to acknowledge that their clients were operating as unregistered investment advisers, although they were not eligible for the private adviser exemption and had not obtained an exemptive order from us," the SEC said in its final rule.

For family office advisers overseen by state securities regulators, enforcement varies by state, Hamburger said.

State Fines

"If you're dealing with a state that's not going out and conducting regular reviews or examinations, then they're probably not going to detect it," he said.

States generally oversee investment advisers that manage less than $25 million. Dodd-Frank raised that threshold and firms that manage from $25 million to $100 million must generally move from SEC to state registration in 2012.

In Pennsylvania, a typical penalty is $25,000 for an individual who has failed to register as a representative of an adviser firm, plus the cost of the investigation, said Joseph Minisi, senior counsel for the division of enforcement, litigation and compliance for the Pennsylvania Securities Commission.

Instances of unregistered firms are rarer than those of unregistered individuals, and generally come to the state's attention when fraud or another securities-law violation is involved, Minisi said.

SEC Resources

The average registered investment adviser firm is reviewed by the SEC less than once every 11 years given the current rate of examinations, according to a report released in January by the agency on improving adviser oversight. The rule is one of more than 90 the SEC was charged with writing as part of the Dodd-Frank law.

"If the SEC does not receive additional resources, many of the issues highlighted by the financial crisis and which the Dodd-Frank Act seeks to fix will not be adequately addressed," said SEC Chairman Mary Schapiro in testimony to the Senate Committee on Banking, Housing and Urban Affairs in July, according to prepared remarks.

Family offices may apply for an exemptive order if they don't meet all points of the SEC's definition and feel they should still be exempt, said Sylvie Durham, an attorney in New York for Greenberg Traurig LLP. It may cost families about $200,000 in legal fees to apply for an exemptive order, according to the SEC. Previously granted orders will be honored, the agency said in its final rule.

Most family offices would rather comply rather than risk an enforcement action, said Selinger, of McDermott Will & Emery.

"Family offices tend to be very averse to negative publicity," he said. "The SEC periodically finds a test case to say, 'Hey, we're serious.'"