As an alternative, the family office may seek to terminate the investment vehicle and distribute its holdings in kind. But this alternative may be complicated by limitations on the ability to transfer the collective investment vehicle's holdings, as would be the case with a fund investment or a direct investment in private placement securities.
A third option would be to liquidate the collective's holdings, but this could raise ethical issues. Family offices may have fiduciary obligations to their clients. If non-family clients suffer financial losses due to this type of restructuring they could argue the family office breached its fiduciary duties to act in the best interests of investors.
A family office that provides investment advice to a charitable organization that receives non-family funding is also in an uncomfortable position. It could stop providing investment advice to the charitable organization, but that may be counter to the family's mission. The entity could also stop accepting non-family donations, but this would exclude community involvement in the charitable enterprise.
While it is often easy to identify the changes that need to be made for a family office to qualify for regulatory exemption, devising a plan that avoids these types of unintended consequences is a greater challenge.
In conclusion, family offices that do not take the time to understand how the Family Office Rule affects them do so at their own peril. It is not safe to assume that your family office remains exempt from SEC regulation simply because it was exempt under the Private Adviser Exemption. Instead, you should undertake an analysis to determine whether you qualify under the new rule and, if necessary, devise a plan to restructure.
David S. Guin and Mark J. Tice are a partner and associate, respectively, at the law firm of Withers Bergman.