(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 advisors by March 30, 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. Advisors that register must publicly disclose assets and identify information about their businesses.
"Most of them will do almost anything to avoid having to register," says 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, Ill., 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.
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 advisors 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, says Lybecker, who's based in Washington, D.C.. "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, says 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.