Multifamily offices that had met the previous 15-client exemption generally must either register or break up their businesses, says Eileen Foley, managing director of Bank of New York Mellon Corp.'s family offices services group.
Duties Under Registration
Advisors 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 advisor, or a so-called outsourced chief investment officer, says 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 advisor," says 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, says Duncan, of Duncan Associates.
"That's one of the big options out there: the noncompliance option," he says. "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, says 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 says.