Dec 21st 2010
A proposed ruling from the U.S. Securities and Exchange Commission exempts family offices from any requirement to register with the SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dodd-Frank eliminated the small adviser exemption from the Advisers Act of 1940, claimed by family offices in the past, so that the SEC could regulate hedge funds and other private fund advisers. The American Institute of Certified Public Accountants (AICPA) has recommended several changes to the proposed ruling in a comment letter to the SEC.
It was not the intention of Dodd-Frank to regulate family offices and the law charged the SEC to propose a ruling whereby family offices could continue to be exempt from regulations and public filings. The proposed ruling is one of a long list that the SEC must write to implement the Dodd-Frank legislation.
Family offices are established by wealthy families to manage their wealth and provide other services to family members, including tax and estate services, and potentially, audits of charitable organizations that are considered family members. Oprah Winfrey, Bill Gates, and Mayor Michael Bloomberg of New York, for example, have opted to manage their financial affairs as founders of family offices, according to The New York Times.
The proposed SEC ruling defines the function of a family office, specifies the relationships that qualify for family membership, defines family clients, and provides guidelines for employee participation. Under the proposed rule a family office is any firm that:
- Provides investment advice only to family members, as defined by the rule; certain key employees; charities and trusts established by family members; and entities wholly owned and controlled by family members
- Is wholly owned and controlled by family members
- Does not hold itself out to the public as an investment adviser
The AICPA recommends expanding the definition of family members to include grandparents of the founders and widows and widowers of family members.
The AICPA also supports the proposed ruling’s recommendation that former family members (i.e., former spouses and spousal equivalents, stepchildren, etc.) be allowed to retain their investments made through the family office, and urges the SEC to reconsider the proposed restriction on making any new investments through the family office.
Within its analysis of the definition of family clients and the structure of family offices, the AICPA argues that the language of the ownership requirement, wholly owned, does not reflect the structure of existing family offices and is inconsistent with the way many traditional single family offices are structured, which is to align the interests of the family with those of their key employees.
While “we support the inclusion of these entities as family clients," the AICPA letter states, the Dodd-Frank Act requires that in defining family office, "the commission recognize the range of organizational, management, and employment structures and arrangements employed by family offices.”
In light of this charge, the AICPA recommends that the Proposed Rule for family offices be modified to read: “(1) majority ownership by family members, directly or indirectly or (2) majority control by family members, directly or indirectly.” Majority is defined as more than 50 percent.
The AICPA also recommended that key employees be allowed to hold a non-controlling interest in the family office entity “as an incentive for employment or to provide positive results.”
The AICPA letter asks for clarification of transition periods and requests that the rule provide relief for, and procedures to correct, inadvertent violations.
A final ruling is expected in the spring of 2011.