Family Office Exemption Narrowly Defined by SEC - the Family ...

Family Office Exemption
Narrowly Defined by S.E.C
Thomas J. Handler, Chair of Advanced Planning and
Family Office Practice Group, Handler Thayer, LLP

Prelude
familyofficeassociation.com
FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
The following article on the new family office
exemption to SEC registration was authored by
Thomas J. Handler for the Family Office Association
based in Greenwich, Connecticut to follow up a
presentation to its members on the same topic. We
hope that you find it of interest.
The firm has previously published two related article
on the same subject, one authored by Steve Thayer
(SEC Adopts Final Rules for RIA Registration) and
another authored by Mr. Handler published in the
Family Wealth Report (The Family Office Exception:
Greater Clarity Could Force Greater Compliance).
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Friday
July 15, 2011
Overview
Following the stock market crash of 1929 and
the Great Depression which followed, Franklin D.
Roosevelt’s 1932 democratic campaign platform
called for regulation of the securities exchanges “to
the full extent of federal power.” The current fear
shared by most Single Family Offices (“SFOs”) that
are not registered with the United States Securities
and Exchange Commission (“SEC”) is that they may
soon come to appreciate the full scope and breadth
of such power exercised in the almost unfettered
discretion of one of the most powerful government
agencies in existence. Although the recently released
final regulations, which delineate the limits of the
new family office exemption, reflect a more moderate
position than initially set forth in the 2010 proposed
regulations, the new regulations serve to significantly
limit the number of SFOs which will be exempt from
registration with the SEC. Perhaps as many as onehalf
of all SFOs not currently registered with the SEC
may now be required to do so on or before March 30,
2012.
familyofficeassociation.com
FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
SEC Release IA-3220 was issued on June 22, 2011,
adopting rule 202(a)(11)(G)-1 (the “Final Rule”) under
the Investment Advisers Act of 1940 pursuant to
the dictates of the Dodd-Frank Act. The Final Rule
exempts “Family Offices” from regulation under
the Advisers Act. The long-standing Private Advisor
Exemption which included SFOs that managed assets
for up to 15 family members was repealed effective
July 21, 2011. Family offices which fail to qualify
for the new Family Office exemption or another
exemption must register with the SEC as a registered
Investment Adviser under the Advisers Act.
Consequently, SFOs may be well advised to retain
counsel immediately in order to assess their level of
compliance with the new Final Rule, provide time to
register, seek an exemption order, or restructure to
avoid SEC registration. The greatly increased clarity
and specificity of the new Final Rule will exclude a
significant number of previously exempt SFOs and is
likely to result in greater scrutiny and concomitant
greater compliance.
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The New Family Office Exemption
The Final Rule defines a Family Office as a company
that: a) has no clients other than Family Clients (as
defined under the Final Rule); b) is wholly owned and
exclusively controlled by family members or family
entities; and c) does not hold itself out to the public
as an investment advisor. In reaction to numerous
public comments submitted in response to the
proposed rule, the SEC expanded some key definitions
while adhering to most of their initial positions. In this
regard, the legislation is generally considered overly
restrictive and unnecessarily heavy handed, however,
the SEC generously grandfathered in a limited group
of SFOs that previously received exemption orders or
meet a narrow set of standards.
Generally, the determination of what constitutes a
“family” has followed the SEC’s previous policies.
In the Final Rule, the SEC has broadened some
definitions (for example, the definition of “spouses”
is broadened to include a “spousal equivalent”
which means a co-habitant occupying a relationship
generally equivalent to that of a spouse, which allows
same-sex couples to qualify under the Final Rule)
and narrows others (for example, the definition of
“family member” is limited by the introduction of
a common ancestor concept and the imposition
of a “10-generation” rule). In the Final Rule, the
SEC provides some flexibility by allowing families
to designate a new, or replace an old, founding
ancestor as the SFO evolves, in contrast to the prior
common ancestor limitation from the proposed
rule. Furthermore, while the proposed rule required
the Family Office to be owned and controlled by
individual family members, the Final Rule permits
certain entities such as trusts to own the Family
Office.
familyofficeassociation.com
FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
With respect to charitable entities, the proposed rule
was very restrictive in the type of entities to which an
SFO could provide investment services. Commonly
used advanced planning structures such as charitable
lead annuity trusts and charitable remainder trusts
would have been precluded. Further, management
of investments held by family foundations which
received contributions from non-family donors was
precluded. The Final Rule broadly construes the
type of charitable entities and non-profit entities for
which investment advisory services can be provided.
Moreover any SFO that would constitute an SFO
under the Final Rule, but for it having one or more
non-profit organizations that have received funding
from sources other than Family Clients, should be
deemed a Family Office until December 31, 2013. At
such time, the SFO will either have to register with
the SEC, restructure its activities so that it falls within
the new, limited exemption or spend all the charitable
funds contributed by non-family sources.
In addition the Final Rule greatly broadens the
types of eligible trusts and estates to include trusts
in which the beneficiaries are family members and
public charities. The Final Rule also extends the
amount of time that a person who becomes a “Family
Client” due to the death of a Family Member or KEY
employee or due to an involuntary transfer may be
advised by the Family Office from four months to one
year.
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Areas of Concern
Private families and their advisors share some
significant concerns despite the improvements made
to the Final Rule following the comment period.
Many of these concerns stem from the relatively
unrestrained power of the SEC coupled with onerous
on-going requirements for Registered Investment
Advisors. These requirements include submission and
updating of filing obligations for the RIA entity (Form
ADV) and for each investment advisor (Form U-4).
These filings are maintained in the investment advisor
registration depository managed by the Financial
Industry Regulatory Authority (“FINRA”).
The licensing period is annual and carries with it
record keeping, custody disclosures, audits and
possible fiduciary duty requirements. Although a
statutory fiduciary duty standard is opposed by the
insurance industry, the Financial Planning Coalition
(the “FPC”) is advocating the imposition of a fiduciaryduty
regulation by the SEC. The FPC, composed of
the Financial Planning Association, the Certified
Financial Planner Board of Standards and the National
Association of Personal Financial Advisors, is pushing
the SEC to enact a single standard of care for all retail
advisors pursuant to authority granted by the Dodd-
Frank legislation.
familyofficeassociation.com
FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
These requirements in turn, highlight additional
concerns relating to the invasion of privacy and
complete lack of confidentiality. This angst is
exacerbated by the SEC’s policy of complete
disclosure in press releases, websites, etc., in addition
to the Dodd-Frank directive that the SEC share its
information with other government agencies. Of
course, compliance and audits cost money and carry
risks which are particularly unwelcome by SFOs facing
escalating costs, decreasing margins and diminishing
investment returns. Families see precious little upside
in registration which brings with it related audits,
risk of prosecution, possible adverse publicity and
increased costs. In addition, private families are also
concerned about potential registration and filing
obligations under other SEC rules. The over-arching
concern is that any regulation by a heavy-handed,
extremely powerful government agency is completely
unwelcome.
Moreover, additional technical issues remain. For
example, the types of employees and trusts that
fall within the definition of Family Client are quite
limited. Similarly, recipients of family investment
assets through certain involuntary transfers must
be jettisoned by Family Offices within one year of
receiving such assets. Families are struggling with the
justification for these rules and their propriety.
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Strategies for Dealing With the Final Rule
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FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
Every SFO should review its structure and carefully
assess the current state of its compliance.
SFOs that clearly do not need to register should
carefully monitor their ongoing status in order to
maintain the exemption and avoid registration. Of
course, these SFOs may be required to register with
various state securities agencies or with the SEC for
other reasons.
If a compliance assessment is inconclusive, SFOs are
well advised to promptly seek an exemption order.
For SFOs that face registration, consider the following:
a) registration after creating a captive investment
firm or spinning off an investment subsidiary in
order to limit SEC scrutiny to that enterprise alone;
b) outsourcing the investment function to a multifamily
office, institutional trust company, or other
independent RIA; c) moving (for global families) the
investment function to their international SFO outside
SEC jurisdiction or, creating an international SFO
to compliment the U.S. based SFO; or d) forming a
private trust company, captive insurance company or
private family bank. SFOs should be aware, however,
that these approaches necessarily trade one set of
government regulators for another.
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Conclusion
familyofficeassociation.com
FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
In order to meet the SEC compliance deadline of
March 30, 2012, SFOs should immediately begin to
assess their current level of compliance. After this
determination the registration process, exemption
order process or restructuring process can begin with
sufficient time remaining. Failure to act in a timely
and prudent manner could subject private families to
unwanted adverse publicity, risk of prosecution, lack
of privacy and expensive on-going registration and
compliance obligations.
Thomas J. Handler
Chair of Advanced Planning and
Family Office Practice Group
Handler Thayer, LLP Attorneys and Counselors at Law
About Handler Thayer, LLP
Handler Thayer, LLP is one of the premier private
client law firms in the United States. Its national
and international practice, based out of Chicago,
Illinois utilizes interdisciplinary teams of advanced
planning attorneys. Handler Thayer, LLP is dedicated
to providing distinctive, technologically-current and
responsive services to affluent families, privately held
businesses and family offices. The firm’s practice is
concentrated in Corporate, Real Estate and Securities
Law, Sports & Entertainment Law, Federal, State and
International Taxation, Trusts & Estates, and Financial
& Estate Planning. Firm clientele include foundations,
multinational corporations, professional athletes,
prominent entrepreneurs, celebrities, and family
offices.
For more information please contact Sylvia Ljubicich
via telephone at 312.641.2100 or via e-mail at
sljubicich@handlerthayer.com.
WWW.HANDLERTHAYER.COM
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Handler Thayer, LLP Disclaimer
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FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
LEGAL, INVESTMENT AND TAX NOTICE: This
information is not intended to be and should not
be treated as legal advice, investment advice or tax
advice. Clients should under no circumstances rely
upon this information as a substitute for obtaining
specific legal or tax advice from your own professional
legal or tax advisors.
Pursuant to requirements related to practice
before the Internal Revenue Service, any tax advice
contained in this communication (including any
attachments) is not intended to be used and cannot
be used, for purposes of (i) avoiding penalties
imposed under the United States Internal Revenue
Code or (ii) promoting, marketing or recommending
to another person any tax related matter.
***In some states, this may constitute advertising or
marketing material.
© 2011 Handler Thayer, LLP. All rights reserved.
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About the Family Office Association
The Family Office Association (FOA) is a global
membership organization exclusive to single family
offices and families of wealth. We are based in
Greenwich, Connecticut but have members from all
over the United States and around the world. Our
membership realizes the value of coming together
in a confidential setting to share ideas and compare
notes. The Family Office Association seeks to provide
the combination of privacy and openness where
relationships of trust can grow.
The Family Office Association was started by the
entreaty and with the guidance of a handful of singlefamily
offices in Greenwich, Connecticut, who wished
to have a regular and safe place to meet others
with single family offices and share ideas. True to
that spirit, FOA is the trusted and respected source
that family offices and families of wealth can turn
to for peer networking, expert resources, and fresh
perspectives on how to maintain vigorous multigenerational
wealth.
familyofficeassociation.com
FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
FOA is the advocate of the concept of establishing and
sustaining a single family office devoted to the:
• Preservation of family wealth
• The fostering of Stewardship in the next
generation, and
• The expansion of family philanthropic Legacy
FOA endeavors to find the best experts and
notables in the family office industry to educate the
membership at our Spring, Summer and Fall Summits,
Monthly Breakfast & Luncheon Roundtables, Member
Led Peer-to-Peer Sessions, Special Events and
Member Retreats. FOA has hosted such legends at
our roundtables and summits as Steven Cohen, Ray
Dalio, John Paulson, Mike Milken, Bill Ackman, David
Einhorn, Wilbur Ross, Peter Thiel, Jamie Dinan, Glenn
Dubin, Izzy Englander, Joel Greenblatt, Nassim Taleb,
Marc Lasry, Mike Novogratz, Daniel Loeb, Paul Singer,
Jeff Altman, Richard Perry, Tom Kempner, Larry Robins
and John Burbank
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FOA Disclaimer
The Family Office Association (FOA) is an affinity
group dedicated primarily to the interests of Single
Family Offices. FOA is intended to provide members
with educational information and a forum in which
to exchange information of mutual interest. FOA
does not participate in the offer, sale or distribution
of any securities nor does it provide investment
advice. Further, FOA does not provide tax, legal or
financial advice. Materials distributed by FOA are
provided for informational purposes only and shall
not be construed to be a recommendation to buy
or sell securities or a recommendation to retain
the services of any investment adviser or other
professional adviser. The identification or listing of
products, services, links or other information does
not constitute or imply any warranty, endorsement,
guaranty, sponsorship, affiliation or recommendation
by FOA. Any investment decisions you may make on
the basis of any information provided by FOA is
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FAMILY OFFICE EXEMPTION NARROWLY DEFINED BY S.E.C.
your sole responsibility. The FOA logo and all related
product and service names, designs, and slogans
are the trademarks or service marks of Family Office
Association. All other product and service marks
on materials provided by FOA are the trademarks
of their respective owners. All of the intellectual
property rights of FOA or its contributors remain
the property of FOA or such contributor, as the case
may be, such rights may be protected by United
States and international laws and none of such rights
are transferred to you as a result of such material
appearing on the FOA web site. The information
presented by FOA has been obtained by FOA from
sources it believes are reliable. However, FOA does
not guarantee the accuracy or completeness of
any such information. All of such information has
been prepared and provided solely for general
informational purposes and is not intended as user
specific advice.
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Family Office Association
500 West Putnam Avenue, Suite 400
Greenwich, Connecticut 06830
Ph: 203-570-2898
Angelo J. Robles, Founder and CEO
angelo@familyofficeassociation.com
www.familyofficeassociation.com