Dread the Feds? How Family Offices are Preparing for the Prospect of Regulation
Whether it’s progressive lawmakers or newly assertive regulators at the U.S. Securities and Exchange Commission and Treasury Department, pressure is growing to force family offices to disclose more about their activities.
For years, family offices have flown under the radar of regulators, allowed to quietly go about their business without having to reveal information about their assets or investments. The Dodd-Frank rules that took hold in the wake of the 2008 global financial crisis granted the SEC broad authority to exempt family offices from requirements to register as investment advisers. That exemption applies to all types of family offices—no matter the total assets under management or the nature of those assets, such as the exposure of counter-parties to its positions, or the number of family members who participate.
But scrutiny has increased as family offices have grown in recent years, with 10,000 around the globe holding a combined $5.5 trillion in assets, most of that created in the past 15 years, according to Ernst & Young. The prospect of regulation alarms Patricia Soldano, who spent 25 years building a multi-family office and now serves as a consultant. “I worry that new rules will hurt family businesses and family offices and requirements for greater disclosure and transparency are too intrusive.”
Pressure only mounted in March 2021 after the implosion of Archegos Capital Management cost six banks including Credit Suisse and UBS more than $10 billion when the family office defaulted on a margin call. It was the first major scandal involving the high-net-worth niche of the investment world, though some have noted that Archegos was really a hedge fund that rebranded itself as a family office in name only.
After federal prosecutors charged Archegos owner Bill Hwang in April with securities fraud, SEC Chairman Gary Gensler reiterated his intention to expand regulation of family offices, likely requiring them to disclose their positions.
In early May 2021, Rostin Benham, chairman of the U.S. Commodity Futures Trading Commission, expressed his desire for tightened rules for family offices, possibly through more disclosure of their swaps positions—including counterparty relationships—due to the impact of large investors moving markets. “This isn’t the traditional family office that we are accustomed to,” Behnam told Bloomberg, referring to the size of the positions held by Archegos.
Two months later, U.S. Rep. Alexandria Ocasio-Cortez (D-NY) introduced legislation to require family offices with assets of $750 million or more to register as investment advisers. So far, the legislation hasn’t moved.
But the impetus for AOC’s proposal as well as potential moves at the SEC and CFTC to tighten their oversight of family offices is a result of their explosive growth and their potential to move markets, said Gregory Baker, a partner at New York-based law firm Patterson Belknap Webb & Tyler LLP, where he chairs its securities litigation team. "These agencies are taking the view that family offices are effectively operating as financial institutions and in some instances taking on a lot of debt,” Baker said. “If you make mistakes, you have the potential to impact the market."
Baker, however, could not recall any examples of family office investments that moved the markets.
The potential for regulation has been met with fierce opposition from family-office members, with 81% of them recently surveyed by BNY Mellon viewing it as government intrusion into family finances. In another recent survey, 45% of family-office members interviewed by Ernst & Young said “changing mandatory reporting disclosures” is a concern.
BIPARTISAN HELP FROM CONGRESS?
And they’re targeting Congress, where family office representatives are leading their biggest lobbying push since successfully avoiding new regulations in the wake of the 2008 financial crisis, says Brian Reardon, a lobbyist for the Private Investor Coalition, which advocates for family offices in Washington.
Soldano has organized the first-ever congressional caucus focused on family businesses, including a bipartisan group of leading lawmakers. “Family businesses, which includes family offices, generate 59% of the jobs in this country and that’s why we have to get legislators to understand how big their economic imprint is,” says Soldano, president of Family Enterprise USA, who built the multi-family Cymric Family Office Services, before selling to GenSpring Family offices in 2009. The Congressional Family Business Caucus will raise the awareness and importance of family businesses in the US and the contribution they make to the US Economy.
"Regulation and disclosure would be terrible for family offices," says Paul Westall, the cofounder of family office recruiting firm Agreus Group, adding that "their very existence relies upon their confidentiality. He notes that regulation would deter high-net-worth individuals from establishing family offices and limit future investments in technology, pharmaceuticals, and other key sectors. "We do not believe the talk of regulation and more disclosure will spell the end of a golden era, but it will certainly slow down a thriving investor class because non-disclosure and privacy is worth a price."
For now, family-office members can breathe easy on the prospects of one proposal. A spokesperson for Ocasio-Cortez told Crain Currency that the proposed bill will not go to a vote of the full House of Representatives anytime soon. In addition, it has failed to attract any Republican support. And with the GOP expected to win back the House in the midterm elections this November, that means it will be dead in the water.
As for the agencies, family office advocates note that regulators lack the authority to redefine family offices. So although Gensler’s SEC may have an appetite to do that, only Congress can.
"It's highly unlikely that anything will happen in Congress,” Baker said, “but I don't think it will be the end of the story. It could be part of a broader package of reforms in the future."