House bill

Family Matters: House Bill Would Require SEC Registration for Certain Family Offices

Last summer, Rep. Alexandria Ocasio-Cortez (D-NY) introduced a bill HR 4620 limit the exemption from registration requirements applicable to certain family offices under the Investment Advisers Act of 1940 (the “Advisors Act”). If the bill becomes law, among other things, a family office with $750,000,000 or more in assets under management will no longer be exempt from registration under the Advisors Act.

Family offices are private businesses that provide investments and other services to members of wealthy families. Prior to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the Advisors Act provided a broad exemption from registration with the Securities Exchange Commission ( the “SEC”) for so-called “private advisers” (generally, an adviser who had 15 or fewer clients in a 12-month period, was not an investment adviser to an investment firm registered or business development company and did not “represent” itself as an investment adviser). Following the repeal of this exemption, Dodd-Frank created a new exception to exempt family offices from registration.

The SEC has adopted Rule 202(a)(11)(G)-1, which defines the term “family office” for the purposes of applying the Dodd-Frank exemption. Among other things, the rule defines a family office as a corporation (including its directors, partners, members, managers, trustees, and employees acting in the course of their office or employment) that (i) has no clients other than “Family Clients,” (ii) is 100% owned by Family Clients and is exclusively controlled (directly or indirectly) by one or more Family Members and/or Family Entities; and (iii) does not hold itself out to the public as an investment adviser. Family members include all direct lineal descendants (including by adoption, stepchildren, adopted children, and people who were minors when another family member became that person’s legal guardian) ‘a living or deceased common ancestor and the spouses or equivalents of such lineal descendants, provided that the common ancestor cannot be more than 10 generations distant from the youngest generation of family members. Neither the rule nor Dodd-Frank currently imposes a limit on the amount of assets under management for a family office to claim the exemption.

According to a sign memorandum of the majority staff of the House Committee on Financial Services, HR 4620 responds both to the growth of family offices (both in terms of number and amount of assets under management) and the sudden collapse last year of ‘Archegos Capital Management, a highly indebted family office that had been set up to manage approximately $10 billion for a single investor. Given the impact family office investments can have on financial markets, HR 4620 would require family offices with more than $750,000,000 to register as “exempt filing advisers.” An exempt reporting adviser is required to file with the SEC by completing and filing portions of ADV form (which is the same registration document submitted by registered investment advisers). An exempt reporting adviser is required to disclose, among other things, basic identifying information such as their name, registered office and place of business, details of the size of any private funds they advise, other business interests of the Advisor and its affiliates, and the disciplinary history of itself and its employees. In addition, an exempt reporting adviser must identify the “control persons” who directly or indirectly control it.

HR 4620 would exclude from the definition of “family office” certain bad actors who have been barred from the financial industry by certain state or federal agencies, or who have been the target of final SEC orders involving fraudulent, manipulative, or deceptive conduct. In addition, the SEC would have the power to make rules to lower the threshold for registration of family offices that are “highly leveraged or engaged in high-risk activities.”

The Financial Services Commission was divided along party lines (Democrats for, Republicans against). It is unclear when or if the bill will pass the House and, even if approved by the House, whether it will be approved by the Senate. Among other things, we are planning a careful review of the $750,000,000 threshold. However, even if the bill is not approved, it reflects the growing interest of politicians and regulators in the increased size and influence of family offices, and calls for increased disclosure of their activities and management. . We will continue to monitor and report on developments related to HR 4620 and any other proposals to regulate family offices.