Dodd-Frank reforms and the family office

US family offices won a significant battle in their efforts to remain private earlier this year when they gained exemption from the Dodd-Frank Wall Street Reform and Consumer Protection Act, writes Katie Barker.

Following the backlash from family offices over having to register with the US Securities and Exchange Commission and in order not to inadvertently disadvantage family offices, the US regulators amended the reforms to exclude family offices.

Family offices have traditionally not had to register with the SEC under the Advisers Act 1940 as advisers with fewer than 15 clients were exempt, allowing them to maintain a level of privacy much sought after by many wealthy families. But this exemption was removed by the Dodd-Frank reforms, primarily aimed at regulating hedge funds.

In order to pass this legislation the SEC also had to define what it believes a family office is and so reopening the debate - what constitutes a family office?

On 12 October the SEC published the following definition. 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. 

John Elmes, senior partner at GenSpring multi family office in the US, reckons this definition will force SFOs to take a hard look at their business model: "Many opened their doors to other people and families and now they must make a decision about what they want to be," he says.

"They must decide whether they are a business or if they are primarily there to support the needs of a single family."

Elmes sees the move as a positive one for MFOs such as his. "This is a positive thing for GenSpring as we already comply with all the SEC regulations. The 1940 Advisers Act was created to protect investors and true investment advisers should support fiduciary standards.

"This act will clearly separate the single family offices that support the needs of one wealthy family from those offering advice to wealthy individuals and families on a larger scale. It is right that those larger outfits should comply with regulations," says Elmes.