SEC publishes FAQs on family office rule

The US Securities and Exchange Commission has published a list of questions and answers to help family offices understand if and how they could be affected by the Dodd-Frank Act.

However, according to Charles Lowenhaupt, chairman and chief executive of wealth management firm Lowenhaupt Global Advisors, this isn’t enough.

“The questions raised are narrow and the answers given helpful but also narrow,” he told CampdenFO.

According to the Dodd-Frank Act's family office rule, which was announced last June and will come into effect on 30 March, private family offices in the US are exempt from registering with the SEC, as long as they only advise family clients and are completely controlled by one family.

Family offices also cannot project themselves to the general public as investment advisers nor serve families beyond the 10th generation.

However, many family offices argued the new rule was difficult to understand and didn't deal with the main issues, such as who qualified as a family member. A study by research and consulting firm The Family Wealth Alliance in October found that 54% of family offices in the US didn’t know how the new rule would affect their family office.

The FAQs issued by the SEC attempts to offer some clarity. For example, it said “same sex domestic partners” and “opposite sex partners who have chosen not to marry but live together in a relationship generally equivalent to married couples” are to be considered family members, while in-laws related through the spouse of the common ancestor do not qualify as family members under the family office exemption.

Lowenhaupt reckons that the SEC’s attempt to define what is a family is not practical. “Every group considering itself a family has challenges”, which cannot be under the control of an external governance body, he said.

The Dodd-Frank Act “will make it impossible for many single family offices … to perform one of their core functions – helping every family member live life to the fullest”, he added.

The SEC’s guide also addresses the composition of the family office’s board of directors and the definition of the key employee.

Traditionally, family offices in the US didn’t have to register with the SEC. The Investment Advisers Act of 1940, in fact, exempted private advisers with fewer than 15 clients from registering with the commission, allowing wealthy families to protect their privacy.

However, in 2010, the Dodd-Frank Act, in a bid to strengthen the regulation of hedge funds, removed the private adviser exception, affecting many family offices in the process.