Last summer, Representative Alexandria Ocasio-Cortez (D-NY) introduced bill H.R. 4620 to limit the exemption from registration requirements applicable to certain family offices under the Investment Advisers Act of 1940 (the “Advisers 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 Advisers Act.
Family offices are private companies which provide investment and other services to members of high-net-worth families. Prior to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (“Dodd-Frank”), the Advisers Act provided for 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 any 12-month period, was not investment adviser to a registered investment company or a business development company, and did not “hold itself out” as an investment adviser). Following the repeal of that exemption, Dodd-Frank created a new carve out to exempt family offices from registration.
The SEC adopted Rule 202(a)(11)(G)-1, which defines the term “family office” for purposes of applying the Dodd-Frank exemption. Among other things, the rule defines a family office as a company (including its directors, partners, members, managers, trustees and employees acting within the scope of their position or employment) that (i) has no clients other than “family clients,” (ii) is wholly 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 lineal descendants (including by adoption, stepchildren, foster children, and individuals that were a minor when another family member became a legal guardian of that individual) of a living or deceased common ancestor and such lineal descendants’ spouses or spousal equivalents, provided that the common ancestor can be no more than 10 generations removed from the youngest generation of family members. Neither the rule nor Dodd-Frank currently impose a limit on the amount of assets under management for a family office to avail itself of the exemption.
According to a markup memorandum from the majority staff of the House Committee on Financial Services, H.R. 4620 responds to both 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 leveraged family office which had been established to manage approximately $10 billion for a single investor. Given the impact that family office investments can have on financial markets, H.R. 4620 would require family offices with more than $750,000,000 to register as “exempt reporting advisers.” An exempt reporting adviser is required to file with the SEC by completing and filing portions of Form ADV (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 its name, principal office, and place of business, details about the size of any private funds it advises, other business interests of the adviser and its affiliates, and the disciplinary history of itself and its employees. In addition, an exempt reporting adviser must identify “control persons” that directly or indirectly control it.
H.R. 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 rule making authority to lower the registration threshold for family offices which are “highly leveraged or engaged in high-risk activities.”
The Committee on Financial Services was divided on party lines (Democrats for, Republicans against). It is unclear when or whether the bill will be voted on by the House and, even it is approved by the House, whether it will be approved by the Senate. Among other things, we anticipate scrutiny of the $750,000,000 threshold. However, even if the bill is not approved, it reflects growing interest by 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 developments related to HR 4620, and any other proposals to regulate family offices.