Editor’s Note: Private Wealth attorney and Haute Lawyer partner Michael Kosnitzky, Co-Chair of Pillsbury Winthrop Shaw Pittman’s Private Wealth practice, talks about : Staying between the Navigational Beacons- Operating a Modern Family Office to Qualify for the Family Office Exclusion under the Investment Advisers’ Act of 1940.
Photo Credit: Shutterstock
Single family offices are being increasingly used to manage family wealth. However, these offices often operate within a legal environment with little to no regulatory oversight, in part due to the “family office exclusion” (the “Family Office Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”).
The Advisers Act regulates investment advisers by requiring them to register with the SEC and adhere to compliance rules, such as filing Form ADV, which publicly discloses certain information, and includes record-keeping and ethics compliance requirements, among others. Fortunately, not all investment management activities are subject to registration under the Advisers Act.
The Family Office Rule was established in 2010 through Section 409 of the Dodd-Frank Act. It defines a family office as a company that exclusively serves “family clients,” is owned and controlled by family members, and does not present itself to the public as an investment adviser. The key to maintaining this exclusion lies in understanding the definition of “family clients,” which is broad – as it can include family members, key employees, and certain trusts –yet nuanced, and at times, uncertain.
To stay unregistered, among other requirements, family offices cannot give investment “advice” to non-“family clients” and must be controlled by family members. Understanding what activities constitute investment “advice” can be nebulous, forcing family offices to navigate uncertain waters. For instance, “club investing,” where several wealthy families co-invest in an asset, may be considered giving investment advice to other family offices, potentially triggering SEC registration requirements. The sharing of employees between family office may also constitute providing investment “advice,” and create a “multi-family office” outside of the Family Office Rule.
Because family offices are unregistered, they typically fly under the radar. However, the lack of regulation occasionally draws public attention. For example, the liquidation of Archegos Capital Management, a single-family office, in 2021 led to Congresswoman Alexandria Ocasio-Cortez introducing H.R. 4620, which would require certain family offices to file reports with the SEC. The SEC also noted in 2021 that family offices were one of its key regulatory priorities.
The Family Office Rule is an important exception for family offices, allowing such family offices to pursue their investment strategies and activities, with little to no financial oversight or disclosures. However, as family offices grow in number and size, scrutiny of such family offices will likely grow. Similarly, family offices may face headwinds in other areas of the law, including changes in the tax code. Navigating uncertainty with respect to the Family Office Rule, along with many other areas of the law, will require foresight, prudence, and a holistic perspective.
Photo Credit: Pillsbury Winthrop Shaw Pittman LLPRenowned for his exceptional expertise and unwavering integrity, Attorney Michael Kosnitzky offers adept guidance in intricate legal affairs, including strategic tax strategies for the ultra-wealthy. For valuable insights and expert counsel on compliance, connect at 212.858.1002 (NYC) / 786.913.4885 (Miami) or via email: Michael.Kosnitzky@Pillsburylaw.com.
![image1[2]](https://hauteliving.com/hautelawyer/wp-content/uploads/2024/10/image12-357x238.png)
