Family offices fret over Dodd-Frank disclosures

Unless exemption is extended, they may have to reveal holdings

Jul 25, 2010 @ 12:01 am

By Hilary Johnson

The financial-reform law is threatening the privacy of some of America's richest families.

A provision in the Dodd-Frank law removes the private-adviser exemption in the Investment Company Act of 1940, which limited a private adviser to 15 or fewer clients, and replaces it with a test based on assets. Because most of the nation's estimated 2,500 to 3,000 family offices manage assets that exceed the new law's $100 million threshold, most would be required to register as investment advisers.

Registration would entail filing ADV forms revealing the assets of the family being served.

“The whole point of a family office is to keep family assets protected and private,” said Kristi Kuechler, president of the Institute for Private Investors.

The new law also requires the Securities and Exchange Commission to define “family office” by next year in a way that is consistent with its previous guidance.

Currently, because many family offices serve families with more than 15 members, the SEC typically will issue exemptive orders, which extend the 15-person ex-emption so long as the family office serves descendants and spouses of one person, or the person's companies, charities and trusts.

If the SEC sticks with the “direct descendant” definition, some families worry that problems could arise in the case of stepchildren and adoptions. Others worry about close friends and family office employees, such as chief investment officers, who have been invited to participate in investment strategies and vehicles over the years, said David S. Guin, a partner at Withers Bergman LLP, a law firm that works with many family offices.

As alternatives, families may turn to multifamily offices and private-trust companies to shield their assets and privacy, he said.

“It depends on who you're talking to, whether this is a blessing or a curse,” he said, noting that multifamily offices, such as GenSpring Family Offices LLC, Rockefeller Financial and Bessemer Trust Co. NA, as well as lawyers and compliance consultants, are likely to benefit from any change in current practice.

If a change comes, it may en-danger many family offices, which already are struggling with higher costs and poor investment returns. Facing such challenges, many family offices are now outsourcing the CIO role, according to Family Wealth Alliance LLC.

About four in 10 family offices outsourced investment management last year, up from three in 10 in 2008, according to a survey released in May by the consulting firm. Among family offices with $500 million in assets or less, fully two-thirds have turned to outside experts for investment help, the survey found.

Ironically, if a family office outsources investment management, it won't have to register with the SEC.

One multifamily office an-nounced its readiness to provide guidance and services last week. Pitcairn, which was originally formed to handle the wealth of John Pitcairn, co-founder of what is now PPG Industries, and which became a multifamily office in 1987, said in a statement that the Dodd-Frank law “could limit options for families.”

Pitcairn chief executive Dirk Jungé said that he issued the statement because he wanted to “alert families and their advisers that strategic planning is in order.”

Because multifamily offices bundle the assets of several wealthy families, disclosure can be accomplished without revealing any one family's wealth.

E-mail Hilary Johnson at


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