Comment les changements proposés dans le projet de loi H.R. 4620 peuvent-ils affecter votre Family Office ?

Since a single family office (SFO) is solely tasked with managing the money of one single family, the Securities Exchange Commission (SEC) has historically allowed them to operate under different regulations from traditional investment advisors. The 2008 financial crash first prompted regulators to reconsider this exemption. Although no changes were made at that time, the more recent collapse of Archegos Capital Management in March 2021 spurred lawmakers to introduce bill H.R. 4620, which would change how SFOs are regulated.

What does this new bill mean for your family office?

Until the bill passes and is enacted, the answer is: not much. But it’s never too early to be prepared for potential regulatory changes that could affect how your SFO operates.

Let’s start by looking at the parameters for registration that are presently in place.

Currently, SFOs are exempted from the requirement to register with the SEC as investment advisors, with a few exceptions. Certain factors, such as how the office is structured or how it invests, might result in the SFO breaching defined limits and requiring registration with authorities.

Because SFOs are used by wealthy families to achieve wealth preservation, they are often referred to as “patient capital,” with a long-term view and an asset and risk mix supporting this. Sayings like “Shirtsleeves to shirtsleeves in three generations” and “Wealth does not last beyond three generations” are well-known for a reason. A wealth consultancy, The Williams Group, conducted a 20-year study involving several thousand families and found that seven in 10 families tend to lose their fortune by the second generation, while 9 in 10 lose it by the third generation.

Despite these dismal numbers, the fate of Archegos Capital brought the family office market to broader notice, and worldwide, the media claimed amounts in the range of 5 to 7 trillion dollars were being managed by these family offices. Without context, these numbers give the impression that SFOs are too large to be unregulated. However, this macro view needs to be tempered by examining how and where typical family offices invest. The “patient capital” approach taken by many SFOs is often quite different from the investment approach taken by traditional investors.

What changes if bill H.R. 4620 passes?

Bill H.R. 4620 will amend the Investment Advisers Act of 1940 to impose regulatory oversight of family offices. Critically, the bill would limit the exemption from registration to only “covered” family offices, which refers to those with less than $750 million in assets under management (AUM). If the office has more than $750 million in AUM, it would be required to register with the SEC as an investment advisor and follow investment advisor regulations and reporting rules.

The AUM is not the only criteria in the new bill. A reporting requirement can also be determined by the “high risk” of any investments. It would also require that all family offices provide “such annual or other reports as the Commission determines necessary or appropriate in the public interest for the protection of investors.”

A single family office manages the money of one single family. The office is tasked with acting in a fiduciary manner for the benefit of the whole family, and it is not part of a for-profit industry sector like banks or hedge funds. Rather than regulation, perhaps there is a case for more professionalism — an opportunity to move away from the “cottage industry” approach and operate with structure and standards that meet, if not exceed, those of a regulated business.

To achieve this, the family office staff need the right tools; the days of running the office with spreadsheets and a simple accounting software product are gone. A modern family office needs an integrated technology approach, with a single data source, as the foundation for professional operations. This professionalization would do more than regulation to meet the fiduciary needs of a modern wealthy family.