A key House committee has approved legislation that would limit the exemption provided for family offices from the definition of an investment adviser for purposes of registering with the Securities and Exchange Commission.
The House Financial Services Committee on July 29 approved on a straight party-line vote an amended version of the Family Office Regulation Act of 2021 (H.R. 4620) sponsored by Rep. Alexandria Ocasio-Cortez (D-NY). The bill was approved as part of a two-day markup that included passage of 10 other bills.
H.R. 4620 would amend the Investment Advisers Act of 1940 to limit the use of the family office exemption from registration as an investment adviser with the SEC to offices with $750 million or less in assets under management. As such, family offices with more than $750 million in AUM would have to register with the SEC as “exempt reporting advisers” (ERA) and file limited sections of Form ADV.
The bill would also prevent persons who are barred or subject to final orders for conduct constituting fraud, manipulation, or deceit from being associated with a family office. The SEC would also be authorized to require, by rule, the registration of family offices that are below the $750 million AUM threshold if they are deemed to be highly leveraged or engage in high-risk activities.
Under the legislation, advisory practices that are not considered a covered family office would still be required to maintain records and provide reports to the SEC. What’s more, the legislation would repeal a grandfather clause in Section 409 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which excluded certain family offices that have clients who are not members of the family from registration as investment advisers.
“Through a loophole in current law all investment funds organized and registered as quote ‘family offices’ are exempt from registration with the SEC and have no requirement whatsoever to disclose the size of their portfolio or leverage,” Ocasio-Cortez noted in introducing her legislation.
According to a Committee background memo, family offices are private firms that provide investment advice only to family clients and are exempt from registration with the SEC, and thus, have no requirement to disclose their size, portfolio or leverage, but due in part to legislative and regulatory exemptions, family offices have grown in scope and popularity.
The memo cites a 2021 report by Ernst & Young estimating that private family capital outstrips private equity and venture capital combined, with at least 10,000 single family offices across the world. It also points to Campden Research estimates that family offices manage nearly $6 trillion in assets.
“The recent meltdown of the Archegos Capital Management family office, which led to over $10 billion in losses across some of the world’s largest banks, demonstrated that family offices can be deeply interconnected with the rest of the financial markets and their activities could affect the stability of financial markets,” the Committee’s memo contends.
Senior Exploitation Prevention
The Committee also approved an amended version of the Financial Exploitation Prevention Act (H.R. 2265) introduced by Rep. Ann Wagner (R-MO). In general, this bill would codify an SEC “no action letter” by amending the Investment Company Act to allow a company or agent of the company to postpone a payment or redemption of security when they suspect the request of payment or redemption is the result of financial exploitation of an elder.
The SEC in 2018 released the no action letter (NAL 2018), stating they would not take action against a registered open-end investment company or its SEC-registered transfer agent who, under certain specified conditions, paused a transaction under the reasonable belief that the client was the victim of financial exploitation. Also in 2018, FINRA approved Rule 2165 allowing brokers to step in if they suspect that their elderly client is the victim of a financial crime.
Under the legislation, the postponement period may not extend past 15 business days. In addition, the SEC would be tasked with submitting a report to Congress with legislative recommendations to address the financial exploitation of seniors, according to a summary.
Other Bills
Some of the other bills approved by the Committee during the July 28-29 markup include:
- the Adjustable Interest Rate (LIBOR) Act of 2021 (H.R. 4616, as amended)
- the Short Sale Transparency and Market Fairness Act (H.R. 4618, as amended)
- the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2021 (H.R. 935, as amended)
- a bill requiring the GAO to carry out a study on the impact of the gamification, psychological nudges and other design techniques used by online trading platforms (H.R. 4685, as amended);
- a bill requiring the SEC to carry out a study on payment for order flow (H.R. 4617, as amended)
These bills have now all been cleared for consideration by the full House of Representatives.
