Articles By Topic
By Topic: Family Offices
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From Vol. 5 No.6 (Feb. 9, 2012)
Staff of SEC Division of Investment Management Clarifies the Scope of the Family Office Rule
Family offices historically have been considered “investment advisers” as defined in the Investment Advisers Act of 1940 (Advisers Act) because they provide investment advice for compensation. However, family offices historically have avoided registration by availing themselves of the private adviser exemption in Section 203(b)(3) of the Advisers Act or by seeking and obtaining exemptive relief from the SEC. Under the Dodd-Frank Act, Congress eliminated the private adviser exemption and directed the SEC to adopt a definition of single family office that would be “consistent with previous exemptive policy” and recognize “the range of organizational, management, and employment structures and arrangements employed by family offices.” On June 22, 2011, the SEC adopted Rule 202(a)(11)(G)-1 under the Advisers Act (Family Office Rule). The Family Office Rule generally provides that family offices are excluded from the definition of investment adviser under the Advisers Act and defines family offices for purposes of the exclusion. Under the Family Office Rule, an entity is a family office if it: (1) has only family clients; (2) is wholly owned and exclusively controlled by family members or family entities; and (3) does not hold itself out to the public as an investment adviser. For a comprehensive discussion of the Family Office Rule, see “Developments in Family Office Regulation: Part Three,” The Hedge Fund Law Report, Vol. 4, No. 23 (Jul. 8, 2011). So, as a matter of administrative law, Congress adopted a general principle with respect to family offices and the SEC put that principle into practice via rulemaking. But while rules are more specific than laws, even rules often fail to capture the rich variety of factual circumstances to which they apply. This is particularly the case with respect to family offices, a vast and heterogeneous group of entities engaged in a wide range of activities. Accordingly, to offer industry participants more guidance on applying the Family Office Rule, the staff of the SEC’s Division of Investment Management recently published responses to five categories of questions relating to the scope of the Family Office Rule. Specifically, the staff responded to questions on: (1) ownership and control of family offices; (2) key employees; (3) family members; (4) non-advisory services; and (5) the Family Office Rule’s grandfathering permission. This article summarizes the staff responses. These staff responses are important to two general categories of hedge fund managers: those that have or solicit investments from family offices, and those considering conversion to a family office format. With respect to investments in hedge funds by family offices, see “Public Pension Funds and Endowments Increase Allocations to Hedge Funds, While Allocations from Family Offices Slide,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011). And with respect to conversion by hedge fund managers to a family office format, see “Legal Mechanics of Converting a Hedge Fund Manager to a Family Office,” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).
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From Vol. 4 No.43 (Dec. 1, 2011)
Legal Mechanics of Converting a Hedge Fund Manager to a Family Office
Over the past two years, a number of prominent hedge fund managers have decided to return capital to outside investors and to restructure their businesses as family offices. In August 2010, Stanley Druckenmiller announced he was winding down Duquesne Capital Management LLC to create a family office to oversee some of his $2.8 billion fortune. In February 2011, Chris Shumway announced that he would return outside money invested in Shumway Capital Partners because of increased fund liquidity risks, and would focus on managing internal capital. In March 2011, Carl Icahn announced he would return money to outside investors and convert Icahn Associates into a family office, citing a desire not to disappoint investors should another financial crisis erupt. In July 2011, George Soros noted in an investor letter that he intended to return nearly $1 billion to outside investors and to convert Soros Fund Management into a family office, citing regulatory uncertainty as a key reason for his decision. In August 2011, Edward Perlman announced that he planned to return nearly $470 million to investors and to convert Scottwood Capital Management into a family office, citing increased risks in the credit markets and regulatory uncertainty. Many hedge fund managers cite the burdens associated with the heightened regulatory scrutiny facing hedge fund managers for their decision to restructure their businesses as family offices. As a result of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), many large fund managers that have historically been exempt from registration as investment advisers pursuant to the Investment Advisers Act of 1940 (Advisers Act) will need to register by March 30, 2012 unless an exemption or exclusion is available. While the Dodd-Frank Act mandated adviser registration for many advisers, it also provided several narrowly-tailored exemptions and exclusions, including an exclusion for family offices whereby family offices are not only exempt from registration as investment advisers, but also are excluded from the definition of an investment adviser altogether, which means that they are not subject to the Advisers Act. For a thorough description of the definition of a “family office” and related definitions, see “Developments in Family Office Regulation: Part Three,” The Hedge Fund Law Report, Vol. 4, No. 23 (Jul. 8, 2011). This article starts by providing a detailed catalog of the primary benefits of converting a hedge fund manager to a family office and the primary downsides of such a conversion. For managers who determine that the benefits outweigh the burdens, this article then provides a roadmap of the primary legal and practical mechanics involved in such a conversion. Moving to a family office structure implicates considerations well beyond law and business – considerations relating to legacy, family, time and life goals. Such considerations are beyond the purview of this or any other practical publication; rather, they are the province of deep thought, reflection, conversation and exploration. But for managers who have undertaken the hard analysis and determined that the family office structure fits their goals, this article provides a useful starting place for identifying the relevant issues and taking the first steps.
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From Vol. 4 No.36 (Oct. 13, 2011)
Public Pension Funds and Endowments Increase Allocations to Hedge Funds, While Allocations from Family Offices Slide
On September 27, 2011, investment management software and services provider PerTrac hosted a webinar entitled “Institutional Asset Allocation: The Latest Trends From Pensions, Family Offices and Endowments.” Lois Peltz, of information service provider Infovest21, delivered the presentation, which was the second of a two-part series. The presentation laid out the results of Infovest21’s recent study (Study) of where and how family office, public pension fund and endowment assets are being allocated. See “Developments in Family Office Regulation: Part Three,” The Hedge Fund Law Report, Vol. 4, No. 23 (Jul. 8, 2011). The purpose of the event was to keep hedge fund managers, among others, up to date on investing trends and provide insight into how institutional investors are making investment decisions. See “Implications for Hedge Funds of a Potential Paradigm Shift in Pension Fund Allocation Strategies,” The Hedge Fund Law Report, Vol. 3, No. 16 (Apr. 23, 2010). This article summarizes the salient ideas and investment trends discussed in the course of the webinar.
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From Vol. 4 No.23 (Jul. 8, 2011)
Developments in Family Office Regulation: Part Three
On June 22, 2011, the Securities and Exchange Commission (“SEC” or the “Commission”) issued Release No. IA-3220 (the “Final Release”), adopting rule 202(a)(11)(G)-1 (the “Final Rule”) which defines “family offices” that would be excluded from the definition of “investment adviser” under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The SEC received and considered approximately 90 comment letters on the proposed rule (the “Proposed Rule”) issued on October 12, 2010 and, as a result, modified the Proposed Rule in certain respects, as detailed in this article. While family offices generally meet the Advisers Act’s definition of “investment adviser,” in that they provide investment advice for compensation, they have historically avoided registration by availing themselves of the private adviser exemption found in section 203(b)(3) of the Advisers Act or by seeking and obtaining exemptive relief from the Commission. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010 (the “Dodd-Frank Act”), Congress eliminated the private adviser exemption and directed the Commission to adopt a definition of single family offices that would be “consistent with previous exemptive policy” and recognize “the range of organizational, management, and employment structures and arrangements employed by family offices.” The Final Rule contains three general conditions: that (1) the family office has only family clients; (2) the family office is wholly owned and exclusively controlled by family members and/or family entities; and (3) the family office does not hold itself out to the public as an investment adviser. Each of the foregoing is subject to definitions and as usual, the “devil is in the details.” In a guest article, Michael G. Tannenbaum and Christina Zervoudakis, Founding Partner and Associate, respectively, at Tannenbaum Helpern Syracuse & Hirschtritt LLP, provide a thorough analysis of the Final Rule. This is the final installation of a three-part series by Tannenbaum and Zervoudakis in The Hedge Fund Law Report addressing the regulation of family offices under the Advisers Act, by the Dodd-Frank Act and the Final Rule. Part One of this series, entitled Developments in Family Office Regulation: Part One, presented the SEC’s position on the regulation of family offices prior to the Dodd-Frank Act as reflected by SEC exemptive orders, and Part Two, entitled 2010 Developments in Family Office Regulation: Part Two, discussed the Proposed Rule.
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From Vol. 4 No.20 (Jun. 17, 2011)
New Rothstein Kass Study Explains the “Consultative” Approach to Marketing to Single-Family Offices and the Importance of That Approach for Smaller Hedge Fund Managers
A recently published study by Rothstein Kass, Forbes Private Capital Group and Forbes Insights defined a single-family office; outlined the three attributes of single-family offices that make them attractive sources of capital for hedge funds, especially smaller hedge funds; emphasized the importance of the Executive Director; distinguished between two broad categories of single-family offices; highlighted the marketing mistakes frequently made by hedge fund managers in marketing to single-family offices; and outlined a viable and realistic strategy that hedge fund managers can use to market to single-family offices. In general, with large investors increasingly allocating to large hedge fund managers, single-family offices are filling a capital void that is particularly important for start-up and smaller hedge fund managers. See generally “Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part Two of Two),” The Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011). This article summarizes the key findings of the study.
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From Vol. 4 No.12 (Apr. 11, 2011)
Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part Two of Two)
Variable insurance policies are an often utilized structure through which family offices and other high net worth investors invest in hedge funds and other private investment funds. One of the primary advantages of investing in hedge funds and other private investment funds through variable insurance policies is the deferral of income taxes. However, policy holders must first satisfy two important tests – the “diversification rules” and the “investor control” rules – in order for the policies to qualify for favorable income tax treatment. This article is the second in a two-part series. The first article in this series described the mechanics of investing in an insurance dedicated fund through variable insurance policies and offered a roadmap for satisfying the two tests to ensure the variable insurance policies maintain their tax-advantaged status. See “Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part One of Two),” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 1, 2011). This article describes in detail a recent restructuring transaction in which the authors participated (the “Transaction”) and provides the key terms in the Transaction documents applicable to the diversification and investor control rules.
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From Vol. 4 No.11 (Apr. 1, 2011)
Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part One of Two)
Variable insurance policies are an often utilized structure through which family offices and other high net worth investors invest in hedge funds and other private investment funds. One of the primary advantages of investing in hedge funds and other private investment funds through variable insurance policies is the deferral of income taxes. However, policy holders must first satisfy two important tests – the “diversification rules” and the “investor control” rules – in order for the policies to qualify for favorable income tax treatment. This article is the first in a two-part series of guest articles in the HFLR by James Schulwolf and Peter Bilfield, both Partners at Shipman & Goodwin LLP, and Lisa Zana, a Senior Associate at Shipman. This article describes the mechanics of investing in an insurance dedicated fund through variable insurance policies and offers a roadmap for satisfying the two tests to ensure the variable insurance policies maintain their tax-advantaged status. The second article in this series will describe in detail a recent restructuring transaction in which the authors participated and provide the key terms in the transaction documents applicable to the diversification and investor control rules.
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From Vol. 3 No.42 (Oct. 29, 2010)
2010 Developments in Family Office Regulation under Dodd Frank: Part Two
This is part two of a three-part series that addresses the regulation of family offices under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), signed into law by President Obama on July 21, 2010. The Dodd-Frank Act provides that family offices are to be exempt from the definition of “investment adviser” in the Advisers Act, but left to the Securities and Exchange Commission (“SEC” or the “Commission”) the definitional details, requiring only that the SEC’s implementation of the new rule be consistent with its historic position as reflected in its exemptive orders. In proposing its definition of family office, the SEC focuses on single family offices which have assets in excess of $100 million. There are about 2,500 to 3,000 such family offices in the U.S. In the aggregate, these family offices manage more than $1.2 trillion in assets. Part one of this series presented the current SEC position as reflected by the exemptive orders. See “Developments in Family Office Regulation: Part One,” The Hedge Fund Law Report, Vol. 3, No. 38 (Oct. 1, 2010). In this part two, Michael G. Tannenbaum and Christina Zervoudakis, Founding Partner and Associate, respectively, at Tannenbaum Helpern Syracuse & Hirschtritt LLP, discuss the proposed rules recently issued by the SEC. Unless extended by the SEC, the comment period with regard to the proposals ends on November 18, 2010. There will undoubtedly be comments for the SEC to consider and perhaps adopt. The authors expect that part three of this series will deal with the state of affairs as made final after the comment period ends and the SEC issues its final rules.
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From Vol. 3 No.38 (Oct. 1, 2010)
Developments in Family Office Regulation: Part One
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), signed into law on July 21, 2010, contains sweeping changes that will impact the U.S. regulatory landscape for years to come. It is comprised of a number of separate titles – Title IV, the “Private Fund Investment Advisers Registration Act of 2010,” amends the U.S. Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Dodd-Frank Act requires, inter alia, that the U.S. Securities and Exchange Commission (“SEC”) issue rules relating to family offices. Historically, family offices and their investment officers (and investment affiliates) have been granted exemptions from investment adviser registration under the Advisers Act on the basis that such persons (or entities) were not within the intent of Section 202(a)(11) of the Advisers Act, which contains the definition of “investment adviser.” The relief came in the form of exemptive orders issued by the SEC. The Dodd-Frank Act has codified this rationale by specifically excluding “family offices” from the definition of “investment adviser” under the Advisers Act and requiring the SEC to define the term “family office.” Until the SEC issues its proposed rules, the exemptive orders and other relevant guidance reflect the current family office framework. In a guest article, Michael G. Tannenbaum and Christina Zervoudakis, Founding Partner and Associate, respectively, at Tannenbaum Helpern Syracuse & Hirschtritt LLP, address those exemptive orders and other relevant guidance. In a follow-up article in the HFLR, the authors will address the proposed rules shortly after they are issued by the SEC.
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From Vol. 1 No.17 (Aug. 1, 2008)
SEC Provides Guidance Regarding Exemptions From Registration for Managers of “Family Offices”
In two recent pronouncements, the SEC provided much-needed guidance on when a family office does not have to register as an investment adviser. In a recently-issued no-action letter, the SEC stated that it would not recommend enforcement action against a 3(c)(7) fund in which a fund managed by a family office invested, based on an investment in the family office fund by the non-family member executive director of the family office. In a roughly contemporaneous order granted to another family office, the SEC held that a family office did not have to register as an investment adviser where that family office provided services exclusively to a single family, was owned by the family and had a board of directors, the majority of which was comprised of family members.
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