"Family Office Exemption" could be in jeopardy

Currently, the Securities and Exchange Commission provides an exception to the definition of Investment Advisor for family offices. This exemption, commonly known as the “Family Office Exemption,” allows family offices to avoid being subject to the regulatory compliance burden otherwise imposed under SEC rules on Investment Advisors, a very valuable benefit to family offices, i.e., avoiding registering as an Investment Advisor. However, recent congressional activity seeks to significantly restrict the scope of this exemption.

Prior to its hearing on May 5, 2021, with SEC Commissioner Gary Gensler, proposed legislation was posted by the House Financial Services Committee focusing on a wide range of issues.

Of particular attention to family offices is a piece of legislation that would limit the SEC’s family office exemption to those family offices with $750,000,000 or less in assets under management. While drastic in its impact, the legislation, as currently drafted, is very simplistic as it simply provides that only a family office (defined and determined in the same manner) with assets less than $750,000,000 under management qualifies for the family office exception.

While this legislation is in its infancy in the legislative process, it should be a concern to those family offices whose exemption may be impacted, either now or in the short future, as asset values continue to experience significant appreciation. It should be noted that an alternative to relying on the Family Office Exemption is to form a “regulated” private trust company. A regulated private trust company is exempt from registering as a registered investment advisor.