New rules have been introduced in the US to improve hedge fund transparency and upper-class families around the world are having to choose between surrendering privacy around their investments and significant legal risk.
Lawyers in the US have warned that offices established to manage family wealth that have any connections to the country, are required to register as an investment adviser with the Securities and Exchange Commission. Failure to do so, will mean that the family would run the risk of punitive damages if sued in the US courts by estranged family members or disgruntled employees. Families that do register will have to disclose details of assets and the identities of those for whom the family office manages money. A failure to register could also have legal consequences.
The rules are part of the?Dodd-Frank financial reform legislation. To escape registration, the office can only manage money for those related by blood or marriage.
And example of this rule may be as follows: A family member who studies in the US and becomes resident after college or a family that has established a limited liability company to manage its US assets, are among those whose family office is required to register.
Co-investors in a family-owned company run through the office of US residents may also force the office to register.
Many wealthy families are still unaware about the risks they are facing. Billionaire George Soros recently brought the issue to light when he?was returning the money left over in his hedge funds to investors.
Stephen Fern, chairman of the G9 Family Office Network, an industry association, said it looks as though lawyers who are not in the States haven?t swallowed the importance of the matter. ?I don?t think that outside of the US lawyers have quite got to grips with this, and certainly the vast majority of families haven?t even opened their eyes to it yet.?
A partner at Withers, a law firm, David Guin said, ?The SEC doesn?t really have any desire to regulate family offices but the watchdog will not give a blanket exemption that could then be used by those it does want to regulate.?
Mr. Handler, a partner at Handler Theyer, a law firm, warned that failure to register could be used as a sign of gross negligence were the family office could be sued for investment losses. And thus, if a court recognizes it as a ?tortuous claim?, one with a legal standing, he says that a lot of damage can be done, including ?punitive damages, attorneys? fees, pain and suffering?.
?The rules are bad for private wealth but possibly good for the large banks, multi-family offices, and lawyers and accountants serving family offices,? says Charles Lowenhaupt, head of Lowenhaupt Global Advisors.
Sources: Financial Times