H.R.4620: What Family Offices Should Know about The Family Office Regulation Act of 2021

Background – The Family Office Rule

Family offices are generally excluded from the definition of an investment adviser under the Investment Advisers Act of 1940.  This was a result of the Dodd-Frank Act which gave the SEC the authority to exempt family offices.  Since June 2011, a family office is excluded from the definition of an investment adviser if it:

  • has no clients other than family clients;
  • is wholly owned by family clients and is exclusively controlled (directly or indirectly) by one or more family members and/or family entities; and
  • does not hold itself out to the public as an investment adviser

The size of the family office (i.e., assets under management/AUM or number of family member participants) nor the types of assets managed (e.g., equities, fixed income, derivatives) are qualifying factors.

For further background on SEC Rule 202(a)(11)(G)-1 (the “Family Office Rule”) the original text can be found at Final Rule: Family Offices (sec.gov). The SEC has also posted several staff responses to questions at SEC.gov | Staff Responses to Questions About the Family Office Rule.

H.R. 4620 – The Family Office Regulation Act of 2021

In what appears to be a response to testimony by Archegos Capital Management before the House Financial Services Committee, New York Congresswoman Alexandria Ocasio-Cortez has introduced H.R. 4620.

Under H.R. 4620, the exclusion described above would now be limited to “covered family offices” with a threshold of $750 million or less in AUM. Those family offices with more than $750 million in AUM would still be exempt from registering with the SEC but would have to file reports with the SEC as an “exempt reporting adviser.” Additionally, all family offices that are subject to an SEC order, as described in Section 15(b)(4)(H) of the Securities Exchange Act of 1934, for conduct constituting fraud, manipulation, or deceit, would not be considered a covered family office. Furthermore, certain family offices that utilized a grandfathering clause within the Dodd-Frank Act to qualify for the family office exclusion despite having clients who are not members of the family would also not be considered a covered family office since such grandfathering clause would be repealed.

H.R. 4620 also directs the SEC to exclude family offices that are below $750 million in AUM from being a covered family office if they are highly leveraged or engage in high-risk activities. H.R. 4620 does not define “highly leveraged” or “high-risk activities.” The full text of H.R. 4620 can be found at Text – H.R.4620.

With the House returning from recess this week, family offices should keep an eye on the progress of H.R. 4620. If The Family Office Regulation Act of 2021 were to pass through Congress as currently written, it would significantly alter the availability of existing exemptions for many family offices and the SEC would have the ability obtain data it currently does not have access to.

We would be pleased to provide further information related to this subject. For more information, contact Craig B. Evans, Director, Audit & Accounting at cevans@kmco.com


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