Infovest21 's Investor Focus Issue: Defining a family office

The Securities and Exchange Commission proposed a new rule on October 12 that would help those managing their own family’s financial portfolios determine whether their family offices can continue to be excluded from the Investment Advisers Act of 1940.

The SEC is proposing that a family office be defined as a firm that:

• Provides investment advice only to family members, certain key employees, charities and trusts established by family members, charities and trusts set up by family members, and entities wholly owned and controlled by family members.

• Is wholly owned and controlled by family members

• Does not hold itself out to the public as an investment adviser.

Historically, family offices have not been required to register with the SEC under the Advisors Act because of an exemption provided to investment advisers with fewer than 15 clients. The Dodd-Frank Act removes that exemption, enabling the SEC to regulate hedge fund and other private fund advisers, but includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

Public comments on the proposed definition should be received by the SEC by November 18, 2010. The Dodd Frank Act becomes effective on July 21, 2011.

The SEC has been charged with adopting a definition that is consistent with the SEC interpretation in prior exemptive orders.

Because multi-family offices serve more than the lineal descendants of a single individual, multi- family offices with more than 15 clients are not expected to qualify for the “family office” exemption and are likely going to need to register as investment advisers with the SEC or their home state depending on the amount of assets under management. As SEC-registered investment advisers, multi-family offices will have to adhere to the same requirements as other investment managers, including, for example, the requirement to appoint a chief compliance officer and to have written compliance policies and procedures.

Industry observers estimate approximately 2500 to 3000 family offices exist in the US, managing in total over $1.2 trillion in assets. Generally, family offices have at least $100 million in investable assets.

Views on hedge funds
Family offices, which had scaled back their hedge fund investments during the financial crisis and who were angered by gates and frozen redemptions, are slowly investing again. In the aftermath of the Ponzi schemes and fraud cases, they have concerns about the safety of their assets and investment portfolios.

As a result, many family offices are reassessing their portfolio construction, asset allocation and risk management policies.

Based on the family office interviews in the current issue of Infovest21's Investor Focus, we see families are allocating a higher percentage of their portfolio to liquid assets and are accepting lower returns. Some are investing a higher percentage in gold.

Families are also spending more time doing thorough due diligence on topics such as liquidity, lock-ups, side pockets, fees and terms. Due diligence has become more sophisticated. Some conduct identity, background and reputational due diligence as well as operational due diligence. Manager’s controls, procedures and counterparty relationships are assessed. Some family offices have instituted on-site compliance efforts where they test and independently verify practices. Monitoring is occurring at regular intervals.

Some family offices are reexamining portfolio construction and emphasizing risk management. In particular, some are examining tail risk hedging.

The issues contains interviews with:
*RIJO Investments
*Consolidated Investment Group
*Nine Thirty Capital

Other features include:
*Family office and tail risk hedging
*Family office regulatory update
*Sampling of Who's WHo in Family Offices
*Quarterly Sentiment Indicator: Managers