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What Washington’s proposed legislation could mean for the future of family office structures

Nov 29, 2021

A surge in the number of family offices in recent years has brought greater scrutiny of the largely unregulated structure, and now Congress is getting involved.

The latest proposed legislation would bring more oversight to family offices, which historically exist to manage the wealth of a single, high-net-worth family.

Finding the sweet spot between regulating those who operate on the fringes of the family office structure while not over-regulating those who are operating within its original structural intent may prove difficult.

Most family offices are designed for one family with a lot of complicated wealth, possibly tied to a private company or crossing multiple generations. Family offices provide structure, governance and professional support to manage everything confidentially, and in most cases, given the sophistication of the family involved, there’s no need for traditional securities regulations such as consumer disclosures, or other red tape.

That lack of regulation, though, has allowed some people to take complicated, high-risk, derivative-based actions, veering away from the intent of the family office structure by bringing in multiple families and recruiting investors without drawing widespread scrutiny. For some of those investors, the consequences have been dire.

Congress’ challenge is to walk that fine line between providing protections to those who may need it without burdening those who don’t with unnecessary regulations.

The background

The number of family offices and the assets underneath them have grown rapidly due in part to the boom in tech billionaires. There are about 10,000 family offices globally, and nearly half were started this century. In the wake of that growth, the SEC has been looking at the family office space for a while.

The Archegos Capital Management fallout in March 2021 added to the urgency. Former hedge fund manager Bill Hwang shifted to a family office structure with his company Archego Capital Management, using a highly leveraged portfolio concentrated in just a few stocks and relying heavily on swaps. It ultimately triggered about $20 billion in losses for those involved with that family office over two days.

This summer, a U.S. House bill was introduced that would amend the Investor Adviser Act of 1940 in order to provide greater oversight for family offices. The proposal, championed by Rep. Alexandria Ocasio-Cortez, would limit the exemption for family offices to those with less than $750 million in assets under management.

Most offices with more than $750 million in AUM would be required to register with the SEC and provide annual or other reports as deemed necessary, a major shift from what is required under current law.

What’s next?

If the current legislation were to pass, even in a revised form, people who work in family office structures will need to be up to speed on what the changes mean for them. Some unlicensed advisors to family offices, for example, might need to update or add to their credentials.

If regulations are enacted and deemed too restrictive, some people with their assets in a family enterprise structure could shift their resources to another country where the financial laws may be more appealing.

Political observers speculate the latest legislation (HR 4620) would have support of enough Democrats to move through the House, but it likely would not have the backing of enough Republicans to reach the 60 votes needed to move through the Senate in its current form.

Even if the proposal fails to gain the political support to become law, the proposal itself could send a signal to the market, which might then react. The proposal’s existence is likely to educate more investors on family office and its original purpose and intent. Or the ideas for greater oversight could shift to something specific such as derivatives, in the wake of the Archegos issues.

Certainly the majority of family offices are set up as they were intended to operate, serving multi-generational families without unnecessary disclosures and regulation. It’s also true, though, that it remains unclear how many family offices might be leveraged in a similar fashion to Archegos and at risk of a similar meltdown.


Robert H. Zondag, CTP
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