Family Office Regulation with Tim Terry

As part of our GFO Pulse Q & A series, Jane Flanagan, Director of Family Office Consulting, sat down with Tim Terry, Founding Director of the Private Investor Coalition (PIC) and General Counsel for a New York family office, to discuss the legislative and regulatory issues facing family offices today.

Jane: Tim, first and foremost, I’d like to thank you for your work on behalf of family offices everywhere. I know that you’ve been advocating for families on the Hill since PIC’s inception in 2009, and our clients have benefitted from your efforts – from the Dodd-Frank exemption to your recent work on Reg BI and everything in between. Many of our clients are paying close attention to what’s happening in Washington. What issue has PIC’s attention right now?

Tim: HR 4620, the Family Office Regulation Act of 2021 that was introduced by New York Congresswoman Alexandria Ocasio-Cortez is a top priority. The Archegos meltdown brought to light concerns that had been festering within Congress and the SEC for the past couple of years about the lack of transparency into family offices.

The Archegos narrative quickly turned into a “bash the rich” and “regulate family offices” response from some instead of focusing on the core issue that caused the meltdown – bad credit risk management by the broker dealers. Unfortunately, the one shining example of a family office that Congress and regulators now have in their minds is Archegos. But, as we know, Archegos was an outlier and operated very differently from how the overwhelming majority of family offices operate.

On top of that, there has also been a lot of media attention on family offices investing in cryptocurrency and SPACs – areas receiving heightened scrutiny by the SEC, Congress and consumer advocacy groups. The combined effect of these story lines has led to calls for more transparency into family office market activities. HR 4620 seeks greater regulation of family offices to address these concerns.

Jane: This context is helpful, Tim. We’ve had many clients express concern about HR 4620 and wonder about the likelihood of its passage. What does this legislation mean practically for family offices?

Tim: This is really important: the intent behind HR 4620 is not a passing threat. There is consistent and enduring concern in Congress and with regulators about family offices and their impact on the financial system. The pressure for transparency will only grow. The key is to find a remedy now that honors these concerns while allowing family offices to remain private and continue to enjoy the protections intended for them as investors.

The chances of HR 4620 passing in this current Congress are slim. There’s a possibility that it passes the House, but it is unlikely to pass the Senate. Of course, the landscape is constantly evolving, and anything can happen. But even if HR 4620 only passes the House, it would still likely become the standard by which Congress will attempt to regulate family offices in the future.

Jane: The biggest concern we hear about regulation relates to preserving the privacy of the family and the family office. What is PIC’s response to HR 4620?

Tim: We oppose it. It is poorly drafted and would do nothing to prevent the next Archegos because it doesn’t address the problems inherent in the Archegos trades – hyper leverage and bad risk management on both sides. We share the concern about privacy and regulation, but we also need to be realistic. We are currently working on an alternative to HR 4620 that would contain the following elements:

1. The Family Office Exemption remains intact.
2. Family offices would be required to make a filing with the SEC to claim the Family Office Exemption, similar to what we used to do to claim the CPO and CTA exemptions.
3. Family offices would be subject to reasonable data requests from the SEC, perhaps through a new “Form FO” that is similar in scope to the CFTC’s Form 40 – but tailored to family offices so that it would not be overly invasive or burdensome.
4. Each family office’s privacy would be maintained. Neither the exemption claim nor Form FO would be available to the public. In short, the regulators would have a view, but the public would not, similar to how confidential Form 13Fs are currently treated.
5. To correct an oversight in the current Family Office Exemption, in-laws would be added to the definition of “family client.”

We welcome this audience’s feedback on these alternative proposals and believe that these steps are more likely to yield the information that regulators are seeking and the protections we demand than HR 4620.

Jane: How can family offices support this effort?

Tim: Joining PIC is a great way to support this effort and all of the other work we do (e.g. amended Accredited Investor definition, streamlined Reg BI, request for family office exemption to the Corporate Transparency Act) to advocate for family offices. Also, now is the time to contact your local Representative or Senator to make sure that they understand your concerns that HR 4620 will not prevent future Archegos-like situations. Ask them for the opportunity to discuss another way.

Longer term, there is a real need to develop data to help us tell the true family office story and reassure those with concerns. We can provide anecdotal information, but empirical data is better at convincing Congress and the regulators of the immense, positive contribution that family offices and their capital have on our communities and the broader economy.

The reality is that the Archegos narrative as being a family office problem is not going away, and the work we do together today – to advocate for reasonable measures to ensure the safety of the financial system while protecting our privacy – will make a positive difference for everyone.

Jane: Tim, thank you very much for your time and your perspective.

Recommended Reading:

PIC Member Alert – Family Offices & Archegos

Private Investor Coalition Comment Letter

To Learn More, Contact:

Jane Flanagan, Director of Family Office Consulting, 312-557-2025 or JPF7@ntrs.com  

© 2021 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S.LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice. Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, and personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.  Privacy Notice: To learn about how Northern Trust uses the personal information you provide and your related rights please visit https://www.northerntrust.com/united-states/privacy/north-america.