A guest blog by Agreus Advisor, Christopher Costi.
Family Offices have enjoyed decades of privacy away from the watchful eye of the regulators but with all of this set to change over the next 12 months, should Family Offices be taking the role of Compliance Officer more seriously?
Family Offices are exempt from regulatory oversight. Or at least, they have been since 2010 with the passing of the Dodd-Frank Act which granted Family Offices exemption from the previously passed 1940 Investment Advisors Act.
Fast-forward to 2021 however and the much-discussed Archegos Scandal prompted US policymakers to take legislative action to increase regulatory oversight of Family Offices. And that they did.
In autumn, the Democrats approved a bill which would see Family Offices with over $750M in AUM forced to register with the Securities Exchange Commission (SEC). Not only would further regulation go against the very DNA of Family Offices but it would unpick the extraordinary effort that went into passing the Dodd-Frank Act some 10 years ago.
Perhaps the biggest loss of all would be how it could deter UHNWI’s and Families from establishing Family Offices. The most influential and fluid investors today and the very entities that form the backbone of investments in technology, pharmaceuticals, making a social impact and delivering change in the world we live in. The very entities that are reinjecting life back into the global economy by supporting SMEs.
The good news perhaps in the conversation about regulation is that it will be incredibly difficult to impose, mostly due to the difficulty in defining a Family Office and also because they will fight it to the very end but while regulation might be difficult to impose, it is coming and it is something Family Offices will want to be prepared for.
The SEC has identified amendments to the Family Office rule as one of its regulatory priorities for the year ahead while the Commodity Futures Trading Commission (CFTC) issued a statement claiming that the Archegos failure highlighted the importance of strengthening the body’s oversight of Family Offices. Which of course they plan to do.
It is looking increasingly likely that Congress will try and repeal or at least limit the Family Office exemption and if it does, it could spell an end of a golden era for Family Offices as regulatory bodies around the world take note.
Rather than sitting patiently and awaiting their fate however, Family Offices should act now and seek the help of Compliance Officers, professionals who are charged with designing, implementing and monitoring the processes by which the Family Office will comply with the applicable laws and regulations.
It has always surprised me that the role of a Compliance Officer is not more commonplace within the Family Office, now more than ever. This person would in theory not just be charged with impending regulatory changes and the impact that might have on the Family Office world but there is everyday regulation to comply with too.
This includes the creation of accurate KYC profiles on internal systems, creating and maintaining the Family Office’s Compliance manual, procedures and processes and any associated documentation. This also means ensuring documentation is timely, accurate and complete, reviewing and evaluating any compliance concerns and holistically speaking, ensuring the highest level of governance and integrity throughout the Family Office from ensuring systems and resources are adequate enough to uphold these compliance standards and reporting on a periodic basis to relevant bodies.
Without delving too much deeper into the job description of a Compliance Officer, put simply, Family Offices are consistently looking at new ways to preserve and generate wealth. This often means investing in new asset classes, acquiring new properties and moving into new jurisdictions. All of these items alongside almost everything else a Family Office does requires self-regulating and I believe it is a job only for a Compliance Officer.
For too long Family Offices have relied on the compliance teams that sit within their service providers, be it trust, tax or investment management services. While all of these teams can offer a watchful eye over their involvement in the Family Office, it is certainly time to add another layer of scrutiny to the function to offer a holistic coverage of the Family Office’s compliance with existing and new regulatory policy.
While a Compliance Officer can most certainly take on the administrative side of compliance, most importantly, they can release the time pressure and burden which currently plagues senior leaders within a Family Office, tasked with this watchdog position. Compliance Officers can eliminate the margin of error across the Family Office, reduce risk, eradicate legal concerns, foster better employee engagement, increase financial integrity, ensure compliance with regulations and increase the efficiency in your operations. Above all, they can help to protect your assets and with extraordinary wealth being managed by Family Offices, this should be the number one reason to explore the option of bringing a Compliance Officer into your team.
Would you like to have a conversation about hiring a Compliance Officer for your Family Office?