November 15, 2010
Securities and Exchange Commission
Re: File Number S7-25-10
Comments on proposed rule to define family office based on requirements under the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
In reviewing the proposed rule based on requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act, that would help those managing their own familys financial portfolios determine whether their family offices can continue to be excluded from the Investment Advisers Act of 1940 we have the following comments:
Family offices are created when a family accumulates wealth and needs professional help in protecting and managing their wealth for current and future generations. Since many family members are beneficiaries of family founders and are not educated or lack experience in managing their wealth, family offices provide an efficient and professional means to all members of the family to protect and manage their wealth.
The definition of family should include not only adopted children and stepchildren, but also foster children. A foster family provides a foster child parental guidance and mentoring similar to what they provide to their own children. If the foster family created a trust for a foster child, as a minor, the proposed rules may prevent the foster family from providing investment advice through the family office. The same would be true if the foster child requested investment advice, as an adult, from the foster parents. A foster child should not be excluded or cause a family office to register as an investment adviser just because the person is not a lineal descendant. Family relationships dont necessarily end when a foster child reaches majority age.
Former family members should be allowed to continue to invest through the family office. A decision to discontinue investing through a family office should be a personal decision, not the result of a regulatory requirement just because there is a change in status of the family relationship. Society today is much different than the society during the Advisers Act of 1940.
The family office structure should not be determined by whether a company is wholly owned, but rather it should be determined by the family having majority ownership and control. Voting control of a company should be the primary criteria of the family office structure rather than having complete family ownership. It may well be advantageous to the family to allow trusted family employees to own a minority position in the family office.
Involuntary transfers should allow for a longer period of time to move an investor from the family investment entity. Four months may not be a problem when the investments are publicly traded securities, but if an investment is a private fund or private equity that restricts ownership transfers, it may take much longer to divest ownership while minimizing income tax consequences. The shorter period may cause an investor divesting their investments to incur higher taxes due to the restricted period.
Multifamily offices should be allowed to operate under this exclusion from the Advisers Act, with limitations. Many family offices are created due to a successful family business or as a result of selling a family business. Many times key employees of these businesses are also stockholders in the business and prefer to continue their investment relationship with the family. These relationships are often the result of working together for 10, 20, 30 or more years. It is reasonable to allow these former key employees of the family business to continue to invest through the family office. They have a better understanding of the abilities of the family office by knowing the personnel managing the investments. Limiting the number of independent families to a number such as five unrelated families that each have a minimum of ten (10) years working together prior to investing in the family office can provide reasonable restrictions.