Single-family offices across the globe have prospered because of the growing number of very wealthy people. And also because they have escaped regulation – that might be about to change.
The problem for family offices stems from those working in the financial sector with family offices. Increasingly, regulators are beginning to see a potential conflict of interest emerging when an owner, or senior member of, for example, a hedge fund also has a separate family office.
The potential problem was highlighted by a Bloomberg report, which related the case of Bill Ackman, the billionaire boss of the hedge fund group Pershing Square Capital Management and his family office, Table Management.
According to the report, Table invested in Sprout Pharmaceuticals, maker of the first pill to aid women’s sex drive. After regulatory approval for the drug, Sprout was acquired by Valeant Pharmaceuticals International, which, according to the report, Ackman backed during a hostile-takeover showdown.
The report goes on to highlight other hedge fund managers with family offices, for which there are many in the US. And the issue isn’t just a problem for hedge fund owners – the same potential for a conflict of interest might exist for any owner, or senior partner, of a financial firm with a separate family office.
Unsurprisingly, with their enormous growth in recent years, regulators are looking at family offices with increasing interest. The US Securities and Exchange Commission, in particular, is at the forefront of this scrutiny. The Bloomberg report quoted Jennifer Duggins, who co-runs the SEC’s private funds unit, saying that the regulator was concerned about the potential overlap of investments and timely disclosure of information to investors in such situations.
The Dodd Frank Act of 2010 in the US represented the first serious piece of regulatory pressure on single-family offices. The act attempted to define for regulatory oversight what a SFO is in terms of the investors it served, and came up with a narrow definition around family members only. If a family office was deemed to be a bona fide SFO then it escaped direct regulation.
Nevertheless, some are beginning to question how much longer can SFOs remain unregulated, especially in the US.