If the exemption restrictions are eased multi-family offices will prosper


What it could mean for family offices if Dodd Frank is repealed


Here’s an interesting prospect for the family office sector in the US – the repeal of the Dodd-Frank Act under a Donald Trump administration. The president-elect promised to get rid of the Act during his campaign to be president.

Of course, much of the Act’s attention is centred on the banks and is specifically designed to stop, or at least alleviate, the problems associated with the financial crisis of 2008/2009. But a very small part of the Act is directed at family offices and whether or not they should be regulated. Under Dodd-Frank, family offices are excluded from regulatory oversight if they aren’t commercial in their ambitions, i.e., they seek external clients. To be exempt they must also provide investment advice about securities only to family members. Family members are deemed to be lineal descendants of a common ancestor.

All this means it that a single-family office is exempt from regulatory scrutiny – and there are few family offices that don’t like the current arrangement. Indeed, the popularity of the regulatory exemption has led many hedge funds to ditch their external clients and convert to a single-family office.

Trump has also promised to repeal the estate tax, which will make it easier – and cheaper – for dynastic families to pass on their wealth to the next generation.

Whether the incoming Trump administration spends much time on changing Dodd-Frank remains to be seen. It’s a huge piece of legislation, extremely complicated and some think he’s unlikely to want to completely repeal it, or even change it much. Nevertheless, Trump has promised less government, taxes and regulation, and Dodd-Frank was written primarily by Democrats – the former Congressmen Chris Dodd and Barney Frank. These are pretty good reasons why he and his policymakers will want to see it go, or at least changed.

Trump has also promised to repeal the estate tax, which will make it easier – and cheaper – for dynastic families to pass on their wealth to the next generation. So, it’s not inconceivable that some changes to the regulatory regime around family offices could also happen. And there’s only one way this can go under a Trump administration – by making the exemptions to regulatory oversite less rigid.

Changes to the exemption criteria could have a number of consequences for family offices. It could lead to a boom in commercial family offices seeking outside money as the exemption rules are eased and multi-family offices face the prospect of no longer being regulated. But the blurring of the lines between commercial and noncommercial family offices could create regulatory difficulties further down the road for the whole sector if the commercial side of the family office world gets into trouble through mis-selling/performance disputes with its clients. 

Much remains to be seen, but at the very least, the environment in which the whole financial world will be operating under will change under the Trump administration – and this will even affect family offices.