Investment banks and brokerage firms aren't the only ones scrambling to prepare for the post-Dodd-Frank Act regulatory environment.
Family offices, which provide investment management and other financial services to ultra wealthy families, also face major challenges in dealing with the legislation.
The bombshell in the Dodd-Frank Act for family offices was the revocation of the "less-than-15-client exemption" for private investment advisers. That rule allowed single-family offices to avoid registration with the Securities and Exchange Commission under the Investment Advisers Act of 1940, and the disclosures and costs that come with it.
As long as an entity provided investment management services for fewer than 15 clients, it didn't have to register with the SEC. That exemption is gone, and family offices that formerly flew under the radar have until March 31 either to comply with a tighter definition of an exempt private adviser or submit to SEC regulation.
The new SEC definition requires that advisory services be provided exclusively to family members. In-laws, family friends and most employees of the office are out, meaning no more co-investing opportunities for outsiders.
"Dodd-Frank has forced a lot of family offices to do some soul-searching," said Robert Testa, a senior analyst at Cerulli Associates Inc. who focuses on the family-office market.
"We don't see a mass exodus from the single-family-office structure," he said, "but most of these organizations are restructuring to comply with the new regulations — outsourcing investment management functions or registering as a private trust company."
“After approximately 15 years since the first DAPT legislation passed, not a single DAPT has been tested all the way through the court system. Most likely this is because such a large supermajority believes that if tested the DAPT will work to protect its assets from a creditor of the settlor. However, despite the very high likelihood of protection, if there is a way to increase the odds of success even more, then such a strategy should be utilized whenever possible.
George P. Brown Ph.D
However, as asset protection planning has evolved and the competition among the states to have the most protective asset protection laws has intensified, the asset protection planners now have the ability to use charging order protected entities to protect their clients’ assets from potential creditors. This tool is so easy, yet it is extremely underused by estate planners who at a minimum should be integrating this form of asset protection planning into their repertoire.”