Pondering over Compliance for Family Office Investment Funds under the Alternative Investment Fund Managers framework
The regulatory treatment and categorization of family offices vary significantly between the United States and Europe, particularly in relation to the Alternative Investment Fund Managers Directive (AIFMD) and the role of external capital.
United States
Family offices in the U.S. typically benefit from exemptions under the Investment Advisers Act of 1940, specifically the "family office exemption." This allows single-family offices (SFOs) managing wealth exclusively for one family to avoid registering as investment advisers with the Securities and Exchange Commission (SEC). As a result, U.S. family offices face a minimal regulatory burden compared to their European counterparts.
In the U.S., family offices generally do not raise external capital. They manage the wealth of a single family and are not subject to the same regulatory regimes that govern public investment funds. The U.S. regime is less prescriptive and extensive in regulating family offices, offering privacy and limited regulatory oversight for family offices that meet the exemption criteria.
Europe
In Europe, family offices often face a more complex regulatory environment, largely influenced by the AIFMD. European family offices that manage or raise capital from external investors typically must comply with AIFMD requirements, entailing registration, reporting, and operational standards.
If a family office manages solely internal family capital without external investors, it may be exempt from AIFMD, but the threshold and application vary by country. Some European jurisdictions, such as Luxembourg, offer flexible and specialized investment fund structures tailored for family offices, providing privacy, regulatory advantages, and political stability.
European family offices may face heavier regulatory scrutiny when engaging with external capital or operating investment funds, with greater transparency and compliance obligations compared to U.S. family offices.
Role of External Capital
| Aspect | United States | Europe | |-----------------------------|-------------------------------------|---------------------------------------| | Family offices with no external capital | Generally exempt from registration; minimal regulation under family office exemption | Often exempt from AIFMD if strictly managing internal capital but rules vary by country | | Family offices raising external capital | Typically (if they exist) subject to SEC registration and more regulations; rare for SFOs to raise external capital | Must comply with AIFMD, including registration, disclosures, and operational compliance | | Regulatory burden | Low for single-family offices with no external capital | High if external capital involved; more prescriptive rules |
Additional Context
Family offices in Europe are also influenced by broader EU rules on anti-money laundering and investor protection. The increasing complexity in managing family offices globally, considering geopolitical shifts, taxation, and regulatory regimes, has led ultra-high-net-worth families to consider competitive and bespoke solutions offered by jurisdictions outside Europe and the U.S., such as Luxembourg and Dubai.
In the US, family offices apply for an exemption under the Investment Advisor Act, but with the advent of new legislation, a definition of family offices was introduced. European and US-based family offices can be affected by AIFMD (Alternative Investment Fund Management Directive) under certain circumstances. European family offices do not have an ad-hoc regulatory definition and are categorized based on the regulated services provided.
The US type of family office has evolved to be very close to a hedge fund rather than an institution that preserves the wealth of a single family and provides life events related services. AIFMD does not apply to investment undertakings that are used to invest the private wealth of investors who do not raise external capital. Multi-family office investment vehicles are likely to be caught by AIFMD.
The phenomenon of family offices has been increasing since 2000. Single-family structures are the most traditional form of family offices, but now there are also entities managing and investing the wealth of multiple families. The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or The Sortino Group.
Former hedge fund managers, some well-known, are returning capital to their outside investors and managing their money under the lighter regulatory regime applicable to their families and employees.
This article is a Hedge Fund Guest Article and copyrighted by The Sortino Group.
In the United States, family offices, primarily managing the wealth of a single family and not raising external capital, are exempt from registration as investment advisers with the Securities and Exchange Commission and face a minimal regulatory burden, unlike their European counterparts. On the other hand, European family offices, especially those managing or raising external capital, adhere to stringent regulations such as the Alternative Investment Fund Managers Directive (AIFMD), including registration, reporting, and operational standards, thus experiencing a heavier regulatory burden compared to U.S. family offices.
