Family offices received an unpleasant and unexpected surprise earlier this month – they are now going to have to register their commodity and futures trades. It will be an onerous, and potentially costly, process, many say.
The U.S. Commodity Futures Trading Commission (CFTC) ruled that family offices would no longer be exempt from reporting and registration requirements for commodity and futures trading, whether done directly or through funds.
The ruling could mean from around $50,000 to as much as $150,000 in additional annual expenses to cover compliance, legal, staffing and reporting costs, according to industry executives. In addition, the ruling will mean more public disclosure about a family office’s business – a development very much unwanted by wealthy families who want to remain as private as possible.
“Families see it as an unneeded invasion of personal privacy,” said John Benevides, president, Family Office Services for Harris My CFO.
Adding insult to injury, the ruling comes just weeks before these offices face a deadline to register with the Securities and Exchange Commission as investment advisors; all of these changes stem from new guidelines mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“Family offices have done a lot of re-thinking about how their office should be structured and how their assets should be deployed,” said Barry Schwartz, founding partner of ACA Compliance Group. “But now it seems like entities which were able to avoid SEC registration may still get sucked into registering with the CFTC.”
The Chicago-based Family Office Exchange, a prominent industry association, has alerted its members about the ruling, a spokesman said, and expects that “many family offices will need to register with the CFTC under the new regulation.”
Family Offices in Government Cross-Hairs
Although single family offices were largely ignored by regulatory agencies before 2008, the financial crisis made monitoring systemic risk in capital markets a priority, putting the large heretofore unregulated smaller and mid-sized offices squarely in the government’s cross-hairs.
The rise in popularity of alternative asset classes since 2008, including commodities, has also contributed to additional government scrutiny. “There are two tailwinds at work here,” said Benevides, former president “First, there’s been more allocation in family office portfolios to alternatives. Second, within alternative asset classes, there’s been a tendency to focus on resources such as timber, oil, copper and other precious metals.”
Family offices that do have substantial commodity holdings and need to register and report to the CFTC will face a host of additional tasks and expenses, according to Schwartz, including periodic filings with the National Futures Association, and more stringent disclosure requirements. Family offices will also have to submit to periodic examinations by regulators, Schwartz said, step up the quality of their book and record –keeping, provide ethics training for employees and conduct more internal audits.
Exploring Outsourcing
Some family offices are scouring CFTC records to see if there any exemptions they can take advantage of, while others are considering outsourcing their commodity trading to larger firms like Harris, which is owned by Bank of Montreal.
“Families have reached out to us to see if they can shift their trading to Harris, so they don’t have to do it in-house,” Benevides said. “We are already registered with the SEC as a registered investment advisor and in compliance with the CFTC, so they should be able to outsource commodities trading to a firm like ours.”
Family offices have until the end of the year to register with the CFTC, but there is a chance they may get some good news before then. The commission is still soliciting public comments to help it determine if some family offices might be eligible for exemptions in the future.
“I think they are looking to see how big family offices are in the marketplace,” said Miles Padgett, a Washington, D.C.-based partner in the law firm Kozusko Harris Duncan, “and if they are not significant, they may yet get an exemption.”
