Rule Change Could Channel More Bank Investments Into Family Offices

Tom Burroughes

30 July 2020

A loosening up of post-financial crisis banking regulations, known as the Volcker Rule, could prompt banks to pitch more investment services to family offices, according to international law firm Squire Patton Boggs.

Changes to the rule, named after the former US Federal Reserve Chairman Paul Volcker, who wrote the rule a few years ago, lifts a ban on banks investing in or sponsoring family wealth management vehicles. Prior to this, family offices’ structures were under the Volcker Rule and off-limits to banks.

The rule, introduced in the years after the 2008/2009 market tsunami, generally prohibits banks from certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds. The ban was designed to limit risk-taking of the sort blamed for helping to bring about the market crash.

A period of lobbying by the financial services sector, however, has encouraged legislators to make the rule less severe so that family wealth structures are no longer deemed “covered funds”.

“It is an opportunity for bank-backed private wealth operations to have a different range of opportunities to propose to ultra-high net worth investors. As a result, banks can structure family wealth fund investments in a way they could not have done before,” Daniel G Berick, partner, Squire Patton Boggs, told Family Wealth Report.

“This opens new territory for bank-based wealth management companies and to build new structures for family offices,” Berick, who is based in Cleveland, Ohio, said.

Berick and colleague Andrew S Griesser wrote in a recent note that the change to the Volcker Rule’s restrictions take effect from October 1.

According to the amended rule, a “family wealth management vehicle” is firstly, a trust where the grantor are family customers - as defined in the rule or secondly, a non-trust entity in which family customers own a majority of the voting interests as well as a majority of interests in the entity.

“Generally, ownership of non-trust family wealth management vehicles is limited to family customers and up to five “closely-related persons” of those family customers. However, under a de minimis exception in the amended rule, one or more entities, including a banking entity, that are not family customers or closely related persons may acquire or retain up to an aggregate 0.5 per cent interest in the family wealth management vehicle to establish corporate separateness or address bankruptcy, insolvency, or similar concerns,” the lawyers wrote.

In practice, this means that long-standing non-family employees at a family office, such as a chief investment officer, could under certain conditions acquire an interest in the vehicle, Berick said. Such a change could encourage certain people to stay at a family office, or be motivated to do so.

Such a change to the rules also highlights how family offices have become more significant players in the investment field, alongside corporations and private equity houses, he said.