October 13, 2010

Dodd-Frank and the Family Office

One of the significant changes to the financial regulatory system that Dodd-Frank will bring about is the regulation of advisers to private funds, through the elimination (effective July 11, 2011) of the 15-client exemption contained in Section 203(b)(3) of the Investment Advisers Act. The intent was to bring regulation to the advisers of hedge funds and private equity funds, but Congress recognized (with the help of some lobbying, no doubt) that the definition of “private fund” in Dodd-Frank potentially has a very broad reach. Thus was born the need for an exemption for family offices, which are commonly thought of as those entities that run the money for well-off families, and are presumably unlikely to be significant contributors to the systemic risk concerns that have now rained down regulation on the advisers to private equity and hedge funds.

Yesterday, the SEC proposed rules to implement the Dodd-Frank exemption for family offices, giving commenters just a little over 30 days to weigh in. Next up will probably be proposed rules to implement the exemption for advisers to venture capital funds, which are sure to bring about a lot of commentary given the difficulties in defining what exactly is a venture capital fund (as compared to other private funds).


With the expiration of the TARP program, it appears to be time to justify its existence and to explain how it really wasn’t as bad (or as costly) as everyone made it out to be. I don’t need much convincing on this one, just thinking back to how bad things were in the depths of the financial crisis and how I might have been selling apples on a street corner had it not been for some level of intervention. Nonetheless, we now have a full-scale retrospective on TARP, plus Treasury Secretary Timothy Geithner’s Washington Post opinion piece from last Sunday. In the op-ed piece, Secretary Geithner seeks to dispel the top five myths about TARP: that TARP cost taxpayers hundreds of billions of dollars; TARP was a gift for Wall Street that did not help Main Street; TARP was a quick fix for the market meltdown but left the financial system weak overall; TARP worsened concentration in the banking sector, leaving it more vulnerable to another crisis; and TARP was the centerpiece of a strategy by the administration to assert more government control over the economy. TARP also “lab tested” some of the “reforms” that have now been rolled out to public companies generally, such as the soon-to-be required Say-on-Pay resolution. Now that it is gone, let’s hope we never see it come to pass again.

Wall Street Pay

It is intriguing to juxtapose the TARP defense with the news earlier this week in the WSJ that Wall Street pay has hit a record level at $144 billion, up 4% from last year. This kind of news fans the flames of outrage of compensation levels, although it does appear that pay may be slowing down in the months ahead as some of the financial reforms and other regulatory actions kick in. It also seems that some of the compensation has been shifted to equity and deferred instruments, reflecting an effort toward mitigating risks of employees seeking only short term gains, which is hopefully some good news for these institutions in the long run.

– Dave Lynn