Rep. AOC on Family Offices - YouTube

Thank you, Chairwoman Waters, for holding this  important markup and for considering my bill,  

the Family Office Regulation Act of 2021. Through  a loophole in current law, all investment funds  

organized and registered as "family offices"  are exempt from registration with the SEC,  

and have no requirement whatsoever to disclose  their size, portfolio, or leverage. Now, due in  

part to legislative and regulatory exemptions,  unsurprisingly, this loophole has created a  

massive rush of funneled cash into these entities  deemed as family offices — so much so that a 2021  

report by Ernst & Young estimated that the amount  of money held by private family capital now  

outstrips all private equity and venture capital  combined, with at least 10,000 single family  

offices in the world. I'm proud to offer this  bill which is long overdue. Specifically, my bill  

would limit the use of family office exemption  from registration as an investment advisor with  

the SEC two offices with $750 million or less in  assets under management. So if you are a family  

office that holds less than $750 million  in assets, you can retain that exemption.  

But funds organized as family offices with more  than $750 million in assets under management would  

have to register with the SEC. The bill would also  repeal a grandfathering clause in Section 409 of  

Dodd-Frank that permitted family offices that  have clients that include persons who are not  

members of the family to not register. Finally,  the bill would authorize the SEC to require  

by rule the registration of family offices that  are below the $750 million threshold if they are  

highly leveraged or engaged in high risk  activities. Family offices have now grown to  

the point that they are deeply interconnected  with the rest of the financial system,  

and their activities could affect the stability  of our financial markets. And there are plenty of  

examples, including the Archegos implosion earlier  this year, that led to $10 billion in losses. But,  

the Archegos implosion is not the only reason why  we need this bill. Consider this: family offices  

now manage more capital than private equity firms.  As I mentioned, more than 10,000 family entities  

registered as family offices in the U.S. manage a  combined $6 trillion in assets. This is more than  

all U.S. private equity firms combined, which now  hold, as of 2019, only $4.1 trillion in assets.  

Second is that tech titans and the ultra rich  use family offices to exacerbate inequality  

and leverage tax advantages. Reporting  by ProPublica earlier this year found  

that the 25 richest Americans pay little to no  taxes thanks to the preferential treatment of  

their investments in the tax code. And  many of them are using the advantages  

and lack of transparency in family offices to  evade and not pay their fair share in taxes.  

Third, family offices are now starting to move  into volatile cryptocurrency markets. Family  

offices are also emerging as significant investors  in cryptocurrency hedge funds. Assets under  

management in these cryptocurrency funds reached  $36.9 billion in July of of this year, this month,  

while a 2020 report by PWC found that nearly half  of all such investors in crypto private funds are  

in family offices. I would also like to enter into  the record a fact sheet authored by Open Markets  

Institute regarding the risks family offices  posed to the financial system, as well as a  

statement of support from Americans for financial  reform. Without objection, such is the order.  

In sum, you know, I think that this  is a rather commonsense provision.  

If we want to prevent systemic risks, I believe  it is eminently reasonable that a family office  

that holds almost a billion dollars in assets  simply register with the SEC. And if you have  

less than $750 million in assets, but you are  extremely highly leveraged or engaged in very  

high risk activities, I think the bare minimum is  to ask for and require registration with the SEC.  

Normal family offices that have less than $750  million in assets can preserve their exemptions,  

but again, I believe it's eminently reasonable to  expect a family office that holds almost a billion  

dollars in assets to register. Thank you. Madam  Chairwoman. The gentlewoman from Missouri, Miss  

Wagner is recognized for five minutes to strike  the last word. I thank you, Madam Chairwoman, and  

I do move to strike the last word. This bill is  a pretty significant rollback of the SEC's family  

office rule, so I just have a couple questions for  the gentlewoman from New York, Ms. Ocasio-Cortez,  

Ms. Ocasio-Cortez, the Dodd-Frank Act included  a provision requiring the SEC to define family  

offices in order to exempt them from regulation  under the Investment Advisors Act. The purpose of  

the SEC's family office rule is to allow a family  office to give investment advice to a family  

client without registering under the Advisors Act.  This exclusion makes sense because it recognizes  

that families should be able to manage their  own finances without government interference.  

This bill upends the policy justifications by  requiring family offices with over $750 million  

in assets under management to register with the  SEC and in addition to requiring some family  

offices with less assets under management to in  fact register. I have a couple of questions for  

the gentlelady from New York, Ms. Ocasio-Cortez,  if she would so engage. Why is it appropriate  

now for the SEC to interfere in the  financial matters of individual families.  

If I may? One of the things that the SEC did not,  you know, where there was an oversight in the  

passage of Dodd-Frank is that I don't believe  that we saw, and perhaps that individual saw,  

the acceleration of income inequality to the  extent and the degree that it exists today.  

And so, the idea that a single person or a single  family could hold enough wealth that they could  

represent systemic risks was something that could  not be really factored in back at that time.  

But now we have the ascent particularly, even  during the pandemic, of not just billionaires  

but super billionaires whose own holding  could represent a significant threat to any  

one individual or market. Which is why we believe  that any one office, and believe in the underlying  

concerns of the bill, which is why we — Reclaiming  my time, because I have several questions.  

Are you concerned by the privacy implications that  this bill raises with respect to families managing  

their own money? And did I understand you to  say that this was a bill about income inequality  

and not about an overturning of the SEC's  family h office rule and an invasion of privacy,  

allowing families to make their own investment  decisions? Well, it's certainly not about income  

inequality because it's about assets rather than  what salary an individual's being paid. But,  

you know, I believe that what we really need —  this is really about systemic risks. If Jeff Bezos  

has a billion dollars in assets and is trying to  trade in a highly leveraged way, which threatens  

small families, then he should register with the  SEC. Reclaiming my time. How did you choose a $750  

million threshold? Was it about family offices  with over seven — what, I guess, what is it about  

family offices with over $750 million in assets  under management that justifies a rolling back  

of the family office rule and requiring  SEC oversight of those family offices,  

compared to a family office with $745 million in  assets under management. Well, you know, I'm sure  

the Congresswoman is no stranger to the fact that,  at the end of the day, many times we have to draw  

a line somewhere. And I believe that there's  eminent consensus around this figure. You know,  

a family can hold, a family office can hold half  a billion dollars in assets. Consensus from whom?  

Pardon? Consensus from whom? Well, among our  colleagues. Certainly not only. And regulators  

as well. And certainly not with the SEC or  certainly not, Ms. Ocasio-Cortez. You know,  

the Investment Advisors Act of 1940 is focused on  investor protection. It does so through disclosing  

and minimizing conflicts of interest between  clients and people they pay to manage their money.  

Family offices were exempt from registering  under the Advisors Act precisely because it was  

believed that family offices can and should manage  family money with fewer conflicts of interest.  

I'm wondering how that premise has changed and  what about family offices leads you to believe  

that they should now be covered by the Advisors  Act. Well, in 1940 we had much higher rates and,  

you know, we had a fairer economy. It wasn't all  the way fair, but it was much fairer. A fairer  

economy? I yield. The gentlelady's time has  expired. The gentleman from Texas, Mr. Green,  

is recognized for five minutes to strike  the last word. I thank you, Madam Chair,  

and I thank Miss Ocasio-Cortez for this piece  of legislation. She has indicated something  

that bears — Mr. Green, would you speak up  please so that Mr. Perlmutter can hear you?  

Thank you. I am speaking rather loudly. I  think there may be some technology problem.  

But I support Miss Ocasio-Cortez and what  she's trying to do. And she said some things  

that in my opinion bear repeating. 10,000  of these family offices across the nation,  

the world, in fact, $6 trillion in assets this  is major money and this is a circumstance that  

should call to our attention some concern.  Archegos is the proverbial canary in the  

coal mine as I see it. I was here and I  remember long-term capital. Long-term capital  

had investors, the principal investors, who  were Nobel Prize-winning economists. But it was  

opaque, and it was that opacity that created the  problems. They had derivatives that could not be  

explored by the SEC to a limited extent. They  were requiring their investors to invest for  

some period of time and really give no information  to them about what they were investing in.  

Long-term capital was the investor, pardon  me, the canary in the coal mine at the time.  

And when long-term capital started to fail, we saw  AIG attempt to prop it up. My point is, we see now  

another opportunity to prevent a circumstance  that developed after long-term capital. With  

this $6 trillion dollars, and if some of it going  into cryptocurrency going into the broader economy  

we're not talking about a home office where you  have a person who sits there behind a desk and  

he's taking care of the business of a family.  Well, this family business now is integrating  

itself into the broader economy, and as it  integrates itself into the broader economy, it  

can pose systemic risk that we did not contemplate  at the time we were initially embracing concerns  

related to family businesses. So I absolutely  support what Ms. Ocasio-Cortez is attempting to do  

in terms of giving a carve out for $750  million. I think that's more than reasonable,  

and I support the notion that we have to have  more insight into what's happening within  

these family offices. And I will yield the  balance of my time to Miss Ocasio-Cortez. Mr.  

Green, would you could you yield to me? I'm  going to yield to the gentlelady. I believe  

you'll be able to claim time. Let me yield to  the gentlelady, Ms. Ocasio-Cortez. Mr. Green  

yields to Miss Ocasio-Cortez. Thank  you, and I thank the Congressman  

for his support of the bill. And again,  this is really about, at the end of the day,  

systemic risks. And when there's concentrations of  wealth, and then when there are shadowy entities  

that are allowed to escape all oversight, no  matter their size, no matter how much risk  

that they're taking on, that presents a systemic  risk to our financial system. And ultimately,  

you know, this is a pretty basic requirement.  It's simply registration with the SEC if you have  

nearly a billion dollars in assets or if you are  engaged in extremely high risk financial activity.  

And really, that's what ultimately this is about.  This is about preventing systemic risk because of  

the emergence and the use and abuse of the  registration of family offices to hold and  

engage in activities with enormous sums of wealth  that absolutely pose systemic risks without basic  

oversight and registration with the SEC. Thank you The time belongs to Mr. Green. 

Will the gentleman from Texas. I shall. I yield  to the gentleman from New York. California.  

California. Excuse me. That would be the very  good looking gentleman from California. Thank you.  

Just a couple of points. These family offices, you  would think it's just a husband and wife. And they  

can involve well over a dozen family units pooling  their power, investing as a group. Some are more  

active than others. Some may even need protection  from the investment advice that they're getting.  

I support the bill. I look forward to working with  the author and the chair of the full committee in  

making sure that the SEC has the authority by  regulation to change the registration form that  

would be applicable, since the Investment Advisors  Act registration form may not be fully applicable.  

I yield back. The gentleman's time has expired.  The gentleman from Michigan, Mr. Heisinger,  

is recognized for five minutes. Thank you,  Madam Chair. I appreciate the recognition  

and I also have a few questions about my  colleague's bill. And through you, Madam Chair,  

I'm hoping that Representative Ocasio-Cortez  would be able to answer a few of these.  

The the author's bill sets the exemption threshold  for family officers to register at the SEC at $750  

in assets under management that was brought  up by my colleague from from Missouri.  

I guess she believes that there is  consensus that that's the right number,  

but I don't see anything in the bill  that contemplates fluctuations of value,  

market value. The market goes up, market goes  down, inflationary pressures that may happen,  

and while I have no realistic belief that my  family is ever going to have these kinds of  

assets, there are some that have, and have earned  that over, whether it's one generation or multiple  

generations. But I don't see anything in your  bill that contemplates those fluctuations and  

what happens for a family office that's  at $740 and doesn't have to register.  

The market goes up for a couple of weeks, it  becomes a $760 million value, does it then have  

to register? How quickly does it have to register,  and what happens when it falls back down to $740  

million, and it's below the threshold? If I may?  Please. Thank you. You know, I think these are all  

excellent questions and this is one of the reasons  why we don't want to be overly prescriptive  

within the language of the bill. So what this  does is that this yields some of that discretion  

to the administration within the SEC, in which the  SEC can then make these determinations and what  

they see fit in what is healthiest and best for  preserving stability in our financial system. So  

you're anticipating that the SEC would come up  with some sort of rule that would then dictate  

how that would be handled? I believe that that  the rules determined by the SEC would do a better  

job than us being overly prescriptive  in in the provisions of the law, yes.  

Your bill also bars people who are subject to  the final order described in section 15(b)(4)(h)  

of the Exchange Act from being able to take  advantage of the family office exclusion.  

15(b)(4) outlines, basically,  bad actors and different  

nefarious actions that have been taken. But I  believe that h applies to people subject to state  

security barrings and other punishments. Why did  you pick those particular bad actors versus the  

others that are outlined in in 15(b)(4) more  broadly? I'm afraid I'm missing something here.  

Well I, you know, one of the things that I  think we see, particularly what we've noticed in  

the developments with Archegos as well as  other abuses, is that these, I believe, are  

provisions that are particularly leaned  in on in creating that systemic risk.