A proposed federal rule that would require certain companies to identify their owners could put added pressure on family offices to hire legal counsel.

Under the rule proposed by the U.S. Department of Treasury, beneficial owners of the enterprise and the persons who file the paperwork to form or register it would need to submit their names and the addresses to Financial Crimes Enforcement Network (FinCEN), a bureau in the U.S. Treasury. 

It is designed to help prevent and combat money laundering, terrorist financing, tax fraud and other illicit activities, according to a summary on the government's website. It comes amid increased scrutiny of family offices by regulators that has been energized by the implosion of Archegos Capital Management, the family office of Bill Hwang, according to a February 9 Bloomberg report. 

Jennifer Post, managing partner in the Los Angeles office of Thompson Coburn law firm, warned that the proposed regulations contemplate civil and criminal penalties for non-compliance and cautioned that family offices must be prepared to respond to inquiries from FinCEN. Since the regulator can disclose the information to the other U.S. and foreign agencies, the rule could lead to more scrutiny of tax filings and other reporting in the U.S. and abroad.

“While the proposed regulations may create new urgency for family offices to retain counsel and other advisers, for any family office it remains critical to adopt compliance and best practices for entity formation, investment documentation and tax reporting,” she said.

A more patient alternative to private equity

Hiring trust, estate and business lawyers ultimately would have the additional advantages of assisting family offices in broadening their potential for deploying capital, Post said. The additional legal assistance can also help marry that capital with charitable and community initiatives by providing clear guidance for compliant activities, rather than wasting time and money in fixing or mitigating compliance errors.

The trend for more than 20 years has been for family offices to outsource legal counsel although most family offices with more than $500 million in assets have in-house attorneys, said Thomas J. Handler, partner and chair of the Advanced Planning & Family Office Practice Group at the Handler Thayer law firm. One of Handler’s firm’s clients has 14 in-house lawyers. Most of the outsourced lawyers are providing investment management and legal counsel, he noted, a trend that is escalating.

Fueling the growth in attorneys at family offices has been increased pressure from regulators, said Handler including higher scrutiny stemming from Archegos, increased use of legal entity identifier numbers and pressure from the World Bank for more transparency. 

But it may not be easy for family offices to find attorneys who specialize in the sector. There are very few qualified family office attorneys in the U.S. and they are expensive, Handler said. “Even the wealthiest families on earth have been unable to recruit these lawyers (who want independence and need a team in order to function effectively),” Handler wrote in an email. 

An estimated $6 trillion to $7 trillion is available to companies through family offices, which offer an alternative means for financial executives and CFOs to access capital that is often provided over a longer period of time than private equity money.