First, so as to put the answer to this question in context, it is important to take note of the real scope of operation of Family Offices.
They are wealth management structures providing services in three fields:
- family secretarial functions, often referred to as "concierge services",
- the legal, financial and administrative management of certain assets, and
- financial management.
The activity undertaken ranges from simple monitoring or performance measurement to more active management: for example the design and operation of an "asset allocation model", or the selection of investment vehicles, in every case accompanied by the execution of investment decisions through a custodian bank.
It is clear that none of the functions mentioned above raises any legal issues, as the Family Office is simply an extension of "private management".
So why has the question of the appropriateness of a legal framework been raised?
Simply because it is sometime noted that an activity for own account can evolve towards management on behalf of a third party. When a family successfully sets up a structure of this sort, their relations often ask them to manage their affairs too. This can lead to the setting up of structures on the "investment fund" model. Since these are activities of a financial nature, it is easy to understand why this possibility needs to be controlled.
In most cases the jurisdictions concerned have not drafted specific regulations for these situations, but apply the rules of common law relating to public issue or wealth management. Nevertheless, the relative legal uncertainty that results, and the desire to encourage the development of wealth management structures, have led certain countries to fix more precise rules for this activity and consequently to define the borderline between the "private" management of wealth, not subject to restrictions, and "commercial" management.
This is the case in the United States, which can be regarded as having the "best practices" in this field. What follows is a simple summary of the key measures applicable there.
In the United States the activity of Family Offices in the field of financial management can be exonerated from the constraints imposed by the Securities and Exchange Commission (SEC) if two conditions are met:
- the "family" is the only "client" of the Family Office,
- the corresponding legal structure is under the exclusive control of the "family".
The precise scope of these two notions is of course laid down in the texts (SEC rules 202 (a) (11) 5 G-1) but the general logic is clear: if no "Investment Advisor" activity is involved, these bodies can act freely. This seems to be an essential tolerance since in the absence of a regulatory text they would be subject to very cumbersome formalities of registration, approval and control, as is the case for all "Investment Advisor" activities.
How can this approach be applied in Monaco?
First of all it should be noted that in our country the creation of any economic activity is subject to prior approval by the Economic Expansion Department. Thus, by definition, the authorities are in a position to check that the project does not involve the risks alluded to above. The Department proposes a model for the exclusive corporate purpose of the planned body. Supervision of this type of activity then becomes relatively straightforward: it is simply necessary to check, throughout the lifetime of the company, that its activity corresponds to that corporate purpose, as is done for other types of business.
In addition, any activities relating to management for third parties, fund management, investment advice and the reception and transmission of orders are strictly regulated by Article 1 of Law number 1.338 and consequently cannot be part of the "commercial" offering of a Family Office.
Things are more difficult when it comes to ownership of the bodies concerned. In the case of a Monegasque joint-stock company (SAM) subsequent transfers of shares, if any, are not subject to official authorization. If the aim is to create a framework comparable to that of the SEC, it might be possible to oblige the founders of a SAM to declare all changes of shareholder. Of course this would to some extent contradict the principle of freedom of transfer of the shares of a SAM, but this would be a simple measure that could be quickly implemented without requiring any legislative reform.
Before concluding, mention should be made of one further issue where it might be useful to adapt or to redefine the administrative doctrine. This is the question of direct taxation.
In most countries where Family Offices exist the approach adopted is simple: insofar as the activity of these structures is comparable, in terms of economic balance, to that of a centre of coordination or a headquarters, that is with no third-party "clients", it generates no proprietary income. Consequently an arbitrary tax base that can amount to 5 to 10% of the operating budget is proposed. If Monaco adopted a similar approach this would lead, with the current rate of company tax, to a tax burden ranging between 1.5 and 3.3% of operating expenses. This would be perfectly acceptable for the families concerned.
In conclusion it should be stressed that the current regulatory and doctrinal framework is extremely well adapted to the development of Family Offices in the Principality. There is no need to draft new legislation and the present texts, and the attitude of the authorities, correspond to the needs of large families wishing to establish a central office for management of their wealth here in Monaco.
