George Soros has a long track record of seeing things others don’t, and his decision to close his fund to outside investors is just the latest example. While Soros and his family are among the first to see the big picture, they won’t be the last hedge fund to change course dramatically because of the new SEC rules.

George Soros has a long track record of seeing things others don’t, and his recent decision to close his fund to outside investors is just the latest example. Why did this legendary investor decide to pull back after such a brilliant career?  Among the key reasons are the new SEC rules under Dodd-Frank legislation that make it too difficult for him to continue.

While Soros and his family are among the first to see the big picture, they won’t be the last hedge fund or other investor to change course dramatically because of the new SEC rules. In fact, the new rules are bad for family wealth worldwide. The rules will do the following:

Impose limitations on how family members can use their family office to care for loyal employees, for distant relatives, in-laws and others;

Require the family office to monitor all transactions and engagements by family members, even in philanthropic projects;

Prohibit the family office from engaging in most charities and foundations and will require that Soros’ own foundation avoid any contribution from any outsider;

Bar the family from joint venturing with other families, except in very limited circumstances;

Require that any governance structure be designed to take into account that family dynamics will now have the sounding board of SEC rules.

In effect, Soros and his family, among the wealthiest in the world, will find that avoiding registration under the SEC will deprive them of much of the freedom of engagement and involvement that they might well believe wealth should bring. They will be exploring alternatives to SEC registration, including using private trust companies, actually “outsourcing” all investment related functions, removing the family itself entirely from any investment role (surely not palatable for one as expert in investment as Soros himself), or looking for some form of “umbrella” structure to make themselves anonymous through pooling and to lessen the regulatory burdens of compliance.

Global fallout

Soros’ decision is relevant to every family and family office for a number of important reasons.

First, Soros, one of the most capable investors of his generation, will make significant sacrifices to avoid the regulatory oversight of the SEC. He foregoes the opportunity to serve others, whether customers, old friends or loyal employees, and possibly to serve his own foundations, to maintain qualification as a “family office.” He is damning the US system of regulation and eschewing any public oversight, despite political positions often supportive of substantial government.

Second, Soros is a global thinker, and he knows that these rules have global repercussions. No family office anywhere in the world can disregard the SEC intrusion into private wealth. The rules must be considered by any family office with a US citizen or resident as a family member or an employee investing with the family. They must be considered by any family office co-investing with or managing funds for a US citizen or resident, or his or her family. The rules also must be considered by any family office with family members engaged in philanthropy in the US or with citizens. The global family is now to be regulated by the US securities rules.

Third, investment management opportunities will be institutionalized. When Soros and other creative and successful private investment managers are taken from the public domain, the remaining pool will become increasingly institutional. Investors will have fewer options from creative minds from which to choose. The big banks will prosper in this environment, and many of the geniuses will become reclusive and find it difficult to manage funds even for their own families. 

Finally, and this may not yet be apparent, simply rejecting other investors will not bring freedom from wealth. As we highlighted in our recent white paper, Limiting Freedom From Wealth: The Impact of New SEC Rules on Families and Single-Family Offices in the United States, complying with the regulations to qualify as a “family office” will necessarily limit how family members can run their offices. Indeed, the office, like the remaining pool of investment advisors, will become “institutionalized” and incapable of reflecting the family’s dreams and personality.

Soros is the canary in the mine of governmental regulation. Others will follow as hedge funds, venture pools, family offices, and others notice Soros and react as he has. We will all be poorer as a result.

Charles Lowenhaupt is chairman, chief executive and president of Lowenhaupt Global Advisors and is a co-founder and President of the Institute for Wealth Management. He is co-author with Don Trone of an upcoming book, Freedom From Wealth.