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October 1, 2015 By Helen Brown Leave a Comment

How Dodd-Frank Affects Your Top Donors

This week we welcome back HBG Senior Researcher Kenny Tavares to the blog. Earlier this year, Kenny and fellow HBG senior researcher Elizabeth Roma shared their extensive research on family offices in a podcast. In this week’s article, Kenny shares more about the legislation affecting hedge funds and family offices, and how this could impact the philanthropic landscape.

Frankenstein-Poster

With Halloween approaching, the time is right for a scary topic! Pull up a chair and let me tell you about the Dodd–Frank Wall Street Reform and Consumer Protection Act, aka Dodd-Frankenstein. Wait, no, sorry. I meant Dodd-Frank.

Since it was passed in 2010, this controversial financial regulation overhaul has drawn screams and groans from those both for and against the legislation. Despite efforts to glom on spare parts, repeal or reduce its effectiveness, like Frankenstein, it lives… IT LIVES!!

But seriously, as fundraisers, we shouldn’t fear Dodd-Frank – in fact, we should learn about and embrace it, because it helps us to gain a better understanding of our donors, particularly those who are investors.

In an effort to provide more transparency to the public on the financial industry, Dodd-Frank has served as a catalyst to emerging trends that we need to know about. Let’s get started with a primer on some of these developments.

First, a quick review

  • The Dodd–Frank Wall Street Reform and Consumer Protection Act is a collection of federal regulations that primarily affect financial institutions and their customers.
  • It was passed in 2010 in response to events and practices that caused the financial crisis in 2008.
  • The goal of Dodd-Frank was to reduce risk in parts of the U.S. financial system.
  • It is named after former U.S. Senator Christopher J. Dodd of Connecticut and former U.S. Representative Barney Frank of Massachusetts, who made significant contributions to its creation.
  • Dodd-Frank created new agencies to monitor the performance of companies and created new rules to protect consumers.

Now, that wasn’t too scary, right? Okay, let’s look at how this law has affected investors.

The Effects of Registration and Regulation on Private Fund Advisers

In a podcast on family offices earlier this year, Helen Brown, Elizabeth Roma and I discussed the new trend of large hedge funds returning money invested by outsiders (non-family members) and converting the fund into family offices.

While there are many reasons why this trend has gained momentum, Dodd-Frank’s new standard for reporting was a primary motivator. Here’s why:

As a result of Dodd-Frank, hedge fund advisors with assets of $100 million or more are required to register with the Securities and Exchange Committee (SEC).

These larger hedge funds are also required to establish compliance programs in order to meet new standards and to participate in systemic-risk reporting. These regulations and the extra cost of compliance have led some organizations to convert their hedge funds to single-family offices.

So: In order to become a single-family office, these hedge funds:

  1. must return “outside” funds to non-family investors
  2. be wholly owned and operated by immediate family members; and
  3. not market themselves as an “investment advisors”

The bad news: now we prospect researchers will not be able to find assets under management (AUM) for family offices like we could for hedge funds.

However, the good news is that you can assume that a prospect with a single-family office is managing at least $100 million, which is believed to be the minimum needed for the office to make financial sense.

More good news: many families behind these new family offices are incorporating philanthropy into their broader financial strategy, taking a more sophisticated, deliberate and purposeful approach to giving.

What else has Dodd-Frank wrought?

New registration and reporting requirements also apply to private equity funds with more than $150 million in assets. How much and how often they have to report depend on the size and type of fund.

Widespread abuse found

General partners in these funds must also register as “private equity investment advisers” with the SEC and report on their operations and finances. The requirements are less stringent than for publicly-traded companies, so some don’t believe in the effectiveness of this rule. However, since the new rules have been established, the SEC has found widespread abuse among advisers, including:

  • manipulation of a portfolio’s value,
  • avoidance of their fiduciary responsibility, and
  • collecting transactions fees from their portfolio companies without first registering as broker-dealers

…all of which are violations of the current law.

As a result of these scary revelations, private equity firms are quickly reversing course on these practices. These changes will benefit private and institutional investors as well as portfolio companies in the form of reduced transactions fees and increased monitoring of their investments. This may have the effect of slowing the explosive growth of compensation for those in the private equity industry.

Regardless, an ongoing examination of these rules changes, as well as how the private equity industry perceives them, is imperative. As more and more individual investors create family offices, these regulations and their impact on the private offices could affect a prospective donor’s perception of their wealth – and therefore their philanthropic giving.

The Rules About Accredited Investors

Under the terms of Dodd-Frank, the SEC adjusted the definition of the term “Accredited Investor,” a person or institution capable of participating in sophisticated higher-risk investments.

Under the old rules, an Accredited Investor (AI) must either have had income that exceeded $200,000 for the current and two previous years OR a net worth of $1 million or more. In 2011, the SEC changed the rule by excluding an AI’s primary residence from the calculation of their net worth, and a recent proposal has suggested changing the income level to $450,000 and the AI’s net worth minimum (minus their primary residence) to $2.5 million.

Dodd-Frank also requires the SEC to revisit its definition of “Accredited Investor” every five years, and establishes a minimum which advisers can charge performance-based advisory fees.

These rules are meant to protect the consumer. Their side impact could be to reduce the number of eligible investors by 60%.

What does this mean for nonprofits?

The people impacted by these proposed changes would include our most top level donors, board members and volunteers, including partners at start-up companies, hedge funds and venture capital firms. Newer hedge funds could be squeezed, too, since they would have to rely on larger investors, including single-family offices, whose leverage can be used to reduce administrative fees. Knowing what is tops on the list of concerns for our key donors is an important part of donor-centered fundraising.

What’s in store?

To date, five of the eight rules in Dodd-Frank that directly affect financial advisors have been finalized. On the horizon is:

  • the creation a self-regulatory organization to help the SEC oversee advisers,
  • the creation of a uniform fiduciary standard for all advisers and broker-dealers, and
  • creation of new rules about compensation that aim to avert reckless financial behavior that could harm investors.

There’s no telling what the future will hold, especially with the upcoming presidential election. That’s why knowing these regulations now (and where they might be headed) will help you to understand your donors’ financial situation when the rules change.

Filed Under: Non-profit trends, Researching Individuals Tagged With: Dodd-Frank, Elizabeth Roma, family offices, high net worth individuals, HNW, Kenny Tavares, philanthropy, podcast, prospect research

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David’s career in prospect research began in 2009, as a graduate research assistant at the Shippensburg University Foundation. In 2011, He became a development researcher for the University of Virginia. In 2015, David became assistant director of prospect research at the University of Baltimore, serving for 3 years. Recently, he was the director of development for Trees Forever. David Joined the Helen Brown Group as a research assistant in January 2020. He earned a B.A. in Theater at Indiana University of Pennsylvania and a M.A. in Applied History at Shippensburg University. David is a member of APRA and APRA Great Plains.

Kenny has worked in development since 1999 and has been involved in prospect research since 2002.

Prior to joining The Helen Brown Group, he was the director of donor and prospect research at the United Way of Massachusetts Bay. Kenny is a member of APRA and NEDRA.

Tara first began her career in development in 2002 supporting the Major Gifts department at Simmons College, and ultimately went on to serve as Assistant Director of Prospect Research. Since that time, she has also worked as a Senior Research Analyst at MIT, as Associate Director of Prospect Management and Research at the Harvard Graduate School of Education, and as Director of Development Research at Combined Jewish Philanthropies (CJP).

Tara originally joined the Helen Brown Group team in 2007 and served as a Research Associate and ShareTraining coordinator until 2008 – she rejoined the company as a Senior Researcher in 2013 and was promoted to her current role in 2018.

She has been an active volunteer with NEDRA for many years and served on the board of directors from 2010-2016. During her time on the NEDRA board, she served in many different roles, including terms as Vice President, Secretary, Chair of the Website and Technology Committee, Chair of the Volunteer Committee, and as Chair and Editor of NEDRA News. She is currently a member of the NEDRA Bootcamp faculty. In addition, Tara has also been involved as a volunteer with Apra, serving stints on the Membership Committee, Chapters Committee, and Bylaws Task Force.

Angie began her career in development in 1999 at Virginia Tech in Corporate and Foundation Relations and later in prospect research at the University of Connecticut Foundation.

A graduate of the University of Tennessee at Martin, her experience includes grants management at the University of South Carolina, program evaluation for South Carolina Research Authority and human resources analysis for Nissan North America.

She returned to development in 2007 and worked in various prospect research positions at Vanderbilt University, including Associate Director. She was named Director for Vanderbilt University Medical Center’s research office in 2015, and joined The Helen Brown Group in 2016.

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Josh began his career in development as the Phonathon Coordinator at Keene State College. He then worked at non-profit consulting firm Schultz & Williams in Philadelphia.

He started his research career at the University of Pennsylvania as a Research Assistant in 2005. He then moved over to the Wharton School of Business, where he became the Associate Director, Research and Prospect Management. Josh joined the Helen Brown Group in 2016.

Josh is also a Colorado licensed Realtor and graduate of Lehigh University.

In March 2017, Kristina joined the Helen Brown Group as a Research Associate. Before joining HBG, she was the Research Manager at Pratt Institute in Brooklyn and an Associate Manager of Prospect Research at City Harvest, a food rescue organization. Kristina started her non-profit career as a legal assistant at the Metropolitan Museum of Art in 2004.  She is a member of Apra and Apra Greater New York. She was Apra Greater New York’s Director of Programming from June 2014 to May 2016. Kristina graduated from The University of Chicago and the Bard Graduate Center.

Grace began her career in development in 2001 as Executive Assistant to the Chief Development Officer with Brigham and Women’s Hospital (BWH), a Harvard Medical School-affiliated academic medical center.

In 2003, she became a prospect researcher for the BWH principal and major gifts team and spent the next 11 years in various research positions with BWH, culminating as Assistant Director of Prospect Research. She has been affiliated with The Helen Brown Group since January 2014.

Heather began her career in 2002 as a prospect research coordinator for the Rocky Mountain Elk Foundation and then moved to Carroll College in 2004.

In 2005, Heather began working on her own as a freelancer and eventually started her own consulting firm, Willis Research Services, in 2007. She joined The Helen Brown Group in 2012.

Heather is a member of the Association of Professional Researchers for Advancement and the Montana Nonprofit Association.

Jennifer began her career in development at her alma mater, Wheaton College, where she was an administrative assistant for the major gifts department.

She joined The Helen Brown Group in March 2008. She earned a master’s degree in library science from the Southern Connecticut State University in May 2009. Jennifer is a member of APRA and NEDRA.

Rick has been a member of the Helen Brown Group team since 2005. Prior to joining HBG, Rick was director of research at St. Paul’s School in Concord, New Hampshire. Rick has worked in development since 1996, both in prospect research and major gifts fund raising. His experience includes the University of Vermont, Phillips Exeter Academy and St. Paul’s School.

Rick is past president of NEDRA and is a member of and frequent volunteer for APRA.

Josh began his career in development as the Phonathon Coordinator at Keene State College. He then worked at non-profit consulting firm Schultz & Williams in Philadelphia.

He started his research career at the University of Pennsylvania as a Research Assistant in 2005. He then moved over to the Wharton School of Business, where he became the Associate Director, Research and Prospect Management. Josh joined the Helen Brown Group in 2016.

Josh is also a Colorado licensed Realtor and graduate of Lehigh University.

Mandi has worked in prospect research and management since 2006. She began her development career as a research analyst in development research at City of Hope, an NCI-designated comprehensive cancer center in Los Angeles. From there, she became the manager of prospect development at Huntington Memorial Hospital, a community hospital in Pasadena, CA. Most recently, she was the associate director of prospect research and management at Occidental College, a private liberal arts college in LA.

Mandi has a BA degree in print journalism from Southern Methodist University and a master’s degree of library and information science from UCLA.

She joined the Helen Brown Group in May 2019.

Kelly began her career in development in 2008 as an administrative assistant in Major Gifts at Wheaton College.

In 2010, she became a research analyst at Dana-Farber Cancer Institute in the Division of Development & Jimmy Fund as part of the prospect identification team. Kelly joined The Helen Brown Group in 2013.

She is a member of APRA and NEDRA.

Jayme began her career in development in 2008 at the Rutgers University Foundation, where she spent the next seven years, first in prospect management and then prospect research. She spent several years at Monmouth University as their senior prospect research analyst, working with the fundraising staff, university president, and top leadership. She has worked as both a volunteer and consultant for non-profits in the areas of research and writing.

She earned a bachelor of arts degree from Drew University and a master of communication and information sciences from Rutgers University. She is a member of APRA.

Jayme joined The Helen Brown Group in April 2019.

Julie has managed finances for The Helen Brown Group since its founding.

In her spare time, she is an editor for the PBS series Masterpiece at WGBH. Julie was nominated twice for an Emmy award for her work on the PBS show Zoom.

Heather began her career in development in 2001 as a prospect researcher for National Wildlife Federation (NWF). She was with NWF for more than thirteen years, including nearly five years as director of research and analytics. Heather is a former secretary of the board of directors of APRA-Metro DC.

She joined The Helen Brown Group in October 2014.

David began his career in development at The Gunnery school in northwest Connecticut in 2011, where he worked in database management and prospect research. Subsequently, he joined the College of Saint Rose as a development research analyst before leading Albany Medical Center Foundation’s prospect research efforts as Associate Director of Prospect Research. He has a Bachelor’s Degree in Sociology from Siena College and is a member of APRA and CASE.

Michele began her career in development in 2012 when she joined the UC Berkeley corporate and foundation relations team as a development analyst. She spent a year and a half at Cal before returning to UC Davis as a prospect analyst. She was with the prospect management and relations team at UC Davis for almost three years prior to joining the research and relationship management team at George Washington University as a Senior Prospect Analyst in 2016.

Michele received her BA in creative writing from Florida State University and her MA in higher education leadership from CSU Sacramento. She currently resides in Northern Virginia, is a member of Apra International, and serves as the social media chair for Apra Metro DC. Michele joined The Helen Brown Group in July 2018.

Angie has worked in development since 2002, partnering with a wide range of nonprofit institutions. She began her professional career at Vanderbilt University in research and prospect development.

She has also worked with a number of community nonprofits in front-line fundraising, grant-writing, and event management. Angie holds an MPA in Nonprofit Management from the Indiana University Lilly Family School of Philanthropy and a BS in Journalism from Middle Tennessee State University. She resides in Nashville, Tennessee, and is a member of AFP Nashville and APRA MidSouth, where she has been active on the executive team.

She joined The Helen Brown Group in October 2015.

Maureen has been a part of the non-profit world since 1991. She started out in annual giving at Harvard Law School and continued her career as director of annual/special gifts at UC Santa Cruz.

In 1999 she made the switch from front-line fundraising to serve as director of prospect research/management at Bentley University and in 2001 began her role as administrator for the North American Foundation for the University of Manchester. She became part of the HBG team in September of 2011.

Helen has been a development professional since 1987. Her previous experience includes The University of North Carolina at Chapel Hill, the Albert Einstein Institution, Boston College, the Harvard School of Public Health and Northeastern University.

Currently she works with a variety of clients to establish, benchmark and re-align research departments; identify major gift prospects; and train researchers and other fundraisers through on-site and web-based training services.Helen is a former member of the board of the Association of Professional Researchers for Advancement (APRA) and is past president of the New England Development Research Association (NEDRA). In 2006 she received the NEDRA Ann Castle Award for service to the prospect research community.

Helen is Special Advisor on Fundraising to the North American Foundation for the University of Manchester and is a member of the board of directors of Factary Ltd. (Bristol, UK). She is a member of NEDRA, APRA, the Association of Independent Information Professionals (AIIP), Women In Development, the Association of Fundraising Professionals (AFP) and Researchers in Fundraising (UK).

Helen is a frequent speaker and has led seminars for a number of professional associations, including Action Planning, AFP, APRA, the Council for Advancement and Support of Education (CASE), NEDRA, RIF, the Planned Giving Council of Central Massachusetts, the Georgia Center on Nonprofits, the International Fundraising Congress and Resource Alliance.

Helen is also co-author (with Jen Filla) of the book, Prospect Research for Fundraisers (Wiley & Sons, 2013).