The following is an excerpt from the SEC website:
Washington, D.C., June 22, 2011 — The Securities and Exchange Commission today approved a new rule to define “family offices” that are to be excluded from the Investment Advisers Act of 1940.
The rulemaking stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients.
The Dodd-Frank Act removed that exemption so the SEC can regulate hedge fund and other private fund advisers. However, Dodd-Frank also included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.
The new rule adopted by the SEC enables those managing their own family’s financial portfolios to determine whether their “family offices” can continue to be excluded from the Investment Advisers Act.
The rule is effective 60 days after its publication in the Federal Register.
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FACT SHEET
Defining A Family Office
How are family offices impacted by the Dodd-Frank Act?
Family offices typically are considered to be investment advisers under the Advisers Act because of the investment advisory services that they provide. As such, they are subject to the registration requirements set forth in that Act. Historically, however, most family offices have been structured to take advantage of an exemption from registration for firms that advise less than fifteen clients and meet certain other conditions.
The Dodd-Frank Act repeals the 15-client exemption to enable the SEC to regulate hedge fund and other private fund advisers. But, the Dodd-Frank Act includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.
Today, the Commission is considering adopting a final rule defining family offices that will be excluded from regulation under the Advisers Act.
Which family offices will be excluded from Advisers Act regulation under the rule?
Any company that:
Provides investment advice only to “family clients,” as defined by the rule.
Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule.
Does not hold itself out to the public as an investment adviser.
Which family members and employees can the family office advise under the exclusion?
Family members. Family members include all lineal descendants (including by adoption, stepchildren, foster children, and, in some cases, by legal guardianship) of a common ancestor (who is no more than 10 generations removed from the youngest generation of family members), and such lineal descendants’ spouses or spousal equivalents.
Key employees. Key employees include:
Executive officers, directors, trustees, general partners, or persons serving in a similar capacity for the family office or its affiliated family office.
Any other employee of the family office or its affiliated family office (other than a clerical or secretarial employee) who, in connection with his or her regular duties, has participated in the investment activities of the family office or affiliated family office, or similar functions or duties for another company, for at least 12 months.
Other family clients. Other family clients generally include:
Any non-profit or charitable organization funded exclusively by family clients.
Any estate of a family member, former family member, key employee, or subject to certain conditions a former key employee.
Certain family client trusts.
Any company wholly-owned by and operated for the sole benefit of family clients.
When will family offices have to register with the Commission under the Advisers Act or with applicable state securities authorities if they do not meet the terms of the exclusion?
By March 30, 2012.
Will existing family office exemptive orders be rescinded?
No. Family offices that obtained exemptive orders from the Commission will be able to continue operating under their existing exemptive orders or they may operate under the new rule.
When will family offices have to register with the Commission under the Advisers Act or with applicable state securities authorities if they do not meet the terms of the exclusion?
That family office will have to obtain a Commission exemptive order or register as an investment adviser.
Grandfathering Provision
The Dodd-Frank Act requires that the Commission not preclude certain family offices from meeting the new exclusion solely because they provide investment advice to certain clients (and provided that advice prior to January 1, 2010). The adopted rule incorporates this grandfathering provision."
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