SEC Proposes Rule Which Would Exclude Family Office from Investment Adviser Registration

October 14, 2010

The United States Securities and Exchange Commission (“SEC”) has proposed to adopt Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 which would exempt a “family office” from registration under the Investment Advisers Act.

Under the proposed SEC rule, a “family office” is considered a company (including its directors, partners, trustees, and employees acting within the scope of their position or employment) that:

  1. Has no clients other than family clients; provided that if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person shall be deemed to be a family client for purposes of this section 275.202(a)(11)(G)-1 for four months following the transfer of assets resulting from the involuntary event;
  2. Is wholly owned and controlled (directly or indirectly) by family members; and
  3. Does not hold itself out to the public as an investment adviser.

Previously, family offices were exempt from investment adviser registration because they fell under the 15-client exemption contained in section 203(b)(3) of the Investment Advisers Act, or the family offices were granted an exception through an exemptive order. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), repealed the 15-client exemption. While the purpose of this repeal was to require private funds to register under the Investment Advisers Act, it consequently would require most family offices to also register under the Investment Advisers Act.

Historically, the SEC has taken the position that the Investment Advisers Act was not designed to interfere with families managing their own wealth and prior to the enactment of the Dodd-Frank Act, the SEC took this approach when granting exemptive orders. The SEC still maintains this position and as a result, under the proposed rule, firms that provide services only to “family clients” will be exempt from registration. According to the proposed rule, the following would be considered family clients: “family members, certain employees of the family office, charities established and funded exclusively by family members or former family members, trusts or estates existing for the sole benefit of family clients, and entities wholly owned and controlled exclusively by, and operated for the sole benefit of, family clients (with certain exceptions), and, under certain circumstances, former family members and former employees.” Additionally, if a family office advises clients that do not fall under this proposed definition, the office will still be able to seek an exemptive order to avoid registration under the Investment Advisers Act.

The proposed rule can be accessed by clicking here. The SEC is currently accepting comments and is looking for guidance on issues such as whether to include stepchildren and former spouses in the definition of family members and whether to place any limitations on such classes.

Posted by Bryan Hill
Labels: SEC, Uncategorized