Family Office

A Small Entity Compliance Guideⁱ

Introduction

On June 22, 2011 the Commission adopted rule 202(a)(11)(G)-1 that defines "family offices" to be excluded from regulation under the Investment Advisers Act of 1940. “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, most family offices have not been registered as investment advisers under the Advisers Act because of the “private adviser exemption” provided under the Advisers Act to firms that advise less than fifteen clients and meet certain other conditions.

The Dodd-Frank Wall Street Reform and Consumer Protection Act repealed the private adviser exemption so hedge fund and other private fund advisers must register with the Commission. However, Dodd-Frank Act also included a new provision requiring the Commission to define family offices in order to exempt them from regulation under the Advisers Act. The new rule adopted by the Commission enables those managing their own family’s financial portfolios with family offices to determine whether their “family offices” can continue to be excluded from regulation under the Advisers Act.

Family offices that are excluded from Advisers Act regulation under the rule

Any company that:

• Provides investment advice about securities 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; and

• Does not hold itself out to the public as an investment adviser.

Permissible family clients

• 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; and

  • Any other employee of the family office or its affiliated family office (other than a clerical, secretarial or administrative employee) who, in connection with his or her regular duties, participates in the investment activities of the family office or affiliated family office, and has been performing such duties for the family office or affiliated family office, or substantially similar functions or duties for another company, for at least twelve 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; and

  • Any company wholly-owned by, and operated for the sole benefit of, family clients.

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.

Registration date for family offices that do not meet the exclusion terms

A family office that does not meet the exclusion terms set forth in the rule, but has been providing investment advice primarily to members of a single family since a date prior to July 22, 2011, and is not registered under the Advisers Act in reliance on the private adviser exemption on July 20, 2011 must register as an adviser or obtain an exemptive order from the Commission by March 30, 2012. Family offices that are not registered as investment advisers in reliance on existing family office exemptive orders from the Commission may continue relying on such orders.

Other resources

The adopting release for rule 202(a)(11)(g)-1 can be found on the Commission’s website at http://www.sec.gov/rules/final/2011/ia-3220.pdf. The proposing release can be found on the Commission’s website at http://www.sec.gov/rules/proposed/2010/ia-3098.pdf. The text of the rule can be accessed through the "Laws and Rules" section of the Division of Investment Management page of the Commission's website at http://www.sec.gov/divisions/investment.shtml.

Contacting the Commission

The Commission's Division of Investment Management is happy to assist small investment advisers with questions regarding the new rule. The Division's Office of Investment Adviser Regulation answers questions submitted by e-mail and telephone. You can submit a question by e-mail to iarules@sec.gov and a staff member of the office will call you to discuss your question. In addition, you can contact the Office of Investment Adviser Regulation at (202) 551-6787. Questions on other investment management matters concerning small companies may be directed to the Division's Office of Chief Counsel by e-mail at IMOCC@sec.gov, or by telephone at (202) 551-6825.

ⁱ This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.

http://www.sec.gov/rules/final/2011/ia-3220-secg.htm