On October 12, 2010, the Securities and Exchange Commission (the “SEC”) proposed a new rule defining “family offices” that would be excluded from regulation under the Investment Advisers Act of 1940 (the “Advisers Act”).
Currently, family offices either rely on the “private adviser exemption” from registration under Section 203(b) of the Advisers Act for advisers with fewer than 15 clients, or have obtained exemptive orders from the SEC under the Advisers Act declaring certain family offices not to be investment advisers within the intent of the Advisers Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, eliminates the “private adviser exemption” as of July 21, 2011, but also creates a new exclusion for “family offices” (as defined by the SEC regulations). Family offices that do not meet the definition (and would otherwise be required to register with the SEC) would still be able to seek an exemptive order from the SEC.
The SEC proposes to define “family office” as any company that:
- provides investment advice only to certain “family clients;”
- is wholly-owned and controlled by family members; and
- does not hold itself out to the public as an investment adviser.
For purposes of this exemption, “family clients” include family members, certain key employees, charities and trusts established by family members and entities wholly-owned and controlled by family members. “Family member” would include any individual and his or her spouse or spousal equivalent (a cohabitant occupying a relationship generally equivalent to that of a spouse) for whose benefit the family office was established and any subsequent spouses or spousal equivalents of such individual, his or her parents, lineal descendants (including by adoption and stepchildren) and these lineal descendants’ spouses or spousal equivalents. “Family member” would also include siblings of the founders of the family office, their spouses or spousal equivalents, their lineal descendants (including by adoption and stepchildren) and these lineal descendants’ spouses or spousal equivalents. As proposed, the definition does not extent to family offices serving multiple families.
“Key employees” would include (i) executive officers, directors, trustees, general partners or persons serving in a similar capacity and (ii) other family office employees (other than those performing solely clerical, secretarial or administrative functions) who, in connection with their regular duties, have participated in the investment activities of the family office, or have performed similar functions or duties for or on behalf of another company, for at least 12 months.
Public comments on the proposed rule may be submitted to the SEC on or before November 18, 2010. This update is only intended to provide a summary of the SEC’s proposed rule. You can read the full text of the proposed rule at http://www.sec.gov/rules/proposed/2010/ia- 3098.pdf. A