June 27, 2011

SEC Rule Defines ‘Family Offices’ Under Dodd-Frank

Firms that meet criteria will be exempt from ’40 Advisers Act regulation

The SEC approved a new rule on Wednesday defining what kind of firm can call itself a “family office” and thereby be excluded from the Investment Advisers Act of 1940.

The rulemaking stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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. At the same time, the legislation included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

In a statement, the SEC said the new rule 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 new rule exempts from registration any firm that:

  • Provides investment advice only to family members, i.e. all lineal descendants of a common ancestor no more than 10 generations removed from the youngest generation as well as their spouses or spousal equivalents; certain key employees; charities and trusts established by family members; and entities wholly owned and controlled by family members.
  • Is wholly owned and controlled by family members.
  • Does not hold itself out to the public as an investment adviser.

Family offices that do not meet the terms of the exclusion have to register with the agency under the Advisers Act or with applicable state securities authorities by March 30, 2012.

The statement said family offices that obtained exemptive orders from the SEC prior to Dodd-Frank will be able to continue operating under their existing exemptive orders, or they may operate under the new rule.

It also said the new rule incorporates a grandfathering provision whereby the SEC may not preclude certain family offices from meeting the new exclusion solely because they provide investment advice to certain clients (and did so prior to Jan. 1, 2010).

The rule is effective 60 days after its publication in the Federal Register.

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