The U.S. Securities and Exchange Commission (SEC) has proposed a rule that could affect which family offices continue to be exempt from SEC investment advisor registration requirements.

The SEC has developed the proposed Rule 202(a)(11)(G)-1 to implement Section 409 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which may require some family offices to register as investment advisors under the Investment Advisors Act of 1940 and allow others to operate without registering.

In the proposed rule, the SEC would define a family office as a firm that:

- Provides investment advice only to family members, as defined by the rule; certain key employees; Dodd-Frank Act compasscharities 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 advisor.

The SEC says the new rule would largely codify previous family office exemptive orders. In the exemptive orders, SEC officials were responding to the specific situations described by the applicants for the orders.

The proposed rule also includes a “grandfathering clause” that would keep the SEC from excluding certain family offices from the definition of family office solely because they provide (or had provided before Jan. 1, 2010) investment advice to certain clients.

Comments on the proposed rule are due Nov. 18.

The SEC is asking commenters to discuss the following questions:

- Whether to allow multifamily offices to operate under the exclusion from the Advisers Act, and, if so, how the SEC should distinguish between a multifamily commercial office and an office more closely resembling those operating under its exemptive orders.

- Whether to allow family clients to transfer assets advised by the family office to non-family clients if there is a death or other involuntary event, and, if so, under what conditions and to what types of transferees.

- Whether to allow key employees to receive investment advice through the family office, and, if so, whether family offices can rely on co-investments to attract investment professionals to work at the family office.

- Whether to require that family offices be wholly owned and controlled by family members, or, if not, whether non-family members could keep a minor ownership stake and under what restrictions.

- Whether a family office holding itself out to the general public as an investment advisor should be excluded from the protections afforded the investing public under the Advisers Act.

Some family offices handle insurance and estate planning issues, but, so far, insurance group reaction to Section 409 of the Dodd-Frank Act has been sparse.

The family office rule is “not an issue we track or on which we’ve taken a position,” according to the Association for Advanced Life Underwriting, Reston, Va.