It has been a busy year for the SEC since President Obama signed the Dodd-Frank Act on July 21, 2010. On June 22, the SEC approved a new rule to define the term “family office,” which modified its proposed rule of Oct. 12, 2010. The final rule became effective on Aug. 29. As a result, I sat down with my colleague, Matt Jacobs, to discuss the key provisions of the family office rule.
Matt advised that the SEC originally proposed the new family office rule in anticipation of the Dodd-Frank Act’s repeal of the private advisor exemption from registration contained in section 203(b)(3) of the Advisers Act. In doing away with the private advisor exemption, Congress’ intent was to require that advisors to private funds (such as hedge funds and private investment vehicles, etc.) register with the SEC; its intent was not to affect family office advisors. Therefore, the Dodd-Frank Act provided that advisors to family offices were exempt from registration as an investment advisor, if the advisor met the definition of family office.
Pursuant to the SEC’s new definition, a family office is a firm: 1) whose only clients are family clients; 2) is wholly owned by family clients and controlled by family members or family entities; and 3) does not hold itself out to the public as an investment advisor.
Under the final rule, family members include all lineal descendants of a common ancestor (who may be living or deceased), as well as current and former spouses or spouse equivalents of those descendants, provided that the common ancestor is not more than 10 generations removed from the youngest generation of family members. Furthermore, the rule accepts all children by adoption and current and former stepchildren as family members.