Haynes and Boone's Newsroom

SEC Adopts Definition of Family Office
07/07/2011
Taylor H. Wilson, Evan Hall

On June 22, 2011, the Securities and Exchange Commission (“SEC”) adopted a final rule defining “family offices” that will be excluded from the definition of “investment adviser” under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and thus exempt from registration.

Background

Family offices are entities established by wealthy families to manage the wealth of, direct the investments of and provide various other services to family members. Many family offices historically have avoided registration as investment advisers by relying on the "private adviser exemption" set forth in Rule 203(b)(3) under the Advisers Act (“Private Adviser Exemption”).1 While the Dodd-Frank Wall Street Reform and Consumer Protection Act repealed the Private Adviser Exemption, it excluded any family office from the definition of investment adviser and directed the SEC to adopt rules defining the scope of this term. The SEC adopted new Rule 202(a)(11)(G)-1 under the Advisers Act to define the term family office for purposes of this exclusion from the definition of investment adviser.

Definition of Family Office

Under the new rule, a "family office" is a company that (i) has no clients other than "family clients," (ii) is wholly owned by "family clients" and exclusively controlled by one or more "family members" and/or family entities, and (iii) does not hold itself out to the public as an investment adviser. The various components to this rule are described in greater detail below:

No Clients Other than Family Clients

A "family office" excluded under Rule 202(a)(11)(G)-1 may not advise any client other than a "family client." A “family client” is defined to include:

  • Family Members. Under the new rule, a “family member” includes all lineal descendants (including adopted children, stepchildren and foster children) of a common ancestor and such lineal descendants’ spouses or spousal equivalents. However, the common ancestor must be no more than ten generations removed from the youngest generation of family members.
  • Former Family Members. Under the new rule, a “former family member” includes a former spouse, spousal equivalent or stepchild.
  • Key Employees. The new rule defines a “key employee” to include (i) any executive officer, director, trustee, general partner or person serving in a similar capacity for the family office and (ii) any other employee of the family office (other than an employee performing solely clerical, secretarial or administrative functions with regard to the family office) who, in connection with his or her regular duties, participates in the investment activities of the family office for at least twelve months.
  • Non-Profit and Charitable Organizations Funded Exclusively by Family Clients.
  • Estates of Family Members, Former Family Members, Key Employees and Certain Former Key Employees.
  • Certain Family Client Trusts. This includes irrevocable trusts in which family clients are the only current beneficiaries and revocable trusts of which family clients are the sole grantors.
  • Companies Wholly Owned by and Operated for the Sole Benefit of Family Clients.

Ownership and Control

A "family office" excluded under Rule 202(a)(11)(G)-1 must be wholly owned by "family clients" and exclusively controlled (directly or indirectly) by one or more "family members" and/or family entities.

Holding Out to the Public

A "family office" excluded under Rule 202(a)(11)(G)-1 may not hold itself out to the public as an investment adviser. This restriction would prohibit various uses of public media to describe the advisory business of the family office, including via the Internet.

Grandfathering Provisions

Under Rule 202(a)(11)(G)-1, the definition of "family office" does not exclude any office that was not registered or required to be registered under the Advisers Act on January 1, 2010, solely because the office provided investment advice to, and was engaged before January 1, 2010, in providing investment advice to: (i) certain officers, directors or employees of the family office who invested with the office before January 1, 2010 and who are accredited investors; (ii) companies owned exclusively and controlled by family members; or (iii) certain investment advisers that provide advice or investment opportunities to the family office and whose assets represent, in the aggregate, not more than 5 percent of the value of the total assets as to which the office provides investment advice.

Transition Provisions

Family offices currently exempt from registration under the Advisers Act pursuant to the private adviser exemption that do not meet the new family office exclusion must register with the SEC by March 30, 2012.

For additional information regarding the new rules, please contact one of the attorneys listed below. You may also view the alert in the PDF linked below.

Taylor H. Wilson
214.651.5615

Evan K. Hall
214.651.5831

Kit Addleman
214.651.5783

Richard M. Fijolek
214.651.5570

 

Vicki L. Martin-Odette
214.651.5674

Rick A. Werner
212.659.4974

 

David Siegal
212.659.4995

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1 In some cases, family offices have sought and obtained an order from the SEC exempting them from registration as investment advisers under the Advisers Act.  

PDF - SEC_Definition_Family_Office.pdf