Washington, D.C., June 22, 2011 — The Securities and Exchange Commission today approved a new rule to define "family offices" that are to be excluded from the Investment Advisers Act of 1940.
The rulemaking stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act.
"Family offices" are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. 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. However, Dodd-Frank also included a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.
The new rule adopted by the SEC 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 rule is effective 60 days after its publication in the Federal Register.
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Family offices typically are considered to be investment advisers under the Advisers Act because of the investment advisory services that they provide. As such, they are subject to the registration requirements set forth in that Act. Historically, however, most family offices have been structured to take advantage of an exemption from registration for firms that advise less than fifteen clients and meet certain other conditions.
The Dodd-Frank Act repeals the 15-client exemption to enable the SEC to regulate hedge fund and other private fund advisers. But, the Dodd-Frank Act includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.
Today, the Commission is considering adopting a final rule defining family offices that will be excluded from regulation under the Advisers Act.
Which family offices will be excluded from Advisers Act regulation under the rule?
Any company that:
Which family members and employees can the family office advise under the exclusion?
When will family offices have to register with the Commission under the Advisers Act or with applicable state securities authorities if they do not meet the terms of the exclusion?
By March 30, 2012.
Will existing family office exemptive orders be rescinded?
No. Family offices that obtained exemptive orders from the Commission will be able to continue operating under their existing exemptive orders or they may operate under the new rule.
When will family offices have to register with the Commission under the Advisers Act or with applicable state securities authorities if they do not meet the terms of the exclusion?
That family office will have to obtain a Commission exemptive order or register as an investment adviser.
Grandfathering Provision
The Dodd-Frank Act requires that the Commission not preclude certain family offices from meeting the new exclusion solely because they provide investment advice to certain clients (and provided that advice prior to January 1, 2010). The adopted rule incorporates this grandfathering provision.