In this Section:

Sec Proposed Rules To Exempt Family Offices From Registration Requirements

The Wall Street Reform and Consumer Protection Act ("Dodd- Frank Act"), given an intent to regulate hedge funds, included a provision to repeal section 203(b)(3) of the Investment Advisers Act of 1940 ("Advisers Act"), effective July 11, 2011. That section had exempted from registration as an "investment adviser" any adviser that had fewer than 15 clients and that neither held itself out generally to the public as an investment adviser, nor acted as an investment adviser to any investment company or business development company. A potential consequence of this repeal is that many "family offices" that have relied on the 15-client exemption could be required to register under the Advisers Act or seek an exemptive order from the SEC before the effective date.

To prevent that consequence, section 409 of the Dodd-Frank Act creates a new exclusion from the Advisers Act in section 202(a)(11)(G), under which family offices, as defined by the SEC, are not investment advisers subject to the Advisers Act. Section 409 instructs that any definition adopted by the SEC should be "consistent with the previous exemptive policy" of the Commission and recognize "the range of organizational, management, and employment structures and arrangements employed by family offices."

The SEC has now proposed, and is accepting comments on, a new definition of "family office." The term "family offices" generally refers to entities established by wealthy families, many of which have more than $100 million of investable assets, to manage their wealth, plan for their families' financial future, and provide other services to family members. According to the SEC, industry observers have estimated that there are 2,500 to 3,000 single-family offices managing more than $1.2 trillion in assets. Family office services typically can include managing securities portfolios; providing personalized financial, tax, and estate planning advice; providing accounting services and return preparation; and directing charitable giving.

The SEC proposal would exempt family offices from the definition of investment adviser under the following three general conditions:

  1. It would limit the availability of the rule to family offices that provide advice about securities only to certain "family clients,"
  2. It would require that family members wholly own and control the family office, and
  3. It would preclude a family office from holding itself out to the public as an investment adviser.

Family Clients

For purposes of the first condition above, "family clients" would include family members; certain key employees of the family office; charities established and funded exclusively by family members or former family members; trusts or estates existing for the sole benefit of family clients; and entities wholly owned and controlled exclusively by, and operated for the sole benefit of, family clients (with certain exceptions) and, under certain circumstances, former family members and former employees.

The proposal explicitly rejects extending the exemption to family offices that serve multiple families in order to save costs. The SEC explains that issuing such an exemption would be inconsistent with its prior exemptive policy.

If assets under management were transferred to a non-family member in an involuntary transfer (such as a transfer of assets to an unrelated charity by will), the transferee could only be advised by the family office for a period of four months after the transfer. Former family members could continue to be advised by the family office, but would not be able to make new investments through the family office.

Ownership and Control

The requirement that the family office be "wholly" owned and controlled by a single family does not admit the possibility of any minority ownership. The SEC requests comments on whether, and to what extent, minority ownership should be permitted.


As required in the Dodd-Frank Act, the SEC rule would grandfather "persons not registered or required to be registered on January 1, 2010, that would meet all of the required conditions under rule 202(a)(11) (G)-1 but for their provision of investment advice to certain clients." These grandfathered clients include natural persons who, at the time of their investment, are officers, directors, or employees of the family office, and had invested with the family office before January 1, 2010. They must be accredited investors under Regulation D of the Securities Act of 1933. The other grandfathered clients are investment advisers registered under the Advisers Act that, in turn, provide investment advice and identify investment opportunities to the family office and invest in such transactions on substantially the same terms as the family office invests but do not invest in other funds advised by the family office, and whose assets as to which the family office directly or indirectly provides investment advice represent, in the aggregate, not more than 5% of the value of the total assets as to which the family office provides investment advice.

In Hunt for Revenue, Congress Targets GRATs [email protected].

More from InsuranceNewsNet