On June 22, 2011, the United States Securities and Exchange Commission (SEC) approved a new rule to define “family offices,” which under the Dodd-Frank reforms were to be excluded from the definition of an “investment adviser” under the Investment Advisers Act of 1940. A “Family Office” under the new rules is any company that:
- provides investment advice only to family clients;
- is wholly owned by family clients and is exclusively controlled by family members and/or family entities; and
- does not hold itself out to the public as an investment adviser.
“Family members” who may provide advisory functions to a Family Office subject to the rule’s safe harbor include all lineal descendants (including adoption, foster children, etc.) of a common ancestor (no more than 10 generations removed from the youngest generation of family members) and the spouses of such lineal descendants.
Also, “key employees” of Family Offices may also provide investment advisory services under the safe harbor of the new rule. These “key employees” include executive officers, directors, trustees and general partners of the family office or its affiliates that also serve as a family office itself. “Key employees” may also include any other employee of the family office who, in connection with their regular duties, has participated in the investment activities of that office for at least 12 months.
Included among permissible clients of Family Offices within the safe harbor of the new rule are non-profit organizations funded exclusively by the family, the estate of a family member or former “key employee,” certain family client trusts and any company wholly owned and operated for the sole benefit of family clients.
Family Offices that do not fall within the safe harbor of the new rule will be required to register as investment advisors with the SEC or state authorities by March 30, 2012. Family operated investment entities, family offices and others are advised to review their current client mix, ownership and organizational structures to ascertain what steps, if any, may be needed for compliance with this new rule.