After a more than two-year process, the Securities and Exchange Commission (SEC) has recently granted exemptive orders sought by advisers seeking to include in-laws and in-laws’ relatives in the definition of “family member” for the purposes of the family office exemption from SEC registration as an investment adviser (Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940) (the Exemption). The family office advisers sought permission from the SEC to continue to rely on the Exemption if they provide services to in-laws and in-laws’ relatives in addition to lineal descendants of a common ancestor. The requests that were granted were those of advisers who were among the handful of firms that filed applications with the SEC after the rules related to in-laws changed in 2011.
Family offices have been in existence for more than a century to manage the financial affairs of the wealthy. Advisers relying on the Exemption do not have to register with the SEC like other money managers, thereby avoiding certain compliance costs, regulatory oversight and disclosure obligations. Only advisers 1) whose only clients are family clients; 2) who are wholly owned by family clients and controlled by family members or family entities; and 3) who do not hold themselves out to the public as investment advisers can rely on the Exemption.
In June 2011, in the wake of the Dodd-Frank Act, the SEC defined family members to 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 adopted children and current and former stepchildren as family members.
Families can designate the common ancestor whose descendants may be served by the family office. The designation of that person rather than a husband and wife means that providing services to non-lineal descendants, such as a spouse’s parents, siblings or nieces and nephews could require the adviser to register with the SEC.
Most recently, on January 20, 2015, the Simons, who have advised their former sister-in-law for 26 years under the prior family office rules, sought permission from the SEC to continue to advise her while relying on the Exemption. The SEC accepted the family office’s argument that the former sister-in-law is an important part of the family whose assets were already managed by them for more than two decades and that, because of that familial, noncommercial relationship, the firm should be able to rely on the Exemption. The SEC’s approval of the Simons’ petition followed similar orders granted to the offices that serve the heirs of energy tycoon Dan L. Duncan and New York banker Joseph S. Gruss.
Petitions seeking similar relief are still pending with the SEC but it is expected that the relief will be granted, which will further cement the SEC’s position regarding the definition of a family member for purposes of the Exemption. However, each family office seeking relief must separately petition the SEC.