The U.S. Securities and Exchange Commission recently adopted Rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 defining the scope of the "family office" exclusion from the definition of investment adviser.1 The exclusion was created last year by the Dodd-Frank Wall Street Reform and Consumer Protection Act.2 Under the Rule, a "family office" is defined as any company that: (i) has no clients other than "family clients," (ii) is wholly owned by family clients and controlled, directly or indirectly, by "family members" and/or "family entities" and (iii) does not hold itself out to the public as an investment adviser. Family offices currently exempt from registration because of the "private adviser" exemption from registration that the the Dodd-Frank Act repealed that do not fall within the new family office exclusion or some other exemption from registration3 have until March 30, 2012 to register under the Advisers Act. Since the SEC may take up to 45 days to process an application for registration, family offices that do not fall within the new family office exclusion must file a complete application, including both Part 1 and Part 2A of Form ADV, by February 14, 2012 to meet the new deadline.
Who Can Family Offices Advise Under the Rule?
In adopting the Rule, the SEC significantly broadened the scope of the definition of "family clients" from the definition included in its proposed rules4 to include: (i) family members and former family members, (ii) key employees (including former key employees with respect to investments made or committed to while such persons were still key employees) of the family office,5 (iii) charities funded exclusively by family clients, (iv) irrevocable trusts in which family clients are the only beneficiaries, (v) irrevocable trusts in which family clients and certain charitable and non-profit organizations are the only beneficiaries, (vi) revocable trusts of which family clients are the sole grantors, (vii) estates of family members, former family members, and key employees, and (vii) certain entities wholly owned by and operated for the sole benefit of family clients.
The SEC also expanded the class of "family members" from its proposal to include in the final rule: (i) all lineal descendants (including descendants by adoption, stepchildren, foster children and individuals that were minors when another family member became a legal guardian of the individual) of a common ancestor (whether living or deceased) and (ii) such lineal desendants’ spouses or spousal equivalents. Though "family members" is defined broadly, no person may be a "family member" if he or she is separated from the family’s common ancestor by more than 10 generations. A family office may change the identity of the common ancestor who is the base of a tree of family members in order to continue to provide services to family members who are more than 10 generations removed from the original common ancestor.
In adopting the Rule, the SEC rejected numerous suggestions to permit "multi-family offices" (i.e., those offices that advise multiple wealthy families) to avail themselves of the family office exemption. As a result, multi-family offices will be required either to divest themselves of multiple family clients or to register as investment advisers by March 30, 2012.
The definition of "family office" under the Rule also includes 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) officers, directors or employees of the office who had invested with the office before January 1, 2010 and who are "accredited investors," 6 (ii) companies owned exclusively and controlled by one or more family members, or (iii) certain investment advisers that provide advice and investment opportunties to the family office and whose assets represent, in the aggregate, not more than 5% of the value of the total assets to which the office provides advice. Offices that satisfy these grandfathering provisions but that do not otherwise meet the definition of "family office" would, however, be subject to certain anti-fraud provisions of the Advisers Act.
Special Transition Deadline For Certain Charitable Organizations
A chartiable organization existing on July 21, 2011 that was created, but not entirely funded, by family clients may remain a client of a family office until December 31, 2013, provided that the organization does not accept additional funding from non-family donors after August 31, 2011.