As contemplated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission has just proposed for public comment a new rule to exempt "family offices" from the requirements of the Investment Advisers Act of 1940.

Most persons hired by wealthy families to offer full-time investment, tax and other financial advice have relied on the so-called "private adviser exemption" to avoid registering as an investment adviser under the Investment Advisers Act. That exemption applies to persons or entities that provide investment advice to fewer than 15 clients in a 12-month period and that do not hold themselves out to the public as investment advisers. In an effort to require hedge funds and other advisers to register under the Investment Advisers Act, a provision in the Dodd-Frank Act removed this exemption, effective July 21, 2011. But the Dodd-Frank Act provides for an exclusion from the definition of "investment adviser" under the Investment Advisers Act for a "family office" to be defined by an SEC rule.

The SEC's proposed rule generally defines a "family office" as any entity that (1) provides investment advice only to "family clients," (2) is wholly owned and controlled by "family members" and (3) does not hold itself out to the public as an investment adviser.

As also defined in the proposed rule, "family client" includes "family members" as well as (1) certain trusts, estates, charitable foundations and other organizations, and entities (including pooled funds) established by and funded exclusively by, existing for the exclusive benefit of, or owned and controlled exclusively by one or more family members or other family clients, and (2) certain key employees of the family office. The proposed rule defines "family members" broadly to include not only the persons typically considered to be part of an immediate family and lineal descendents, but also parents, stepchildren, spousal equivalents, siblings and former family members (to the extent of investments made while family members).

The proposed rule also distinguishes a "family office" from a "family-run office," which must register under the Investment Advisers Act because it provides financial services to clients other than "family clients." It is also important to note that the proposed rule does not exempt a firm that provides investment advice to more than one family.

To review the proposed rule, click here. The SEC will receive comments on its proposed rule until Nov.18, 2010.