The U.S. Securities and Exchange Commission has published a proposed rule that defines “family offices,” which are exempt from the Investment Advisers Act of 1940 under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Dodd-Frank Act repeals Section 203(b)(3) of the Advisers Act, which exempted investment advisers with fewer than 15 clients (and meeting certain other requirements) from registration under the Advisers Act. As a consequence, effective July 21, 2011, many formerly unregistered investment advisers will be required to register with the SEC and meet Advisers Act requirements.

However, under the Dodd-Frank Act “family offices” are not deemed to be investment advisers. Congress directed the SEC to adopt a rule that defined that term and was consistent with the SEC’s previous policy in granting exemptive orders for family offices under the Advisers Act.

The proposed rule makes it clear that family offices serving multiple families are not excluded from the definition of investment adviser. The SEC view is that multifamily offices more resemble a typical commercial investment adviser and, accordingly, are appropriately subject to regulation under the Advisers Act.

The proposed rule defines the term “family office” to mean a company (including its directors, partners, trustees, and employees) with the following characteristics:

  • No clients other than family clients
  • Wholly owned and controlled by family members
  • Does not hold itself out to the public as an investment adviser

Family clients include family members, key employees of the family office, charities established and funded exclusively by family members or former family members, trusts or estates existing solely for the benefit of family clients, and entities wholly owned and controlled exclusively by and operated for the sole benefit of family clients. Family members include the individual and his or her spouse for whose benefit the family office was established, and any of their subsequent spouses, parents, siblings, lineal descendants (including by adoption and stepchildren), and such lineal descendants’ spouses.

Comments on the proposed rule must be received by the SEC on or before November 18, 2010.