New Rule 202(a)(11)(G)-1 exempts a family office from SEC registration as an investment adviser. A family office is any company that has no clients other than “family clients” (as defined below), is wholly-owned and controlled by family members (as defined below), and does not hold itself out to the public as an investment adviser.
The key to this exemption is who qualifies as a family client. A family office may advise the following persons and qualify for the exemption:
- Family members and former family members. Family members include all lineal descendants (including by adoption, stepchildren, foster children, and, in some cases, by legal guardianship) of a common ancestor (who is no more than 10 generations removed from the youngest generation of family members), and such lineal descendants' spouses or spousal equivalents.
Key employees and, subject to certain conditions, former key employees. Key employees include:
- Executive officers, directors, trustees, general partners, or persons serving in a similar capacity for the family office or its affiliated family office.
- Any other employee of the family office or its affiliated family office (other than a clerical or secretarial employee) who, in connection with his or her regular duties, has participated in the investment activities of the family office or affiliated family office, or similar functions or duties for another company, for at least 12 months.
- Former key employees, provided that upon the end of such individual's employment, the former key employee may not continue to receive investment advice except with respect to assets advised by the family office prior his or her employment termination, and may not invest additional assets with the family office except with respect to additional assets that the former key employee was contractual obligated to make prior to his or her employment termination that relate to an existing family-office advised investment.
Family-related persons. Other family clients generally include:
- Any non-profit or charitable organization funded exclusively by family clients.
- Any estate of a family member, former family member, key employee, or, subject to the conditions discussed above, a former key employee.
- Certain family client trusts.
- Any company wholly owned by and operated for the sole benefit of family clients.
In addition, if a person that is not a family client becomes a client of the family office as a result of the death of a family member or key employee or other involuntary transfer from a family member or key employee, that person is deemed a family client for one year following the completion of the transfer of legal title to the assets resulting from the death or involuntary transfer.