On June 22, 2011, the SEC voted unanimously to adopt Rule 202(a)(11)(G)-1 under the Advisers Act, which provides an exemption from most provisions of the Advisers Act to certain family offices. To qualify for the exemption, a family office must:
- provide advice about securities only to certain “family clients”;
- be wholly owned by family clients and exclusively controlled (directly or indirectly) by one or more family members and/or family entities; and
- not hold itself out to the public as an investment adviser.
Rule 202(a)(11)(G)-1(d)(4) provides that “family clients” include current and former family members; certain employees of the family office (and, under certain circumstances, former employees); charities funded exclusively by family clients; estates of current and former family members or key employees; trusts existing for the sole current benefit of family clients or, if both family clients and charitable and non-profit organizations are the sole current beneficiaries, trusts funded solely by family clients; revocable trusts funded solely by family clients; certain key employee trusts; and companies wholly owned exclusively by, and operated for the sole benefit of, family clients (with certain exceptions).
The Dodd-Frank Act prohibits the SEC from excluding from its definition of family office persons not registered or required to be registered on January 1, 2010 that would meet all of the required conditions under Rule 202(a)(11)(G)-1 but for their provision of investment advice to certain clients specified in Section 409(b)(3) of the Dodd-Frank Act.1 In addition, Rule 202(a)(11)(G)-1(e)(2) provides that family offices currently exempt from registration under the Advisers Act in reliance on the private adviser exemption and that do not meet the new family office exclusion are not required to register with the SEC as investment advisers until March 30, 2012.
This final rule reflects a number of changes based on input received during the comment process. Please see our client alert on the rule proposal at http://www.mofo.com/files/Uploads/Images/101018-Family-Offices.pdf. Institutions that interact with family offices may wish to alert them regarding these changes (many of the changes will prompt some restructuring on the part of many family offices). To the extent that investor representation letters or other documents in use currently include references to “family offices” generically, institutions may want to review and revise the documentation in order to include specific reference to the formalized definition of the term now contained in the rules.