The SEC Division of Investment Management has issued guidance regarding key employee trusts under the Family Office Rule. The Family Office Rule provides an exception from the Investment Advisers Act definition of investment adviser for families that are managing their own wealth, meaning, among other things, that they are providing advice solely to “family clients.” The guidance provides (1) that a key employee trust may qualify as a “family client” even if a non-key employee makes “non-investment” decisions for the trust; and (2) that a key employee trust may qualify as a “family client” even if the key employee who is authorized to make decisions with respect to that trust is not the key employee who contributed assets to the trust.
According to the SEC staff, recognizing the need for family offices to attract and retain talented investment professionals as employees, the Family Office Rule permits family offices to include as “family clients” certain non-family members, including those employees whose position and experience should enable them to protect themselves (key employees) and certain investment entities through which those key employees may invest in opportunities connected to the family office. Included in the category of key employee investment entities that would meet the definition of a family client is “[a]ny trust of which: each trustee or other person authorized to make decisions with respect to the trust is a key employee; and each settlor or other person who has contributed assets to the trust is a key employee or the key employee’s current and/or former spouse or spousal equivalent....”
The SEC staff believes it is within the intent of the Family Office Rule for a non-key employee to make administrative decisions for a trust, provided investment decisions are made by a key employee. The Investment Advisers Act does not contain a definition of “investment decision.” However, the SEC staff believes that, for example, the following generally are purely administrative duties and do not involve making “investment decisions”:
- Preparing and filing taxes for the trust (however, advice on structuring a tax-favorable investment strategy would not be purely administrative)
- Keeping records for the trust
- Distributing periodic statements or disclosures to trust beneficiaries.
While these and other administrative duties may result in a non-key employee making certain decisions on behalf of the trust, the SEC staff would generally not consider such decisions to be “investment decisions.”
Additionally, the SEC staff believes it generally is consistent with the intent of the Family Office Rule for one key employee to make investment decisions on behalf of another key employee’s trust. The Family Office Rule requires that each trustee or other person authorized to make decisions with respect to the trust is a key employee. In this case, investment decisions would continue to be made solely by a key employee — individuals that the SEC staff has already concluded should have sufficient financial experience and sophistication to act without the protection provided by its regulations under the Investment Advisers Act.