Currently, many “family offices” have been structured to take advantage of the exemption from registration under section 203(b)(3) of the Investment Advisers Act for any adviser that during the course of the preceding 12 months had fewer than 15 clients and neither held itself out to the public as an investment adviser nor advised any registered investment company or business development company. However, the Dodd-Frank Act, among other matters, will repeal the 15-client exemption contained in section 203(b)(3). One potential consequence of repealing the 15-client exemption is that many family offices that have relied on that exemption would be required to register under the Advisers Act. To prevent that consequence, section 409 of the Dodd-Frank Act creates a new exclusion from the Advisers Act in section 202(a)(11)(G), under which “family offices”, are not investment advisers subject to the Advisers Act. The SEC has now proposed, and is accepting comments on, a new definition of “family office”. As proposed, a “family office” is a company that:
1. Has no clients other than “family clients;”
2. is wholly owned and controlled (directly or indirectly) by “family members;” and
3. does not hold itself out to the public as an investment adviser.
“Family clients” would include family members, certain employees of the family office, charities established and funded exclusively by family members, trusts or estates existing for the sole benefit of family clients, and entities wholly owned and controlled exclusively by family clients. Generally, “family members” would include spouses, parents and lineal decedents. Additionally, holding itself out to the public as an investment adviser suggests that the family office is seeking to enter into advisory relationships with non-family clients, and therefore inconsistent with the proposed definition of “family office.”
The SEC anticipates that some presently existing family offices may need to reorganize the ownership or control structure of the family office in order to meet the family office definition under the proposed rule. On the other hand, family offices that satisfy the definition would not be subject to the costs of registering with the SEC as an investment adviser and its associated compliance costs (or if they were previously registered, they would benefit from the reduced regulatory costs after de-registering in reliance on the exclusion).
For more information regarding registration or complying with the proposed definition of “family office”, please contact us at (619) 278-0020. Full text of the proposed definition can be found here: http://www.sec.gov/rules/proposed/2010/ia-3098.pdf