Removal of Certain ‘Family Offices’ From Investment Advisers Act Underway

Jack Humphrey, Regulatory journalist
June 27, 2011 /

The Securities and Exchange Commission (SEC) has approved a new rule that will exclude certain “family offices” from the provisions of Investment Advisers Act of 1940, a ruling that is backed by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the Investment Advisers Act, family offices are considered to be investment advisers because they provide advisory services, thus the requirement to register with the SEC.

They are entities “established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services,” the SEC noted.

Before the Dodd-Frank was passed, the Investment Advisers Act provided exemption for family offices with fewer than 15 clients from having to register with the SEC.

The Dodd-Frank Act removed that exemption so the SEC can regulate hedge fund and other private fund advisers,” the SEC added.

Under the Dodd-Frank Act, certain family offices must not be prevented from meeting the new exclusion just because they provide investment advice to certain clients (and provided that advice prior to January 1, 2010).

Along with the removal of the exemption, the Dodd-Frank act has authorized the SEC to “define family offices in order to exempt them from regulation under the [Investment] Advisers Act.”

The SEC currently mulls the adoption of rule that defines family offices to be excluded from the Investment Advisers Act.

The new rule will enable those managing their own family’s financial portfolios to determine whether their family offices can continue to be excluded from the Investment Advisers Act. This is effective 60 days after its publication in the Federal Register.

That exclusion will cover family members, including all lineal descendants 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.

Similarly, executive officers, directors, trustees, general partners, or persons serving in a similar capacity for the family office or its affiliated family office will also be excluded, in addition to other family clients like charitable organizations.

Finally, any other employee of the family office or its affiliated family office who has participated in the investment activities of the family office or affiliated family office in connection with his or her regular duties, or similar functions or duties for another company, for at least 12 months, can avail of the exclusion.

By March 30, 2012, family offices that will not meet the “terms of exclusion” will have to register with the SEC under the Investment Advisers Act.

The SEC added that existing family offices will not be “rescinded”. Family offices that obtained exemptions from the SEC will continue to operate under their existing exemptive orders or they may operate under the new rule.

 

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