In Section 409 of Dodd-Frank Act, Congress required the SEC to define “family office” for the purpose of exempting such groups from the registration requirements under the Advisers Act. Section 409 provides that any definition the SEC adopts should be “consistent with the previous exemptive policy” of the SEC and recognize “the range of organizational, management, and employment structures and arrangements employed by family offices.”
The public will have the ability to comment on the SEC’s proposed rule until November 18, 2010. After that time the SEC will take public comments into consideration and then promulgate a final rule sometime thereafter.
The SEC notice can be found here and we have also provided a link to the full Proposed Family Office Rule.
The proposed definition is reprinted below in full.
§ 275.202(a)(11)(G)-1 Family offices.
(a) Exclusion. A family office, as defined in this section, shall not be considered to be an investment adviser for purpose of the Act.
(b) Family office. A family office is a company (including its directors, partners, trustees, and employees acting within the scope of their position or employment) that:
(1) Has no clients other than family clients; provided that 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 shall be deemed to be a family client for purposes of this section 275.202(a)(11)(G)-1 for four months following the transfer of assets resulting from the involuntary event;
(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.
(c) Grandfathering. A family office as defined in paragraph (a) above shall not exclude any person, who was not registered or required to be registered under the Act on January 1, 2010, solely because such person provides investment advice to, and was engaged before January 1, 2010 in providing investment advice to:
(1) Natural persons who, at the time of their applicable investment, are officers, directors, or employees of the family office who have invested with the family office before January 1, 2010 and are accredited investors, as defined in Regulation D under the Securities Act of 1933;
(2) Any company owned exclusively and controlled by one or more family members; or
(3) Any investment adviser registered under the Act that provides investment advice to the family office and who identifies investment opportunities to the family office, and invests in such transactions on substantially the same terms as the family office invests, but does not invest in other funds advised by the family office, and whose assets as to which the family office directly or indirectly provides investment advice represents, in the aggregate, not more than 5 percent of the value of the total assets as to which the family office provides investment advice; provided that a family office that would not be a family office but for this subsection (c) shall be deemed to be an investment adviser for purposes of paragraphs (1), (2) and (4) of section 206 of the Act.
(d) Definitions. For purposes of this section:
(1) Control means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of being an officer of such company.
(2) Family client means:
(i) Any family member;
(ii) Any key employee;
(iii) Any charitable foundation, charitable organization, or charitable trust, in each case established and funded exclusively by one or more family members or former family members;
(iv) Any trust or estate existing for the sole benefit of one or more family clients;
(v) Any limited liability company, partnership, corporation, or other entity wholly owned and controlled (directly or indirectly) exclusively by, and operated for the sole benefit of, one or more family clients; provided that if any such entity is a pooled investment vehicle, it is excepted from the definition of “investment company” under the Investment Company Act of 1940;
(vi) Any former family member, provided that from and after becoming a former family member the individual shall not receive investment advice from the family office (or invest additional assets with a family office-advised trust, foundation or entity) other than with respect to assets advised (directly or indirectly) by the family office immediately prior to the time that the individual became a former family member, except that a former family member shall be permitted to receive investment advice from the family office with respect to additional investments that the former family member was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to the time the person became a former family member; or
(vii) Any former key employee, provided that upon the end of such individual’s employment by the family office, the former key employee shall not receive investment advice from the family office (or invest additional assets with a family office-advised trust, foundation or entity) other than with respect to assets advised (directly or indirectly) by the family office immediately prior to the end of such individual’s employment, except that a former key employee shall be permitted to receive investment advice from the family office with respect to additional investments that the former key employee was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to the time the person became a former key employee.
(3) Family member means:
(i) the founders, their lineal descendants (including by adoption and stepchildren), and such lineal descendants’ spouses or spousal equivalents;
(ii) the parents of the founders; and
(iii) the siblings of the founders and such siblings’ spouses or spousal equivalents and their lineal descendants (including by adoption and stepchildren) and such lineal descendants’ spouses or spousal equivalents.
(4) Former family member means a spouse, spousal equivalent, or stepchild that was a family member but is no longer a family member due to a divorce or other similar event.
(5) Founders means the natural person and his or her spouse or spousal equivalent for whose benefit the family office was established and any subsequent spouse of such individuals.
(6) Key employee means any natural person (including any person who holds a joint, community property, or other similar shared ownership interest with that person’s spouse or spousal equivalent) who is an executive officer, director, trustee, general partner, or person serving in a similar capacity of the family office or any employee of the family office (other than an employee performing solely clerical, secretarial, or administrative functions with regard to the family office) who, in connection with his or her regular functions or duties, participates in the investment activities of the family office, provided that such employee has been performing such functions and duties for or on behalf of the family office, or substantially similar functions or duties for or on behalf of another company, for at least 12 months.
(7) Spousal equivalent means a cohabitant occupying a relationship generally equivalent to that of a spouse.
Bart Mallon, Esq. runs the hedge fund law blog and provides registration and compliance services to hedge fund managers through Cole-Frieman & Mallon LLP, a hedge fund law firm. He can be reached directly at 415-868-5345.