SEC’s Responses to FAQs Regarding “Family Office” Exclusion from “Investment Adviser”


As previously described, the Securities and Exchange Commission has, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted a rule to exclude “family offices” from the definition of “investment adviser” under the Investment Advisers Act of 1940, as amended (the “Rule”). 

An entity that has operated as an exempt family office should now be finally deciding whether it must register with the SEC as an investment adviser or may avoid registration by complying with the requirements of the Rule.  As indicated in the SEC’s release adopting the Rule (PDF), the rapidly approaching deadline for filing an application to register with the SEC is February 14, 2012.  Perhaps just in time for a prospective registrant’s final decision regarding whether it must register, the SEC staff has recently issued responses to frequently asked questions to address some remaining issues in applying the Rule.

Among the more significant responses of the SEC staff to questions regarding the Rule are the following:

  • The Rule’s requirement that the family office be “exclusively controlled” by family members or family entities (1) does not permit control merely by the power of shareholders or other owners to elect or appoint members of a board of directors or other governing body of the family office that determines the management or policies of the family office (the “Board”), but (2) does not preclude non-majority or non-controlling representation of non-family members or non-family entities on the Board.
  • The Rule’s requirement that ownership of the family office be “wholly” by family clients means that a non-family client may not own even non-voting shares of the family office.
  • The “family clients” of  a family office – who may own and/or receive investment advice from the family office – include key employees.  But the definition of “key employees” includes only employees of the family office or an affiliated family office serving the same family, and not employees of a family-owned operating company.
  • A “family member” of a family office – who may own and/or receive investment advice from the family office – does not include (1) any descendent of a stepchild whose parent later divorced the family member stepparent (though the stepchild would be a former family member and, therefore, may continue to be a family client) or (2) in-laws related through the spouse of the common ancestor or through spouses or spousal equivalents.
  • “Spousal equivalents” include same-sex domestic partners and unmarried opposite-sex partners who live together in a relationship generally equivalent to a married couple.

OUR TAKE:  The SEC staff’s responses are helpful in understanding and applying the Rule, but do not include any departure from the adopting release for the Rule or any other surprise.  The responses, however, do illustrate the difficulty in some cases of applying the Rule to complicated family relationships or structures.

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