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SEC Defines Family Offices Exempt from RIA Registration

In a rule adopted yesterday, the Securities and Exchange Commission (SEC) adopted a rule defining “family offices.” “Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Family offices were exempt from registration as investment advisers with “fewer than fifteen clients” prior to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, but when that act goes into effect on July 21, 2011, they will no longer be able to claim that broad exemption because it will be repealed.

In its place, as authorized by Congress, the SEC has exempted a new category of advisers that constitute “family offices.” A family office (1) provides investment advice only to “family clients,” as defined by the rule; (2) Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule; and (3) Does not hold itself out to the public as an investment adviser.

“Family Clients” include:

• lineal descendants (including by adoption, stepchildren, foster children, and, in some cases, by legal guardianship) 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.

• Any non-profit or charitable organization funded exclusively by family clients.

• Any estate of a family member, former family member, key employee, or subject to certain conditions a former key employee.

• Certain family client trusts.

• Any company wholly-owned by and operated for the sole benefit of family clients.

A family office may also advise “key employees” and still be exempt from registration. A “key employee” is (i) an executive officer, director, trustee, general partner, or person serving in a similar capacity at the family office or its affiliated family office; or (ii) any other employee of the family office or its affiliated family office (other than an employee performing solely clerical, secretarial, or administrative functions) who, in connection with his or her regular functions or duties, participates in the investment activities of the family office or affiliated family office, provided that such employee has been performing such functions or duties for or on behalf of the family office or affiliated family office, or substantially similar functions or duties for or on behalf of another company, for at least 12 months. A family office may also advise trusts established by key employees whose beneficiaries are the key employee’s immediate family members, or lineal descendants. Former key employees would not be required to liquidate or transfer their family office investments, but may not make new investments after their departure.

It should be noted that the SEC declined to permit a key employee’s spouse, spousal equivalent, and immediate family members to be considered key employees.

The SEC also provided transition guidance. Specifically, all current family offices who will have to register because they do not meet the new definition must register by March 30, 2012. Additionally, family offices that obtained exemptive orders from the SEC prior to July 21, 2011 will be permitted to operate without registration.


Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.

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