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SEC Issues Family Office Rule

The U.S. Securities and Exchange Commission (SEC) adopted a new rule defining “family offices.” This rule was written in response to the Dodd-Frank Act and clarifies which offices are excluded from the definition of an investment adviser under the Investment Advisers Act of 1940.

The new rule excludes offices that provide securities advice only to family clients. These offices must be wholly owned and controlled by family members or family entities. Finally, the office cannot hold itself out to the public as an investment adviser.

Family members are defined as lineal descendents of a common ancestor, provided the ancestor is no more than 10 generations removed from the youngest generation of family members. Current and former spouses or spousal equivalents of those descendents are also included.

Family clients also include irrevocable trusts, revocable trusts and estates. The SEC purposely included these in response to comments requesting that the exemption cover common estate planning vehicles. A nonprofit or charitable organization (including a charitable trust) can be treated as part of the family if it is funded exclusively by family members.

The family office must be wholly owned by family clients and exclusively controlled by family members or family entities.

The family office cannot hold itself out as a public investment adviser. In other words, the family office must exist for the family itself and not offer financial advice for non-family members. The SEC stated that the exclusion does not extend to offices serving multiple families. (See the aforementioned definition of what constitutes a family.)

The new rule was issued to clarify regulations pertaining to family offices, not to interfere with how families manage their finances. The SEC directly acknowledged that “disputes among family members … could … be resolved within the family unit or, if necessary, through state courts.” Thus, parents and grandparents are still allowed to give financial advice to their children and grandchildren.

If you operate a family office, consult with your legal professionals if you have questions or need clarification.

Source: SEC press release “SEC Adopts Rule Under Dodd-Frank Act Defining ‘Family Offices,’” June 22, 2011; www.sec.gov/news/press/2011/2011-134.htm.


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