Investment Advisers Act: SEC Proposes Rule Defining “Family Offices” That Are Exempt from Regulation Under the Investment Advisers Act of 1940

Sullivan & Cromwell LLP - October 15, 2010
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On October 12, 2010, the SEC proposed a rule in connection with its implementation of Title IV of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) defining “family offices” that are exempt from regulation under the Investment Advisers Act of 1940 (the “Advisers Act”).

Historically, most family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients. Effective July 21, 2011, the Dodd-Frank Act will remove that exemption, primarily for the purpose of requiring advisers to private funds, such as hedge funds, to register under the Advisers Act. In order to continue to provide an exemption for family offices, the Dodd-Frank Act excludes from regulation under the Advisers Act “family offices” and directs the SEC to issue a rule defining “family offices” that are exempt from regulation under the Advisers Act.

The SEC is proposing to define a family office as any firm that (1) provides investment advice only to members of a single family, certain key employees, charities and trusts established by family members, entities wholly owned and controlled by family members and, under certain circumstances, former family members and former key employees; (2) is wholly owned and controlled by family members; and (3) does not hold itself out to the public as an investment adviser. The SEC has requested comments on the proposed rules by November 18, 2010.