10.14.2010

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Updates

On October 12, 2010, the Securities and Exchange Commission proposed a new rule, based on requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Financial Reform Act, defining “family offices” that will be excluded from regulation under the Investment Advisers Act of 1940.

In the past, family offices have not been required to register with the SEC under the Investment Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients.  The Financial Reform Act will eliminate this “private adviser exemption” effective July 21, 2011, but it also provides for certain limited exemptions, including one for “family offices.”

SEC's Definition Focuses on Clients, Control and Public Identity of the Family Office

The SEC proposes to define a “family office” as any firm that

    • provides investment advice only to “family clients,” meaning family members, certain key employees, charities and trusts established by family members and entities wholly owned and controlled by family members; 
    • is wholly owned and controlled by family members; and
    • does not hold itself out to the public as an investment adviser.

Family Member.  For purposes of this exemption, a “family member” would include the individual and his or her spouse or spousal equivalent for whose benefit the family office was established, any of their subsequent spouses or spousal equivalents, their parents, lineal descendants (including by adoption and stepchildren) and these lineal descendants’ spouses or spousal equivalents.  “Family member” would also include siblings of the founders of the family office, their spouses or spousal equivalents, their lineal descendants (including by adoption and stepchildren) and these lineal descendants’ spouses or spousal equivalents.

Key Employees.  Key employees would be limited to those that are likely to be in a position or have a level of knowledge and experience in financial matters sufficient to be able to evaluate risks and take steps to protect themselves.  Specifically, it would include (i) executive officers, directors, trustees, general partners or persons serving in a similar capacity and (ii) other family office employees (other than those performing solely clerical, secretarial or administrative functions) who, in connection with their regular duties, have participated in the investment activities of the family office, or have performed similar functions or duties for or on behalf of another company, for at least 12 months.

SEC Is Accepting Comments

Public comments on the proposed rule may be submitted to the SEC on or before November 18, 2010.

Additional Information

This Update is only intended to provide a summary of SEC's proposed rule.  You can read the full text of the proposed rule at http://www.sec.gov/rules/proposed/2010/ia-3098.pdf.  You can find other discussions about the Financial Reform Act on our Web site.

© 2010 Perkins Coie LLP


 

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