Another important new exemption is the Act’s amendment of the definition of “investment adviser” in the Advisers Act to exclude “family offices.” The Act also directs the SEC to develop, through rules, regulations, or orders, a definition of “family office” that is consistent with the SEC’s previous exemptive orders and other SEC guidance for family offices.
The Dodd-Frank Act requires that any action taken by the SEC to provide an exemption for a “family office”:
- Be consistent with the SEC’s previous exemptive policy with respect to family offices;
- Recognize the range of organization, management and employment structures and arrangements employed by family offices; and
- Contain a grandfather provision that includes in the definition of “family office” any person or entity that was not registered or required to be registered as an investment adviser under the Investment Advisers Act on January 1, 2010 solely because the person provided investment advice, and was engaged before January 1, 2010 in providing investment advice, to certain natural persons and entities associated with a family office, including certain registered investment advisers that identified investment opportunities for the family office and invested in those opportunities on substantially the same terms as the family office.
A person or entity that is a “family office” solely as a result of the grandfather provision will be deemed to be an investment adviser for purposes of the anti-fraud provisions of the Investment Advisers Act. A family office that currently relies on the private adviser exemption from registration in current Section 203(b)(3) of the Investment Advisers Act should assess whether it fits within the parameters of the SEC’s prior exemptive policy and thus will be able to rely on the new exemption for a family office. Previously because many family offices serve families with more than 15 members, the SEC typically issued exemptive orders, which extended the 15-person exemption so long as the family office serviced descendants and spouses of one person, or the person’s companies, charities and trusts. If the SEC continues to maintain the “direct descendant” definition in its rule making process, there could be concerns about the case of stepchildren and adoptions or close friends and family office employees.
There are a few alternatives available to family offices seeking to avoid the disclosure requirements of Dodd-Frank:
- If investment management is outsourced, the family office will not be required to register with the SEC.
- Families may consider entering into multifamily office arrangements so that disclosures that will be required with the SEC do not reveal specifics about any one family’s wealth.
Families may consider becoming a private trust company under state banking regulation, although under this option a family office will be subject to state law requirements for private trust companies that should be carefully considered.