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A recent no-action letter provides some clarification on the application of the new exemption from registration under the Investment Advisers Act of 1940 for “family offices.”


Historically, Section 203(b)(3) of the Investment Advisers Act of 1940 allowed persons who would otherwise be required to register as investment advisers to avoid registration if they had fewer than fifteen clients.  This exemption not only allowed many hedge funds and other private funds to avoid regulation, but it also allowed so-called “family offices” to escape registration.  Broadly speaking, a family office is an entity established by a wealthy family to manage the family’s wealth and provide other related services, such as estate planning, tax services, and investment advisement.

The Dodd-Frank Act repealed Section 203(b)(3) of the Advisers Act in order to subject hedge funds and other private funds to regulation, but it also provided a new exemption for “family offices” in Section 202(a)(11)(G) of the Advisers Act and directed the SEC to adopt a rule defining the term “family office.”

The SEC responded by enacting new Rule 202(a)(11)(G)-1, which defines “family office”  as a company (including its directors, managers, partners, etc.) that: 1) has no clients other than family clients; 2) is wholly owned by family clients and exclusively controlled by family members or family entities; and 3) does not hold itself out to the public as an investment adviser.

The Adamson No-Action Letter

In a January 16, 2012 no-action letter request, Peter Adamson III proposed to provide investment advisory services to up to ten families in family office settings.  Adamson was about to retire from a forty-year career in the securities industry, giving up his post at $1 billion plus investment advisory firm that he had founded in 1997.  Each of the principals of the family offices had been a client of Adamson’s for at least ten years, Adamson would no longer be associated with any registered investment adviser or broker-dealer, and he would provide services only to the family clients of the family offices.  

Adamson sought assurance that he could provide advisory services to each of the ten family offices without running afoul of Rule 202(a)(11)(G)-1, which would be satisfied with respect to each of the ten offices, individually.  Adamson, through his attorney, pointed out that “nothing we have seen in the Rule, the commentary in the release adopting the Rule, or in the exemption orders issued prior to the Rule’s adoption suggest that an adviser in a family office must act exclusively for only one family office.”

The SEC denied Adamson’s request on the grounds that he had failed to demonstrate or explain how the proposed arrangement does not create a multi-family office.  The SEC pointed out that in Investment Advisers Act Release No. 3220 (June 22, 2011), the Commission had emphasized that the family office exemption does not extend to family offices serving multiple families: “In particular, footnote 114 states that if several unrelated families established separate family offices staffed with the same or substantially the same employees, such employees would be managing a de facto multifamily office, such that the family offices could not rely on the exclusion.”

The SEC press release relating to new Rule 202(a)(11)(G)-1 contains answers to some frequently asked questions about the definition of “family office,” and is a good place to start if you are tasked with determining whether a client meets the family office exemption.

Remember to check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

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