Recently the SEC approved a new rule to define the term “family Office.” Pursuant to the SEC’s new definition, a “Family Office” is a firm: 1) whose only clients are family clients; 2) and is wholly owned by family clients and controlled by family members and/or family entities; and 3) does not hold itself out to the public as an investment adviser.
Under the rule, family members include all lineal descendants of a common ancestor (who may be living or deceased) as well as current and former spouses or spouse equivalents of those descendants, provided that the common ancestor is not more than ten (10) generations removed from the youngest generation of family members. Furthermore, the rule accepts all children by adoption and current and former stepchildren as family members.
Included in the definition of family clients are family members (as defined above) and all of the following individuals and/or entities: 1) key employees of the family office (including executive officers, directors, trustees and general partners for the family office or its affiliated family office); 2) any other employee of the family office or any affiliated family office (other than an employee performing solely clerical, secretarial, or administrative functions) who has participated in the investment activities of the family office or any affiliated family office for at least 12 months; 3) any estate of a family member, former family member, key employee (and in some instances, a former key employee); 4) nonprofit and charitable organizations funded exclusively by family clients; 5) certain family trusts; 6) and companies wholly owned and operated for the benefit of family clients.
Family Offices are excluded from registration with the SEC. While not required to register with the SEC, those firms fitting the definition of Family Office must respond to certain questions found on Form ADV Part IA and periodically update same.
Please Note: Advisers who are currently relying upon the Family Office exemption but will no longer qualify under the new definition, must register with the SEC by March 30, 2012 (a later compliance deadline of December 31, 2013 has been established for Family Offices that manage assets of nonprofit or other charitable organizations funded by, in part, non-family assets). If you would like to discuss this blog post in more detail, please feel free to contact me in my firm’s Lawrenceville, New Jersey with any questions you may have.