Apps Help Create Family Tree

NYC Manhattan art

On March 31, 2012, rules governing family office hedge funds were radically changed. The Dodd-Frank Wall Street Reform Act mandated that many family office hedge funds previously excluded from registration under the Financial Advisers Act were now liable for registration under the Private Fund Investment Advisers Registration Act. Accordingly, the Securities and Exchange Commission (SEC) was required to issue new definitions as to what constitutes a “family office” fund. We will examine the definitions that enable a fund to continue its exemption as a family office fund.

Exempting Registration — Conditionally

Title IV of Dodd-Frank excluded family offices from the definition of investment adviser under the Investment Advisers Act of 1940 and, correspondingly, exemption from registration under that act. However, at the same time that this exemption came into force, Section 409 of the Dodd-Frank Act directed the SEC to adopt a new rule defining the term “family office” so as to clarify which funds were eligible for the exemption.

Defining “Family Office”

Under Rule 202(a)(11)(G) of the Investment Advisers Act, the SEC adopted a definition of a family office as a company that:

  • Provides investment advice only to “family clients,” as defined by the rule.
  • Is wholly owned by family clients and is exclusively controlled by family members and/or family entities, as defined by the rule.
  • Does not hold itself out to the public as an investment adviser (Source: U.S. Securities and Exchange Commission, June 22, 2011).

Defining “Family Client”

In order to meet the new definition, the family office must limit its investment advisory services to those defined as “family client” as follows:

  • Family members. Family members include all lineal descendants (including by adoption, stepchildren, foster children, and, in some cases, by legal guardianship) of a common ancestor (who is no more than 10 generations removed from the youngest generation of family members), and such lineal descendants’ spouses or spousal equivalents.
  • Key employees. Key employees include: executive officers, directors, trustees, general partners, or persons serving in a similar capacity for the family office or its affiliated family office.
  • Any other employee of the family office or its affiliated family office (other than a clerical or secretarial employee) who, in connection with his or her regular duties, has participated in the investment activities of the family office or affiliated family office, or similar functions or duties for another company, for at least 12 months (Source: supra).

Others Defined as “Family Clients”

In addition to the above, the SEC has included as “family clients”’: a non-profit or charitable organization funded exclusively by family clients; the estate of a family member, former family member or key employee; certain family trusts; and any company wholly owned by and operated for the sole benefit of family clients.