Press Room: Tax Release

February 06, 2012

SEC Guides on Family Office Rule as Deadline Nears

As the March 30 deadline approaches, the SEC has provided family offices with additional guidance to consider in determining whether registration as an investment advisor is required. For a family office seeking to remain exempt from registration and other elements of the Investment Advisers Act, the recently released FAQ further clarifies, among other things, the permissible client and ownership/control requirements.

Permissible Clients - To avail itself of the family office exemption, a family office may only provide investment advice to “Family Clients” as defined in the rule. The guidance generally does not depart from the literal wording found in the rule, and makes clear that an exempt family office cannot give investment advice to the following:

  • A lineal descendant’s in-laws related through the descendant’s spouse
  • A former family member’s new family, such as children born in a subsequent marriage
  • Key employees of a family owned operating company

Ownership and Control - To remain exempt, a family office must be wholly owned by Family Clients, and exclusively controlled by Family Members and their associated Family Entities. The guidance states that a family office may have a minority of non-family members on its board of directors and still satisfy the “exclusive control” standard. However, a board comprised of only non-family members does not meet the standard even if family members have the right to appoint, terminate or replace the board members. Alternatively, if the governing documents require that matters relating to management or policies must be decided by Family Member shareholders, this may be overcome. Furthermore, issuing non-voting shares of the family office to non-family clients will fail the wholly owned standard.

Although the provision of non-investment advisory services to non-family clients (such as accounting, administrative and concierge services) does not affect exemptive status, the SEC staff twice took the opportunity in its FAQ to warn that “investment advice” is broadly interpreted under the Advisers Act. If not done already, a family office should closely evaluate the range of services offered, to whom they are provided and the ownership/control structure of the office. By March 30, a non-exempt family office should consider registering as an investment advisor unless it is willing to terminate ineligible client relationships, restructure its ownership and control, and/or cease providing investment advice.

The full SEC FAQ is available here.

For more information, please contact your WTAS advisor.