The Securities and Exchange Commission has proposed a new rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act to define the term “family offices,” according to law firm Pillsbury Winthrop Shaw Pittman LLP.

Advisers falling within this definition will be excluded from the definition of “investment adviser” under the Investment Advisers Act of 1940 and will therefore not be required to register with the SEC. Many family offices had previously relied on the “private adviser exemption” from registration, which exempted advisers with fewer than 15 clients from the registration requirement of the Advisers Act.The Dodd-Frank Act removed the private adviser exemption from the Advisers Act.

Proposed Rule 202(a)(11)(G)-1 defines a family office as any firm satisfying the following three conditions:

Family Clients. Family offices may only provide investment advice to “family clients.” Family clients include family members, certain employees of the family office, charities established and funded exclusively by family members, trusts or estates existing for the sole benefit of family clients and entities wholly owned and controlled by family clients. Former family members may retain investments held through a family office but may not make new investments.

Ownership and Control. The family office must be wholly owned and controlled by family members.
Holding Out. The family office may not hold itself out to the public as an investment adviser.
The SEC noted that a family office that fails to meet the requirements of the new rule would still be able to seek an exemptive order from the SEC.

Comments on the proposed rule must be received by the SEC by Nov. 18, 2010.

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