In a key move for the US wealth sector, the SEC has set out its definition of what is meant by family offices that can be excluded from registering with the regulator.
In a move eagerly awaited by the US family wealth management sector, the Securities and Exchange Commission yesterday approved new guidelines that define those “family offices” that will be excluded from the Investment Advisers Act of 1940.
The move came after lawmakers passed the Dodd-Frank Wall Street Reform and Consumer Protection Act last year. Historically, family offices have not been forced to register with the SEC under the 1940 legislation because of an exemption to advisors catering to fewer than 15 clients. The prospect of putting these institutions under regulatory control had caused some concerns in the sector. (To view an article on the subject from last year, click here).
Last year’s legislation, part of a wave of regulatory action coming into force around the world since the 2008 financial crisis, had removed the exemption so that the SEC could regulate hedge fund and other private fund advisors. However, the Dodd-Frank law also included a new provision that forced the powerful regulator to define what was meant by a “family office” to exclude them from the Advisers Act provisions.
“Family offices” are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services.
The rule is effective 60 days after its publication in the Federal Register.
According to guidance in a statement, a “family office” will be excluded if it provides advice only to family clients; is wholly-owned by family clients and exclusively controlled by family members and/or family entities, as defined by the rule and that it does not hold itself to the public as an investment advisor.
In defining “family members”: they “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”, the statement said.
As for “key employees”, they are “executive officers, directors, trustees, general partners, or persons serving in a similar capacity for the family office or its affiliated family office”.
“Other family clients” are defined as “any non-profit or charitable organization funded exclusively by family clients; any estate of a family member, former family member, key employee, or subject to certain conditions a former key employee”.