On June 22, the Securities and Exchange Commission (SEC) adopted a rule exempting from registration and regulation under the Investment Advisers Act of 1940 (Advisers Act) certain “family offices.”1 The rule implements Section 409 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Without the rule, many family offices would have been forced to register as investment advisers in light of the repeal of Section 203(b)(3) of the Advisers Act, the 14-client rule upon which many family offices relied for exemption from registration. While the SEC significantly expanded the rule from its proposed form, many of the definitions remain complicated, and given the widely varying structures of family offices, some offices may need to restructure their operations or terminate clients to avoid registration under the Advisers Act. Family offices that cannot meet the definition of “family office” are required to be registered with the SEC as investment advisers by March 30, 2012, unless they choose to seek exemptive relief from registration and regulation.

Family Members and Family Clients

A family office is an entity providing investment advisory services that meets each of the following criteria:

1. Its only clients are “family clients” (family members and certain alter ego family entities formed for tax, charitable, or estate planning purposes).2

2. It is wholly owned by family clients and exclusively controlled by “family members” or family entities.

3. It does not hold itself out to the public as an investment adviser.