family offices final

8/4/2019 Family Offices Final

http://slidepdf.com/reader/full/family-offices-final 1/14

37983Federal Register / Vol. 76, No. 125 / Wednesday, June 29, 2011 / Rules and Regulations

115 U.S.C. 80b. Unless otherwise noted, when werefer to the Advisers Act, or any paragraph of theAdvisers Act, we are referring to 15 U.S.C. 80b of the United States Code, at which the Advisers Actis codified.

2See Family Offices, Investment Advisers ActRelease No. 3098 (Oct. 12, 2010) [75 FR 63753 (Oct.18, 2010)] (‘‘Proposing Release’’). ‘‘Family offices’’are entities established by wealthy families tomanage their wealth and provide other services tofamily members. See section I of the ProposingRelease for a discussion of family offices.

3Public Law 111–203, 124 Stat. 1376 (2010), atsection 403.

415 U.S.C. 80b–2(b)(3). This provision exemptsfrom registration any adviser that during the courseof the preceding 12 months had fewer than 15clients and neither held itself out to the public asan investment adviser nor advised any registeredinvestment company or business developmentcompany.

5See section 409 of the Dodd-Frank Act.

B. Russell National School Lunch Actand the Child Nutrition Act of 1966.

PART 235—STATE ADMINISTRATIVEEXPENSE FUNDS

■ 15. The authority citation for 7 CFRPart 235 continues to read as follows:

Authority: Secs. 7 and 10 of the Child

Nutrition Act of 1966, 80 Stat. 888, 889, asamended (42 U.S.C. 1776, 1779).

■ 16. Section 235.6 is amended byadding a new paragraph (i) to read asfollows:

§ 235.6 Use of funds.

* * * * *(i) Full use of Federal funds. States

and State agencies must support the fulluse of Federal funds provided to Stateagencies for the administration of ChildNutrition Programs, and exclude suchfunds from State budget restrictions orlimitations including hiring freezes,

work furloughs, and travel restrictions.PART 246—SPECIAL SUPPLEMENTALNUTRITION PROGRAM FOR WOMEN,INFANTS AND CHILDREN

■ 17. The authority citation for part 246continues to read as follows:

Authority: 42 U.S.C. 1786.

■ 18. Section 246.3 is amended to adda new paragraph (c)(3), as follows:

§ 246.3 Administration.

* * * * *(c) * * *(3) The written agreement must

include a statement that supports fulluse of Federal funds provided to Stateagencies for the administration of theWIC Program, and excludes such fundsfrom State budget restrictions orlimitations including hiring freezes,work furloughs, and travel restrictions.

* * * * *■ 19. Section 246.26 is amended byadding a new paragraph (k) to read asfollows:

§ 246.26 Other provisions.

* * * * *(k) Program evaluations. State and

local WIC agencies and contractors mustcooperate in studies and evaluationsconducted by or on behalf of theDepartment, related to programsauthorized under the Richard B. RussellNational School Lunch Act and theChild Nutrition Act of 1966 (42 U.S.C.1786).

PART 248—WIC FARMERS’ MARKETNUTRITION PROGRAM (FMNP)

■ 20. The authority citation for part 248continues to read as follows:

Authority: 42 U.S.C. 1786.

■ 21. Section 248.3 is amended byredesignating paragraph (c) introductorytext as paragraph (c)(1) and adding anew paragraph (c)(2) to read as follows:

§ 248.3 Administration.

* * * * *(c) * * *

(2) The written agreement mustinclude a statement that supports fulluse of Federal funds provided to Stateagencies for the administration of theFMNP, and excludes such funds fromState budget restrictions or limitations,including hiring freezes, workfurloughs, and travel restrictions.

* * * * *

■ 22. Section 248.24 is amended byadding a new paragraph (d) to read asfollows:

§ 248.24 Other provisions.

* * * * *

(d) Program evaluations. State andlocal FMNP agencies and contractorsmust cooperate in studies andevaluations conducted by or on behalf of the Department, related to programsauthorized under the Richard B. RussellNational School Lunch Act and theChild Nutrition Act of 1966 (42 U.S.C.1786).

Dated: June 23, 2011.

Audrey Rowe,

Administrator, Food and Nutrition Service.

[FR Doc. 2011–16282 Filed 6–28–11; 8:45 am]

BILLING CODE 3410–30–P

SECURITIES AND EXCHANGECOMMISSION

17 CFR Part 275

[Release No. IA–3220; File No. S7–25–10]

RIN 3235–AK66

Family Offices

AGENCY: Securities and ExchangeCommission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange

Commission (the ‘‘Commission’’) isadopting a rule to define ‘‘familyoffices’’ that will be excluded from thedefinition of an investment adviserunder the Investment Advisers Act of 1940 (‘‘Advisers Act’’) and thus will not

be subject to regulation under theAdvisers Act.

DATES: Effective Date: August 29, 2011.

FOR FURTHER INFORMATION CONTACT:Sarah ten Siethoff, Senior SpecialCounsel, or Vivien Liu, Senior Counsel,at (202) 551–6787 or [email protected],

Office of Investment AdviserRegulation, Division of InvestmentManagement, U.S. Securities andExchange Commission, 100 F Street,NE., Washington, DC 20549–8549.

SUPPLEMENTARY INFORMATION: TheSecurities and Exchange Commission isadopting rule 202(a)(11)(G)–1 [17 CFR

275.202(a)(11)(G)–1] under theInvestment Advisers Act of 1940 [15U.S.C. 80b] (the ‘‘Advisers Act’’ or‘‘Act’’).1

Table of Contents

I. BackgroundII. DiscussionIII. Paperwork Reduction ActIV. Economic AnalysisV. Final Regulatory Flexibility AnalysisVI. Statutory AuthorityText of Rule

I. Background

On October 12, 2010, the Commissionissued a release proposing new rule202(a)(11)(G)–1 that would exempt‘‘family offices’’ from regulation underthe Advisers Act.2 We proposed thisrule in anticipation of the Dodd-FrankWall Street Reform and ConsumerProtection Act’s (the ‘‘Dodd-FrankAct’’) 3 repeal of the private adviserexemption from registration containedin section 203(b)(3) of the Advisers Act,effective July 21, 2011, upon whichmany family offices currently rely.4

The Dodd-Frank Act creates in itsplace a new exclusion from the Advisers

Act in section 202(a)(11)(G) underwhich family offices, as defined by theCommission, are not investmentadvisers subject to the Advisers Act.5 Historically, family offices that felloutside the private adviser exemptionhave sought and obtained from usorders under the Advisers Act declaringthose offices not to be investmentadvisers within the intent of section

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mailto:[email protected]

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37984 Federal Register / Vol. 76, No. 125 / Wednesday, June 29, 2011 / Rules and Regulations

6See, e.g., Bear Creek Inc., Investment AdvisersAct Release Nos. 1931 (Mar. 9, 2001) (notice) [66FR 15150 (Mar. 15, 2001)] and 1935 (Apr. 4, 2001)(order); Riverton Management, Inc., InvestmentAdvisers Act Release Nos. 2459 (Dec. 9, 2005) [70FR 74381 (Dec. 15, 2005)] and 2471 (Jan. 6, 2006)(order). We are troubled by comment letters wereceive by counsel to some family offices thatappear to acknowledge that their clients wereoperating as unregistered investment advisers,although they were not eligible for the privateadviser exemption and had not obtained anexemptive order from us. We note that an advisermay not ‘‘rely’’ on exemptive orders issued to otherpersons.

7Section 409(b) of the Dodd-Frank Act. Section409 also includes a ‘‘grandfathering clause’’ thatprecludes us from excluding certain family officesfrom the definition solely because they provideinvestment advice to certain clients and hadprovided investment advice to those clients before January 1, 2010. See section 409(b)(3) of the Dodd-Frank Act.

8The public comments we received on theProposing Release are available on our website athttp://www.sec.gov/comments/s7-25-10/ s72510.shtml.

9See, e.g., Comment Letter of the American BarAssociation, Section of Business Law and Sectionof Real Property, Trust and Estate Law (Nov. 18,

2010) (‘‘ABA Letter’’); Comment Letter of PerkinsCoie/Private Investor Coalition Inc. (Nov. 11, 2010)(‘‘Coalition Letter’’); Comment Letter of Tannenbaum, Helpern, Syracuse & Hirschtritt LLP(Nov. 18, 2010) (‘‘Tannenbaum Letter’’).

10See, e.g., Comment Letter of Miller & MartinPLLC (Nov. 18, 2010) (‘‘Miller Letter’’)(recommending that non-family clients bepermitted de minimis investments in family limitedliability companies, partnerships, corporations andother entities and be permitted de minimisownership stakes in the family office itself);Comment Letter of Porter Wright (Nov. 10, 2010)(supporting various forms of non-family clientinvestment through the family office with fivepercent de minimis maximums for each type of exception).

11See, e.g., Coalition Letter.12See Proposing Release, supra note 2, at sections

I and II for a discussion of the rationale for thefamily office exclusion.

13See supra note 7 and section II.A.5 of thisRelease.

14Rule 202(a)(11)(G)–1(b)(1).15The term ‘‘company’’ used throughout this

Release and rule 202(a)(11)(G)–1 has the samemeaning as in section 202(a)(5) of the Advisers Act,which defines ‘‘company’’ as ‘‘a corporation, apartnership, an association, a joint-stock company,a trust, or any organized group of persons, whetherincorporated or not; or any receiver, trustee in acase under title 11, or similar official, or anyliquidating agent for any of the foregoing, in hiscapacity as such.’’

16Rule 202(a)(11)(G)–1(d)(6).

202(a)(11) of the Advisers Act.6 Recognizing this past practice, section409 of the Dodd-Frank Act instructs thatany family office definition theCommission adopts should be‘‘consistent with the previous exemptivepolicy’’ of the Commission andrecognize ‘‘the range of organizational,management, and employment

structures and arrangements employed by family offices.’’ 7

We received approximately 90comments on the proposed rule, most of which were submitted by law firmsrepresenting family offices.8 Manyurged that we adopt a broaderexemption to accommodate typicalfamily office structures that were notreflected in our previous exemptiveorders.9 Some urged us to includeexceptions in various aspects of the ruleto allow individuals or entities with nofamily relations to nevertheless receiveinvestment advice from the family office

without the protections of the AdvisersAct.10 Some disputed our interpretationof the legislative direction we receivedto define the term ‘‘family office’’consistent with our previous exemptive

orders.11 After careful consideration of these comment letters, we are adoptingrule 202(a)(11)(G)–1, with certainmodifications from our proposal asfurther described below.

II. Discussion

We are adopting new rule202(a)(11)(G)–1 under the Advisers Act

to define the term ‘‘family office’’ forpurposes of the Act. Family offices, asso defined, are excluded from the Act’sdefinition of ‘‘investment adviser,’’ andare thus not subject to any of theprovisions of the Act. The scope of therule is generally consistent with theconditions of exemptive orders that wehave issued to family offices. As withthe proposal, and as discussed in moredetail below, our final rule in somecases has modified those conditions toturn the fact-specific exemptive ordersinto a rule of general applicability andto take into account the need for certain

clarifications and further modificationsidentified by commenters.As we discussed in the Proposing

Release, our orders have provided anexclusion for family offices because weviewed them as not the sort of arrangement that the Advisers Act wasdesigned to regulate.12 Disputes amongfamily members concerning theoperation of the family office could, aswe noted in the Proposing Release, beresolved within the family unit or, if necessary, through state courts underlaws designed to govern familydisputes. In light of the purpose of theexclusion and the legislativeinstructions we received, we have notexpanded the exclusion, as severalcommenters suggested, to permit familyoffices to provide advisory services tomultiple families or to clients who arenot family members, other than certainkey employees.

The failure of a family office to beable to meet the conditions of the rulewill not preclude the office fromproviding advisory services to familymembers either collectively orindividually. Rather, the family officewill need to register under the AdvisersAct (unless another exemption is

available) or seek an exemptive orderfrom the Commission. A number of family offices currently are registeredunder the Advisers Act.

A. Family Office Structure and Scope of Activities

As proposed, rule 202(a)(11)(G)–1contains three general conditions. First,

the exclusion is limited to family officesthat provide advice about securitiesonly to certain ‘‘family clients.’’ Second,it requires that family clients whollyown the family office and familymembers and/or family entities controlthe family office. Third, it precludes afamily office from holding itself out tothe public as an investment adviser. In

addition to these conditions, we haveincorporated into the rule the‘‘grandfathering’’ provision required bysection 409 of the Dodd-Frank Act.13

1. Family Clients

A family office excluded from the Actis limited to an office that advises only‘‘family clients.’’ 14 As discussed inmore detail below, family clientsinclude current and former familymembers, certain employees of thefamily office (and, under certaincircumstances, former employees),charities funded exclusively by family

clients, estates of current and formerfamily members or key employees,trusts existing for the sole current

benefit of family clients or, if bothfamily clients and charitable and non-profit organizations are the sole current

beneficiaries, trusts funded solely byfamily clients, revocable trusts fundedsolely by family clients, certain keyemployee trusts, and companies whollyowned exclusively by, and operated forthe sole benefit of, family clients (withcertain exceptions).15

a. Family Member

Under the rule, a ‘‘family member’’

includes all lineal descendants of acommon ancestor (who may be living ordeceased) as well as current and formerspouses or spousal equivalents of thosedescendants, provided that the commonancestor is no more than 10 generationsremoved from the youngest generationof family members.16 All children byadoption and current and formerstepchildren also are considered familymembers.

We have expanded persons who may be considered family members inresponse to several comments wereceived. We had proposed to define the

term ‘‘family member’’ by reference to


http://www.sec.gov/comments/s7-25-10/s72510.shtml







17Proposed rule 202(a)(11)(G)–1(d)(5) (definingthe founders as the ‘‘natural person and his or herspouse or spousal equivalent for whose benefit thefamily office was established and any subsequentspouse of such individuals.’’ Proposed rule202(a)(11)(G)–1(d)(3) (defining family members as‘‘the founders, their lineal descendants (including by adoption and stepchildren), and such linealdescendants’ spouses or spousal equivalents; theparents of the founders; and the siblings of thefounders and such siblings’ spouses or spousalequivalents and their lineal descendants (including by adoption and stepchildren) and such linealdescendants’ spouses or spousal equivalents’’).

18See, e.g., Comment Letter of Dechert LLP (Nov.29, 2010) (‘‘Dechert Letter’’); Comment Letter of Fried, Frank, Harris, Shriver & Jacobs LLP (Nov. 18,2010) (‘‘Fried Frank Letter’’).

19See, e.g., Coalition Letter; Comment Letter of the New York State Bar Association, Business LawSection, Securities Regulation Committee (Dec. 10,2010) (‘‘NY Bar Letter’’).

20See, e.g., NY Bar Letter; Comment Letter of Skadden, Arps, Slate, Meagher & Flom LLP (Nov.17, 2010) (‘‘Skadden Letter’’).

21Skadden Letter.22See, e.g., Comment Letter of Foley & Lardner

LLP (Nov. 18, 2010) (‘‘Foley Letter’’); Miller Letter;Comment Letter of Northern Trust (Nov. 18, 2010)(‘‘Northern Trust Letter’’).

23See, e.g., Comment Letter of the AmericanInstitute of Certified Public Accountants (Nov. 16,2010) (‘‘AICPA Letter’’); Comment Letter of TheBlum Firm, P.C./Blum (Nov. 18, 2010) (‘‘Blum

Letter’’); Comment Letter of Hogan Lovells US LLP(Nov. 18, 2010) (‘‘Hogan Letter’’).

24See, e.g., ABA Letter; Comment Letter of Duncan Associates (Nov. 18, 2010) (‘‘DuncanLetter’’); Comment Letter of Kozusko Harris VetterWareh LLP (Nov. 18, 2010) (‘‘Kozusko Letter’’).

25Moreover, the approach we are adopting has been used in other contexts to delimit members of a family for purposes of special regulatorytreatment. See, e.g., Section 1361(c)(1)(B) of theInternal Revenue Code of 1986, as amended(treating members of a family as a singleshareholder of an S Corporation and defining familymembers as ‘‘a common ancestor, any lineal

descendant of such common ancestor, and anyspouse or former spouse of such common ancestoror any such lineal descendant’’ but providing thatan ‘‘individual shall not be considered to be acommon ancestor if, on the applicable date, theindividual is more than 6 generations removed fromthe youngest generation of shareholders’’); NevadaRevised Statutes section 669.042 (defining a familytrust company subject to special trust companyregulation as having family members within 10degrees of lineal kinship or 9 degrees of collateralkinship to the designated relative); New HampshireRevised Statutes section 392–B:1 (defining a familytrust company subject to special banking regulationas having family members within 5 degrees of linealkinship or 9 degrees of collateral kinship to adesignated relative).

26See, e.g., ABA Letter (suggesting a 9 generationlimit); Duncan Letter (recommending that theCommission follow that used for Nevada familytrust companies, which allows for 10 degrees of lineal kinship and 9 degrees of collateral kinshipand stating that other states’ family trust companylaws with fewer degrees of kinship allowed hadresulted in some family office clientele beingoutside the limitations); Kozusko Letter(recommending 10 generations (but not countingminors as a separate generation from their parents)

as a size that, based on its experience and client base and on studies of family businesses, wouldcomfortably accommodate most family offices butthat would not open up the family office to abuseas a disguised commercial enterprise); NorthernTrust Letter (stating that of the over 400 familyoffices they represent, some are now focused ontheir fifth through seventh generations). We havedetermined not to include a separate limit ondegrees of permissible collateral kinship because,given our relatively expansive 10 generation lineallimit, a reasonable collateral limit would not inpractice expand the range of family memberscovered by the rule.

27No formal documentation or procedure isrequired for designating or redesignating a commonancestor.

the ‘‘founder’’ of the family office, andgenerally to include the founder’sspouse (or spousal equivalent), theirparents, their lineal descendants, andtheir siblings and their linealdescendants.17 Commenters observedthat the proposed rule implicitlyassumed that the founder of the familyoffice is the initial generator of the

family’s wealth and is an individual orcouple.18 They noted that in manycases, however, family offices areestablished by persons severalgenerations remote from the initialwealth generator.19 Some commentersalso criticized our proposed approach

because it would treat who could be afamily member differently depending onwhen the family office wasestablished.20 For example, onecommenter stated that our proposalwould have allowed a family office thatwas formed a long time ago to provideservices to persons that are currently

third or fourth cousins to each other, butthat a family office established todaymay need to wait at least 40 or 50 years

before being able to provide services toequivalent types of family members.21

Some commenters recommended thatthe Commission address these concerns

by leaving the term ‘‘family member’’undefined,22 while othersrecommended that the Commissionretain the approach of the proposedrule, but expand the rule to treat asfamily members grandparents, great-grandparents, aunts, uncles, great aunts,and great uncles of the founders andtheir spouses and children.23 Leaving

the term family member undefinedcould allow typical commercialinvestment advisory businesses to relyon the exclusion (by, for example,designating an extremely remote familymember as a common ancestor). On theother hand, attempting to expand thefamily member definition by ascendingup the family tree from the founderswould not address the difficulty inidentifying the founders of the familyoffice as identified by commenters andwould not address the concern,depending on when the family officewas founded, that the definition will notcapture many family members of familyoffices established several generationsafter the initial family wealth wascreated.

We are adopting, instead, an approachsuggested in several comment lettersthat permits a family to choose acommon ancestor (who may be

deceased) and define family members by reference to the degree of linealkinship to the designated relative.24 This approach avoids any assumptionsregarding the source of family wealthand the inconsistent treatment of extended family members compared tothe approach we proposed.25 In order toprevent families from choosing anextremely remote ancestor, which couldallow commercial advisory businessesto rely on the rule, we are imposing a10 generation limit between the oldestand youngest generation of familymembers. Such a limit, suggested byseveral commenters, would constrainthe scope of persons considered familymembers while accommodating the

typical number of generations served bymost family offices.26

Under this approach, the family officewill be able to choose the commonancestor and may change thatdesignation over time such that thefamily office clientele is able to shiftover time along with the familymembers served by the family office. Afamily office exempt under the rule witha common ancestor several generationsup from current family members will beable to serve a greater number of currentcollateral family members but fewerfuture lineal members.

For example, G1 (who is deceased)founded a business and placed hisfortune into a trust for the benefit of hisheirs. G4 founded a family office tomanage that wealth for the ever growingnumber of family members descendedfrom G1 and treated G1 as the commonancestor for purposes of which familymembers the family office could advise

under the exclusion. At the time G4created the family office, current clientsextended as far as G4’s great-grandchildren (or G7). Over time thefamily grows and additional generationsare born. Eventually, to allow the familyoffice to serve later generations thatwould otherwise extend beyond the 10generation limit, the family officeredesignates its common ancestor to anindividual in G3.27 The family officecan do this under rule 202(a)(11)(G)–1

because the rule does not specify whichindividual the common ancestor is andit does not specify that it always has to

be the same common ancestor. As aresult of this redesignation, the familyoffice is able to advise clients twogenerations younger, but would nolonger be able to advise certain branches





28See Annex A for an illustration of the impactof redesignating the common ancestor.

29Rule 202(a)(11)(G)–1(d)(6). As proposed, we areusing the definition of spousal equivalent currentlyused under our auditor independence rules. SeeProposing Release, supra note 2, at n.24.

30See, e.g., Coalition Letter; NY Bar Letter.31Comment Letter of Alliance Defense Fund

(Nov. 18, 2010); Comment Letter of Thomas V. Cliff (Nov. 1, 2010).

321 U.S.C. 7. The Act provides that in‘‘determining the meaning of any Act of Congress,or of any ruling, regulation, or interpretation of thevarious administrative bureaus and agencies of theUnited States * * * the word ‘spouse’ refers onlyto a person of the opposite sex who is a husbandor wife.’’

33See, e.g., ABA Letter; Dechert Letter;Tannenbaum Letter.

34See, e.g., Hogan Letter; Tannenbaum Letter.Guardianship arrangements for adults, however,can raise unique conflicts and issues as comparedto guardianships for minors that we believe aremore appropriately addressed through anexemptive order process where the Commission canconsider the specific facts and circumstances, thanthrough a rule of general applicability.

35Rule 202(a)(11)(G)–1(d)(4)(ii).

36Proposed rule 202(a)(11)(G)–1(d)(2)(vi), and(d)(4).

37See, e.g., Comment Letter of Perkins Coie/Lindquist (Nov. 18, 2010) (‘‘Lindquist Letter’’);Comment Letter of Proskauer Rose LLP (Nov. 16,2010).

38See, e.g., Coalition Letter; Comment Letter of

Kramer Levin Naftalis & Frankel LLP (Nov. 17,2010) (‘‘Kramer Levin Letter’’).

39Rule 202(a)(11)(G)–1(d)(7).40Rule 202(a)(11)(G)–1(b)(1).41Proposed rule 202(a)(11)(G)–1(b)(1).42See, e.g., Comment Letter of Davis Polk (Nov.

18, 2010) (‘‘Davis Polk Letter’’); Fried Frank Letter.43See, e.g., ABA Letter; Comment Letter of

Withers Bergman LLP (Nov. 17, 2010) (‘‘WithersBergman Letter’’).

44See, e.g., Comment Letter of Barnes &Thornburg LLP (‘‘as soon as legally and reasonablypractical, or in the alternative, within one year’’) ;Coalition Letter (‘‘as soon as it is both legally andpractically feasible, and in any event would havea grace period of at least one year’’).

45

See, e.g., Fried Frank Letter; Comment Letter of Sidley Austin LLP (Nov. 18, 2010).46See, e.g., AICPA Letter (1 year); Comment

Letter of Bessemer Securities Corporation (Nov. 17,2010) (‘‘Bessemer Letter’’) (1 year); Davis Polk Letter(3 years); Dechert Letter (2 years); Hogan Letter (2years); Comment Letter of Kleinberg, Kaplan, Wolff & Cohen, P.C. (Nov. 17, 2010) (‘‘Kleinberg Letter’’)(2 years); Kramer Levin Letter (1 year).

47The one year period would not begin to rununtil completion of the transfer of legal title to theassets resulting from the involuntary event. We notealso that if the involuntary transferee does notreceive investment advice about securities forcompensation from the family office, then theavailability of rule 202(a)(11)(G)–1 would beunaffected. For a discussion of the Commission’sand the staff’s views on when investment adviceabout securities for compensation is provided under

the Advisers Act, see Applicability of theInvestment Advisers Act to Financial Planners,Pensions Consultants, and Other Persons WhoProvide Investment Advisory Services as aComponent of Other Financial Services, InvestmentAdvisers Act Release No. 1092 (Oct. 8, 1987) [52 FR38400 (Oct. 16, 1987)] (‘‘Release 1092’’).

48See rule 202(a)(11)(G)–1(d)(4). Severalcommenters questioned whether the identity of thetrustee matters under the rule. See, e.g., CommentLetter of SchiffHardin LLP/Debra L. Stetter (Nov.18, 2010) (‘‘Schiff/Stetter Letter’’); Comment Letterof Vinson & Elkins LLP (Nov. 15, 2010). A trust thatmeets the conditions in the rule for qualifying asa family client is unaffected by whether the trustis managed by an independent trustee.

49Rule 202(a)(11)(G)–1(d)(4)(vii).

of G1’s family tree without registeringunder the Advisers Act.28

The rule, as proposed, treats linealdescendants and their spouses, spousalequivalents, stepchildren, and adoptedchildren as family members.29 Mostcommenters generally supported ourinclusion of spousal equivalents,stepchildren and children byadoption,30 but two commenters 31 opposed the inclusion of spousalequivalents, invoking the Defense of Marriage Act (‘‘DOMA’’).32 Because theterm ‘‘spouse’’ is not defined in the ruleand a ‘‘spousal equivalent’’ is identifiedas a category of person, separate anddistinct from a ‘‘spouse,’’ that meets thedefinition of a ‘‘family member,’’ we donot believe that the rule violates thatAct.

In response to comments we haveexpanded the definition to includefoster children and persons who wereminors when another family member

became their legal guardian.33 We arepersuaded by the commenters thatargued that foster children and childrenin a guardianship relationship oftenhave familial ties indistinguishable fromthat of children and stepchildren, andthat including such individuals wouldnot cause the family office to resemblea typical commercial investmentadviser.34

Finally, the rule treats former familymembers (i.e., former spouses, spousalequivalents and stepchildren) as familymembers.35 We had proposedpermitting former family members toretain any investments held through thefamily office at the time they became aformer family member, but to limit themfrom making any new investments

through the family office.36 Commenterspointed out that a former spouse’sfinancial arrangements often remainintertwined with those of the family,particularly if they provide for childrenwho remain family members.37 Someargued that stepchildren of a divorcedspouse may remain close to the familyafter the divorce.38 We are persuaded by

these arguments and have modified thedefinition of former family member toinclude stepchildren.39

b. Involuntary Transfers

As proposed, rule 202(a)(11)(G)–1prevents an involuntary transfer of assets to a person who is not a familyclient (e.g., a bequest to a friend of assets in a family office-advised privatefund) from causing the family office tolose its exclusion. Under the rule, afamily office may continue to provideadvice with respect to such assetsfollowing an involuntary transfer for a

transition period of up to one year.40

The transition period permits the familyoffice to orderly transition that client’sassets to another investment adviser orotherwise restructure its activities tocomply with the Advisers Act.

We proposed to allow the familyoffice to continue to advise a non-familyclient for four months following thetransfer of assets resulting from theinvoluntary event.41 A number of commenters argued that four months isan inadequate period of time totransition investment advicearrangements as a result of aninvoluntary transfer,42particularly forilliquid assets such as investments inprivate funds.43 Some suggested that thefamily office be required to transfer theassets as soon as legally and practicallyfeasible.44 Others suggested that we treatinvoluntary transfers in the samemanner as we had proposed treatingformer family members—permitting

their existing investments to remainwith the family office but prohibitingnew investments.45 Still otherssuggested that the transfer period belengthened to anywhere from one yearto three years.46

After an involuntary transfer, such asa bequest, the office would no longer beproviding advice solely to members of a

single family, and after several such bequests the office could cease tooperate in any way as a family office.Thus, we believe that relief forinvoluntary transfers must betemporary. We are persuaded, however,that the four month transition period weproposed would be inadequate and haveextended the period to one year.47

c. Family Trusts and Estates

Rule 202(a)(11)(G)–1 treats as a familyclient certain family trusts establishedfor testamentary and charitablepurposes. We have expanded the typesof trusts that may be treated as a familyclient in response to several commentsthat our proposal failed to take intoaccount certain aspects of trust andestate planning.48 As discussed in moredetail below, these expansionsaccommodate common estate planningand charitable giving plans and do notsuggest that the family office is engagingin a commercial enterprise.

Irrevocable trusts. The rule treats as afamily client any irrevocable trust inwhich one or more family clients are theonly current beneficiaries.49 Weproposed including as a family client





50Proposed rule 202(a)(11)(G)–1(d)(2)(iv).51See, e.g., Comment Letter of Arnold & Porter

LLP (Nov. 11, 2010); Bessemer Letter.52Rule 202(a)(11)(G)–1(d)(4)(viii).53See, e.g., Comment Letter of Jones Day (Nov.

11, 2010) (‘‘Jones Day Letter’’); Comment Letter of McDermott Will & Emery/Edwin C. Laurenson(Nov. 18, 2010) (‘‘McDermott/Laurenson Letter’’).

54See, e.g., Comment Letter of Dorsey & WhitneyLLP/Bruce A. MacKenzie (Nov. 17, 2010) (‘‘DorseyLetter’’); McDermott/Laurenson Letter.

55Rule 202(a)(11)(G)–1(d)(4)(ix).56See, e.g., Davis Polk Letter; Comment Letter of

Lee & Stone (Nov. 17, 2010) (‘‘Lee & Stone Letter’’) .57Rule 202(a)(11)(G)–1(d)(4)(vi). For former key

employees, the advice is subject to the conditioncontained in rule 202(a)(11)(G)–1(d)(4)(iv).

58See, e.g., ABA Letter; AICPA Letter.59See, e.g., Comment Letter of K&L Gates/Paul T.

Metzger (Nov. 17, 2010); Comment Letter of LevinSchreder & Carey Ltd (Nov. 18, 2010) (‘‘LevinSchreder Letter’’).

60Rule 202(a)(11)(G)–1(d)(4)(v).61See, e.g., Foley Letter; Comment Letter of

Morgan, Lewis & Bockius LLP (Nov. 18, 2010)(‘‘Morgan Lewis Letter’’).

62Rule 202(a)(11)(G)–1(e)(1).63Proposed rule 202(a)(11)(G)–1(d)(2)(iii).64See, e.g., Dorsey Letter; Levin Schreder Letter.65See, e.g., Comment Letter of Goodwin Procter

LLP (Nov. 17, 2010) (‘‘Goodwin Letter’’); CommentLetter of Willkie Farr & Gallagher LLP (Nov. 17,2010).

66We note that only the actual contributions tothe non-profit or charitable organization need beexamined for this purpose, and not any income,gains or losses relating to those contributions. Forpurposes of determining whether funding provided by a non-family client to the non-profit or charitableorganization is ‘‘currently held’’ by theorganization, the non-profit or charitable

Continued

any trust or estate existing for the sole benefit of one or more family clients.50

As suggested by commenters, the finalrule disregards contingent beneficiariesof trusts, which commenters explainedare often named in the event that allfamily members are deceased to preventthe trust from distributing assets todistant relatives or escheating to the

state.51 If the contingent beneficiarylater becomes an actual beneficiary andis not a permitted current beneficiary of a family trust under the exclusion (suchas a family friend), the rule’s provisionsconcerning involuntary transfers allowfor an orderly transition of investmentadvice regarding those assets away fromthe family office.

Also in response to commenters, therule permits the family office to adviseirrevocable trusts funded exclusively byone or more other family clients inwhich the only current beneficiaries, inaddition to other family clients, are non-

profit organizations, charitablefoundations, charitable trusts, or othercharitable organizations.52 Severalcommenters noted that families oftenestablish and fund trusts whose solecurrent beneficiaries are both familyclients and public charities.53 Such anentity may not be a ‘‘charitable trust’’ asa technical manner, but we see noreason for treating them differentlyunder the rule from charitable trustsfunded exclusively by family clients.

Other commenters argued that a trustshould be permitted to have current

beneficiaries that are not family clientsand that the rule instead should merelyrequire that the trust be for the primary

benefit of one or more family clients.54 These commenters argued that thefamily office’s provision of investmentadvice to these kinds of trusts would notchange the family office’s character andthat it is the trust that is the client of the family office, rather than the

beneficiary. We disagree. Current beneficiaries of a trust are greatlyaffected by the nature and quality of investment advice provided to the trustand would be harmed if there werefraud committed by the family office inmanaging trust assets. Even if in small

numbers, these individuals and entitiesstand to benefit substantially from theprotections of the Advisers Act and do

not necessarily have any family ties orinvestment sophistication to stand inthe Act’s stead.

Revocable Trusts. The rule also treatsas a family client a revocable trust of which one or more family clients are thesole grantors.55 Accordingly, a revocabletrust may be advised by a family officerelying on the rule regardless of whether

the beneficiaries of the trust are familymembers. We received severalcomments that argued that revocabletrusts should be treated differently thanirrevocable trusts, since the grantor of arevocable trust effectively controls thetrust and the beneficiaries of the trusthave no reasonable expectation of obtaining any benefit from the trustuntil the trust becomes irrevocable(generally upon the death of thegrantor).56 Therefore, the identity of the beneficiaries of the trust should notmatter so long as one or more familyclients are the sole grantors of the trust.

We agree that in the case of a revocabletrust, the contingent nature of any beneficiary’s expectation that it will benefit from the trust’s assets supportsdisregarding a revocable trust’s

beneficiaries under the exclusion, justas other contingent beneficiaries aredisregarded.

Estates. The final rule treats as afamily client an estate of a familymember, former family member, keyemployee or former key employee.57 Assuggested by several commenters, thisprovision permits a family office toadvise the executor of a family

member’s estate even if that estate will be distributed to (and thus be for the benefit of) non-family members.58 Theexecutor of an estate is acting in lieu of the deceased family client in managingand distributing the family client’sassets. Therefore, advice to the executoris equivalent to providing advice to thatfamily client.59

d. Non-Profit and CharitableOrganizations

The rule treats as a family client anynon-profit organization, charitablefoundation, charitable trust (includingcharitable lead trusts and charitable

remainder trusts whose only current beneficiaries are other family clientsand charitable or non-profit

organizations), or other charitableorganization, in each case fundedexclusively by one or more other familyclients.60 We understand that somefamily offices currently advisecharitable or non-profit organizationsthat have accepted funding from non-family clients.61 So that these familyoffices have sufficient time to transition

such advisory arrangements orrestructure the charitable or non-profitorganization, we are including atransition period of until December 31,2013 before family offices have tocomply with this aspect of theexclusion.62

We had proposed treating as a familyclient any charitable foundation,charitable organization, or charitabletrust established and funded exclusively

by one or more family members.63 Somecommenters recommended that theCommission change the requirementthat charities be established and funded

‘‘by family members’’ to ‘‘by familyclients’’ because they asserted thatfamily charities are often establishedand funded by family trusts,corporations or estates, and notexclusively by family members.64 Weagree that making this change isconsistent with our view of the scope of persons that should be permitted to beserved by the family office. Severalcommenters also believed that weshould not require that a charitableorganization be established by familymembers or family clients in order toreceive investment advice from thefamily office under the exclusion

because in some cases such charitableorganizations may have been originallyestablished by distant relatives that donot currently qualify as ‘‘familymembers.’’ 65 We agree that as long as allthe funding currently held by thecharitable organization came solely fromfamily clients, the individuals orentities that originally established it arenot of import for our policy rationale.66 We have changed the rule accordingly.





organization may offset any spending by theorganization occurring at any time in the year of that non-family client contribution or anysubsequent year against the non-family clientcontribution (i.e., the organization may treat thenon-family client contributions as the first funding

spent).67See, e.g., Goodwin Letter; Kozusko Letter.68See, e.g., Coalition Letter; Kozusko Letter.69See, e.g., Dechert Letter; Fried Frank Letter.

Charitable lead trusts are entities in which a charityreceives payments from the trust for a specifiedperiod as a current beneficiary, but the remainderof the trust is distributed to specified beneficiaries.Charitable remainder trusts are entities in whichspecified individuals or entities receive paymentsfrom the trust for a specified period as a current beneficiary, but a charity receives the remainder of the trust.

70See our discussion about family trusts insection II.A.1.c of this Release.

71See, e.g., Foley Letter; Kleinberg Letter.

72See, e.g., Ropes & Gray Letter; Skadden Letter.73Rule 202(a)(11)(G)–1(e)(1).74Rule 202(a)(11)(G)–1(d)(4)(xi). Under rule

202(a)(11)(G)–1(d)(2), control is defined as thepower to exercise a controlling influence over themanagement or policies of an entity, unless suchpower is solely the result of being an officer of suchentity. If any of these companies are pooledinvestment vehicles, they must be exempt fromregistration as an investment company under theInvestment Company Act of 1940 because theAdvisers Act requires that an adviser to a registeredinvestment company must register. See 15 U.S.C.80b–3a(a)(1)(B).

75See, e.g., Blum Letter; Kramer Levin Letter(suggesting that the requirement be modified torequire only that the entity be controlled and 80%owned by family clients to qualify as a familyclient).

76See, e.g., Coalition Letter; Kramer Levin Letter.See also Levin Schreder Letter (suggesting that theentity be controlled and substantially owned (80%) by family clients); Miller Letter (suggesting that theentity be wholly owned or controlled by andoperated for the primary benefit of family clients).

77Morgan Lewis Letter.78See, e.g., Kramer Levin Letter; Miller Letter.

A number of commenters stated that‘‘charitable organization’’ can havevarying meanings when consideredunder trust and estate law versus undertax law.67 Some of these commenterssuggested that we add the term ‘‘non-profit organization’’ to ensure that wecapture what is generally considered acharitable organization under both trust

and tax law and based on their viewthat, as long as the non-profitorganization is solely funded by familyclients, the family office providing itwith investment advice under theexclusion should not be of concern as apolicy matter.68 We intended to broadlycapture charitable and non-profitorganizations as commonly understoodunder both trust law and tax law andhave modified the rule as suggested.Other commenters asked that we clarifythat charitable lead trusts and charitableremainder trusts are included as familyclients under the exclusion.69 The rule

we are adopting today clarifies that suchtrusts are included if their sole current beneficiaries are other family clientsand charitable or non-profitorganizations and if they meet the termsof other charitable organizations thatmay be advised by the family office—namely that they are funded exclusively

by other family clients.70 We believethis treatment of charitable lead trustsand charitable remainder trusts ensuresthat they are treated consistently withother trusts and charitable or non-profitorganizations under the exclusion.

Finally, several commenters stated

that the Commission should permit thefamily office to provide investmentadvice under the exclusion to charitableorganizations even if funded in part bynon-family clients.71 They argued that

because the contributed assets will not be invested for the benefit of the donors,as long as the family controlled thecharitable entity or was its substantialcontributor, it served no public policy

purpose to preclude third partycontributions.72 We are leaving thisaspect of the proposal unchanged

because a non-profit or charitableorganization that currently holds non-family funding lacks the characteristicsnecessary to be viewed as a member of a family unit. Permitting suchorganizations to be advised by a family

office would be inconsistent with theexclusion’s underlying rationale thatrecognizes that the Advisers Act is notdesigned to regulate families managingtheir own wealth.

As noted above, however, we dorecognize that some non-profit orcharitable organizations advised byfamily offices have accepted non-familyclient funding. Such organizations mayneed time to spend the non-familyfunding so that none of it is ‘‘currentlyheld’’ by the organization or totransition advisory arrangements. Therule provides until December 31, 2013

before this condition to the exclusion becomes applicable to family offices(i.e., if the only reason the family officewould not meet the exclusion is becauseit advises a non-profit or charitableorganization that currently holds non-family client funding, the family officegenerally may nevertheless rely on theexclusion until December 31, 2013).73 To rely on this transition period, a non-profit or charitable organization advised

by the family office must not accept anyadditional funding from any non-familyclients after August 31, 2011, exceptthat during the transition period thenon-profit or charitable organizationmay accept funding provided infulfillment of any pledge made prior toAugust 31, 2011.

e. Other Family Entities

To allow the family office to structureits activities through typical investmentstructures, rule 202(a)(11)(G)–1 treats asa family client any company includinga pooled investment vehicle, that iswholly owned, directly or indirectly, byone or more family clients and operatedfor the sole benefit of family clients.74 Some commenters objected to therequirement in our proposal that these

entities be wholly owned and controlled

by, and operated for the sole benefit of,family clients to qualify for theexclusion.75 These commentersgenerally suggested modifying thisaspect of the family client definition torequire only that the entity be majorityowned or controlled and operated forthe primary benefit of family clients orsimilar variations.76 One commenter

suggested such an expansion to allowemployees of the family that do notqualify as ‘‘key employees’’ to have amanagement role in the entity.77 Others

believed that non-family clients more broadly should be able to have a greaterrole in family office-advised entities.78

We believe that the elements of ownership and benefit are important toensuring that the policy objectivesunderlying the family office exclusionare preserved. If non-family clients owna portion of such an entity, they have avested interest in how the assets of thatentity are managed—it is the source of

their ownership stake’s value. This isalso true of a non-family client who isa beneficiary of that entity. As long asthe entity is wholly owned by and forthe sole benefit of family clients,however, we agree that, as with familytrusts and family charitableorganizations, the entity having non-family client control does not changethat family clients are the ultimate

beneficiaries of the investment advice,and thus we have eliminated therequirement for control by family clientsin the final rule.

f. Key Employees

The final rule treats certain keyemployees of the family office, theirestates, and certain entities throughwhich key employees may invest asfamily clients so that they may receiveinvestment advice from, and participatein investment opportunities provided

by, the family office. More specifically,the final rule permits the family officeto provide investment advice to anynatural person (including any keyemployee’s spouse or spousalequivalent who holds a joint,community property or other similarshared ownership interest with that key

employee) who is (i) an executiveofficer, director, trustee, general partner,





79Rule 202(a)(11)(G)–1(d)(8).80See, e.g., ABA Letter; Coalition Letter.81 Id.82See, e.g., Fried Frank Letter; NY Bar Letter;

Skadden Letter.83See Proposing Release, supra note 2, at n.46

and accompanying text.84See, e.g., NY Bar Letter; Skadden Letter.

85See Section III.B of Privately Offered Investment Companies, Investment Company Act

Release 22597 (April 3, 1997) [62 FR 17512 (April7, 1997)] (‘‘3(c)(7) Release’’).

86See 3(c)(7) Release, supra note 85, at SectionIII.A.2.B.

87As we explained when we adopted rule 3c–5,employees who simply ‘‘obtain information’’ but donot ‘‘participate in’’ the investment activities of thefund are not included in the definition of knowledgeable employee because they may nothave investment experience. See 3(c)(7) Release,supra note 85, at Section III.B.

88Some commenters pointed out that a familymay establish more than one family office for taxor other structuring reasons and recommended thatthe definition of key employee include employeesof multiple family offices that serve the samefamily. See, e.g., Davis Polk Letter; Fried FrankLetter.

89

Rule 202(a)(11)(G)–1(d)(8). ‘‘Affiliated familyoffice’’ is defined as ‘‘a family office wholly owned by family clients of another family office and thatis controlled (directly or indirectly) by one or morefamily members of such other family office and/orfamily entities affiliated with such other familyoffice and has no clients other than family clientsof such other family office.’’ Rule 202(a)(11)(G)–1(d)(1).

90See, e.g., NY Bar Letter; Skadden Letter.Similarly, a few commenters suggested that wedefine key employees using the accredited investorstandard from Regulation D under the SecuritiesAct of 1933. See, e.g., Comment Letter of SchulteRoth & Zabel LLP (Dec. 8, 2010); Lee & Stone Letter.We believe the knowledgeable employee standardmore accurately encompasses employees that are

likely to be financially sophisticated and to notneed the protections of the Advisers Act.

91Exemptive orders issued in the past 10 yearsgenerally did not permit family offices to provideinvestment advice to non-key employees. The twoexemptive orders issued to family offices permittingsuch advice contained grandfathering provisionsthat restricted these employees’ investments to theexisting ones and prohibited the advisers fromestablishing new advisory relationships with a non-family member. Adler Management, L.L.C.,Investment Advisers Act Release Nos. 2500 (Mar.21, 2006) [71 FR 15498 (Mar. 28, 2006)] (notice) and2508 (Apr. 14, 2006) (order); Longview Management Group LLC, Investment Advisers Act Release Nos.2008 (Jan. 3, 2002) [67 FR 1251 (Jan. 9, 2002)](notice) and 2013 (Feb. 7, 2002) (order).

92Commenters recommending this changeinclude the Fried Frank Letter and the SkaddenLetter. Paragraph (d)(3) of the rule, however, differsfrom rule 205–3 and section 3c–5 in that it does notinclude executives in charge of sales because sucha function is not applicable to a family office.

93Rule 202(a)(11)(G)–1(d)(4)(x). The grantor of the trust could also be a current or former spouseor spousal equivalent of the key employee if, at thetime of contribution, the spouse or spousalequivalent held a joint, community property, orother similar shared ownership interest in the trustwith the key employee.

94See, e.g., Withers Bergman Letter (suggestinglineal descendants); Kleinberg Letter (suggestingimmediate family members).

or person serving in a similar capacityat the family office or its affiliatedfamily office or (ii) any other employeeof the family office or its affiliatedfamily office (other than an employeeperforming solely clerical, secretarial, oradministrative functions) who, inconnection with his or her regularfunctions or duties, participates in the

investment activities of the family officeor affiliated family office, provided thatsuch employee has been performingsuch functions or duties for or on behalf of the family office or affiliated familyoffice, or substantially similar functionsor duties for or on behalf of anothercompany, for at least twelve months.79 The final rule also permits the familyoffice to advise certain trusts of keyemployees, as further described below.Finally, in addition to receiving directadvice from the family office, keyemployees (because they are ‘‘familyclients’’) may indirectly receive

investment advice through the familyoffice by their investment in familyoffice-advised private funds, charitableorganizations, and other family entities,as described in previous sections of thisRelease.

Many commenters supported theinclusion of key employees as familyclients.80 They agreed that permittinginvestment participation by keyemployees of family offices would aligntheir interests with those of familymembers and enable family offices toattract highly skilled investmentprofessionals who may not otherwise beattracted to work at a family office.81

Some commenters, however, urged usto include key employees of familyentities other than the family office asfamily clients.82 Some reasoned thatsince the definition of key employee is

based on the knowledgeable employeestandard used in Investment CompanyAct rule 3c–5,83 it should be expandedto cover key employees of any entityrelated to the family office because rule3c–5 allows knowledgeable employeesto be employees of certain affiliatedentities.84 Such an approach wouldextend Investment Company Act rule3c–5 beyond its intended scope. That

rule permits knowledgeable employeesof affiliated entities to count asknowledgeable employees of thecovered private fund only if theaffiliated entity is participating in theinvestment activities of the covered

private fund.85 Because of this role,these individuals could be presumed tohave sufficient financial sophistication,experience, and knowledge to evaluateinvestment risks and to take steps toprotect themselves, even without theprotection of the Investment CompanyAct.86

Many family entities advised by the

family office, however, are not involvedin providing investment advisoryservices to the family office or its clientsand rather have principal businessactivities in a variety of industriesunrelated to investment management.There is no reason to expect that theirkey employees have a level of knowledge and experience in financialmatters sufficient to protect themselveswithout the protections afforded by theAdvisers Act.87 We agree, however, thatif a person qualifies as a knowledgeableemployee of an affiliated family office,that those employees should be in a

position to protect themselves inreceiving investment advice from afamily office excluded from regulationunder the Advisers Act.88 We havemodified the rule to includeknowledgeable employees of anaffiliated family office in the definitionof key employee.89

A few commenters suggested that weinclude as family clients long-termemployees of the family, even if they donot meet the knowledgeable employeestandard.90 Expanding the family client

definition in this way would excludefrom the Advisers Act’s protectionsindividuals for whom we have no basison which to conclude that they canprotect themselves.91 We thereforedecline to make the change suggested bycommenters.

We have made two other changes todefinitions relating to key employees in

response to recommendations fromcommenters. First, in response tocommenters and to reduce uncertaintyidentified by commenters we haveincluded a definition of ‘‘executiveofficer,’’ which is virtually identical tothe definition of the same term used inAdvisers Act rule 205–3 and InvestmentCompany Act rule 3c–5.92 Similar tothose rules, this definition delineatesexecutive officers that should haveenough financial experience andsophistication to invest without theprotection of the Advisers Act. Second,the final rule clarifies that family clients

include trusts of which the keyemployee generally is the solecontributor to the trust and the soleperson authorized to make decisionswith respect to the trust.93

Commenters recommended that wepermit a trust established by a keyemployee with his or her linealdescendants or immediate familymembers as beneficiaries to be a familyclient, to allow typical estate planning

by key employees.94 We do not believeit is appropriate to broadly permit trustsfor which the key employee is not thesole person authorized to makeinvestment decisions to be a family

client. Since a non-family client will be





95Rule 202(a)(11)(G)–1(d)(4)(x).96Section 2(a)(51)(A)(iii) of the Investment

Company Act.97See, e.g., Kleinberg Letter; Kramer Levin Letter.

98See, e.g., ABA Letter; Comment Letter of Cadwalader, Wickersham & Taft LLP (Nov. 18,2010) (‘‘Cadwalader Letter’’).

99This analysis is consistent with our analysis inthe 3(c)(7) Release where we stated that the12-month experience requirement was designed tolimit investments to employees that have therequisite experience to appreciate the risks of investing in the fund. 3(c)(7) Release, supra note 85,at Section III.B. As is the case under rule 3c–5, anemployee need not work for a particular familyoffice for the entire 12-month period. The timeperforming substantially similar functions or duties by that employee for or on behalf of anothercompany may be counted toward the 12 monthrequirement. See 3(c)(7) Release, supra note 85.

100Rule 202(a)(11)(G)–1(d)(4)(iv).101See, e.g., ABA Letter; Coalition Letter.102Schiff/Stetter Letter.

103A number of commenters requested that weclarify the extent to which a family office couldprovide investment advice to an employee benefitplan or pension plan sponsored by the family officewithout registering under the Act. See, e.g.,

Comment Letter of the American Benefits Council/Committee on the Investment of Employee BenefitAssets (Nov. 18, 2010); Coalition Letter; WithersBergman Letter. In our view, a family office or otheremployer that merely establishes an employee benefit plan or pension plan and selects one ormore investment advisers for that plan would not be an investment adviser subject to the AdvisersAct because it would not be an ‘‘investmentadviser’’ within the meaning of section 202(a)(11).A family office (as defined in rule 202(a)(11)(G)–1)thus would not be required to register under the Actif, in addition to providing advice to family clients,its advisory activities are so limited. However, afamily office providing additional advisory servicesto an employee benefit plan all of whoseparticipants are not family clients may be requiredto register under the Act unless another exemptionis available.

104

Rule 202(a)(11)(G)–1(b)(2). We have added theword ‘‘exclusively’’ to clarify that ‘‘control’’ cannot be shared with individuals or companies that arenot family members or family entities. A familyentity is defined as any of the trusts, companies orother entities set forth in paragraphs (v), (vi), (vii),(viii), (ix), or (xi) of subsection (d)(4) of rule202(a)(11)(G)–1, but excluding key employees andtheir trusts from the definition of family clientsolely for purposes of this definition.

105See, e.g., Coalition Letter; Comment Letter of McDermott Will & Emery/Richard L. Dees (Nov. 18,2010) (‘‘McDermott Dees Letter’’).

106See, e.g., Dorsey Letter; Comment Letter of McGuire Woods LLP (Nov. 18, 2010).

107See, e.g., AICPA Letter; Davis Polk Letter;Dechert Letter.

making investment decisions for thistype of trust, and its beneficiaries arenot family members or key employees,this type of trust stands to benefit fromthe protections of the Advisers Act.However, we are persuaded that it isappropriate to allow the family office toadvise trusts for which the keyemployee is the sole person making

investment decisions.95 Permitting thefamily office to provide advice to thistype of entity tracks a parallel conceptincluded in the definition of ‘‘qualifiedpurchaser’’ under the InvestmentCompany Act 96 and thus createsconsistency in entities considered not toneed investor protection under our rules

because investment decisions are madesolely by individuals that we havealready concluded should havesufficient financial experience andsophistication to act without theprotection provided by our regulations.

Some commenters urged us to even

further expand the definition of keyemployee to include their spouses andspousal equivalents (even if not withrespect to joint property) or all of theirimmediate family members.97 There isno reason to believe that the keyemployee’s spouse or immediate familymembers independently have thefinancial sophistication and experienceto protect themselves when receivinginvestment advice from the familyoffice. Such individuals are notconsidered to be knowledgeableemployees under Advisers Act rule205–3 or Investment Company Act rule3c–5. We see no basis for following adifferent approach in this context. Thepremise of the rule is to allow familiesto manage their own wealth. Keyemployee receipt of family office adviceis permitted because their position andexperience should enable them toprotect themselves and to allow familyoffices to attract talented investmentprofessionals as employees. Thisunderlying rationale does not support asa general rule including key employees’family members unless there is a jointproperty interest involved.

Several commenters disagreed withthe 12-month experience requirement

for key employees who are notexecutive officers, directors, trustees,general partners, or persons serving insimilar capacities of the family office,arguing that employees a family officewould hire into these roles wouldpresumably possess adequateknowledge and sophistication infinancial matters regardless of whether

he or she met the 12-month experiencerequirement.98 We believe that the 12-month experience requirement is animportant part of limiting employeeswho receive investment advice withoutthe protections of the Advisers Act (orfamily membership) to those employeesthat are likely to be in a position or havea level of knowledge and experience in

financial matters sufficient to be able toevaluate the risks and take steps toprotect themselves. In addition,commenters’ argument is equallyapplicable in a private fund orperformance fee context, and we see no

basis for distinguishing treatment of keyemployees of family offices from keyemployees of private funds or qualifiedclient advisers under InvestmentCompany Act rule 3c–5 and AdvisersAct rule 205–3, respectively.99 Wetherefore adopt this requirement asproposed.

Finally, as proposed, the final rule

prohibits key employees (includingtheir trusts and controlled entities) frommaking additional investments throughthe family office upon the end of the keyemployees’ employment by the familyoffice, but will not require former keyemployees to liquidate or transferinvestments held through the familyoffice to avoid imposing possibleadverse tax or investment consequencesthat might otherwise result.100 Whilesome commenters supported thislimitation,101 one commenter expressedobjections to it, asserting that former keyemployees of family offices oftencontinue to have a close relationship

with the family and it should be thefamily’s decision whether to terminatetheir family office’s services to them.102 We are including key employees asfamily clients because their particularrole in the family office causes us to

believe that the employee should be ina position to protect him or herself without the need for the protections of the Advisers Act. Once the employee isno longer in that role, this policyrationale no longer holds true to the

same degree. Accordingly, we areadopting this aspect of the rule asproposed.103

2. Ownership and Control

The final rule requires that, to qualifyfor the exclusion from regulation underthe Advisers Act, the family office must

be wholly owned by family clients and

exclusively controlled, directly orindirectly, by one or more familymembers or family entities.104 Our finalrule expands who may own the familyoffice from ‘‘family members,’’ asproposed, to ‘‘family clients.’’ However,the rule continues to require that controlof the family office remain, directly orindirectly, with family members andtheir related entities.

Commenters urged us to expand bothwho could own the family office andwho could control a family office underthe rule.105 Some stated that manyfamily offices are owned by familytrusts, and that allowing familymembers to indirectly own and controlthe family office did not providesufficient clarity that such a trust couldown and control the family office.106 Commenters also pointed out that manyfamily offices permit their employees toown equity interest in family offices asan incentive to attract and retaintalented employees, and urged us not toprohibit such arrangements.107 These





108See, e.g., Coalition Letter; Levin SchrederLetter; McDermott Dees Letter.

109We note that, as proposed, we are not limitingthe exclusion to a family office that is not operatedfor the purpose of generating a profit. We also notethat some family offices may be structured such thatall or a portion of family client investment gains are

distributed as dividends from the family office(when family clients own the family office) and thata not-for-profit requirement would preclude thisfamily office structure. We were persuaded byseveral commenters who cautioned against limitingthe exclusion for family offices to those that operateon a not-for-profit basis, arguing that it would bedifficult to administer and is unnecessary given thelimited clientele that a family office may advise andrely on the exclusion. See, e.g., AICPA Letter; DavisPolk Letter; Kozusko Letter.

110Rule 202(a)(11)(G)–1(b)(3). For purposes of this rule, despite language under rule 203(b)(3)–1(c)regarding holding out, a family office could notmarket non-public offerings to persons or entitiesthat are not family clients since such activity wouldnot be consistent with a family office that only

provides investment advice to family clients anddoes not hold itself out to the public as aninvestment adviser.

111See, e.g., Coalition Letter; ABA letter.112See footnote 56 of the Proposing Release,

supra note 2. In response to one commenter’srequest, we clarify that a family office that iscurrently registered as an investment adviser andexpects to de-register in reliance on rule202(a)(11)(G)–1, will not be prohibited from relyingon the rule solely because it held itself out to thepublic as an investment adviser while it wasregistered under the Advisers Act. See DechertLetter.

113

See, e.g., Cadwalader Letter; Comment Letterof Lowenstein Sandler PC (Nov. 12, 2010);Comment Letter of Stradling Yocca Carlson & Rauth(Nov. 16, 2010).

114We note that under section 208(d) of theAdvisers Act, it is unlawful for any personindirectly to do anything that would be unlawfulfor such person to do directly under the AdvisersAct or rules thereunder. Therefore, if severalfamilies that are unrelated through a commonancestor within 10 generations have established aseparate family office for each of the families, buthave staffed these family offices with the same orsubstantially the same employees such employeesare managing a de facto multifamily office. As aresult, these family offices may not claim the familyoffice exclusion.

115See section 409(b)(3) and (c) of the Dodd-Frank Act.

116

We note that section 409(c) of the Dodd-FrankAct provides that ‘‘a family office that would not be a family office, but for section 409(b)(3) of theDodd-Frank Act, shall be deemed to be aninvestment adviser for the purposes of paragraphs(1), (2) and (4) of section 206 of the Advisers Act.’’This provision is reflected in paragraph (3) of rule202(a)(11)(G)–1(c).

117Coalition Letter.118AICPA Letter.119See, e.g., Lee & Stone Letter (to provide time

to restructure certain ‘‘club deals’’ in which clientsof the family office may have engaged); CommentLetter of Paul, Hastings, Janofsky & Walker LLP(Nov. 17, 2010) (requesting an expandedgrandfather provision to allow more time for anorderly restructuring); Ropes & Gray Letter.

commenters asked us to explicitly broaden the ownership requirementfrom ‘‘family members’’ to ‘‘familyclients’’ to permit these types of arrangements. Other commenters arguedmore broadly that the ‘‘wholly ownedand controlled’’ aspect of the proposeddefinition does not adequately reflectthe variety of organizational

arrangements already in place at familyoffices and that the Commission shouldfocus as a policy matter solely onwhether the family office is beingoperated for the benefit of members of a single family.108

Commenters persuaded us to expandwho may own the family office from‘‘family members’’ to ‘‘family clients.’’This change is consistent with the intent

behind our proposed language (whichcontemplated that the family could ownthe family office indirectly) and moreclearly allows family members tostructure their ownership of the family

office for tax or other reasons. We alsoagree with suggestions that the rulepermit key employees to own a non-controlling stake in the family office toserve as part of an incentivecompensation package for keyemployees. We remain convinced,however, that for our core policyrationale to be fulfilled—that a familyoffice is essentially a family managingits own wealth—the family, directly orindirectly, should control the familyoffice. Accordingly, the final ruleprovides that while family clients mayown the family office, family membersand family entities (i.e., their whollyowned companies or family trusts) mustcontrol the family office.109

3. Holding Out

As proposed, the final rule prohibitsa family office relying on the rule fromholding itself out to the public as aninvestment adviser.110 Commenters

supported this prohibition.111 Holdingitself out to the public as an investmentadviser suggests that the family office isseeking to enter into typical advisoryrelationships with non-family clients,and thus is inconsistent with the basison which we have provided exemptiveorders and are adopting this rule.112

4. Multifamily OfficesThe exclusion we are adopting today

does not extend to family offices servingmultiple families, as urged by severalcommenters.113 Comments we receiveddid not persuade us that the rule could

be drafted to distinguish in anymeaningful way between such officesand family-owned commercial advisoryfirms that offer their services to otherfamilies.114 Moreover, they did notpersuade us that the protections of theAdvisers Act, including the applicationof the anti-fraud provisions of the Act,would not be relevant to a familyobtaining services from an officeestablished by another family withwhich it could have conflicts of interest.Families, of course, may have conflictsamong members leading to disputes.But, as discussed in our ProposingRelease, the premise of the exclusion isthat such disputes could be worked outwithin the family unit or, if necessary,

by state courts under laws that facilitateresolution of family disputes. In amultifamily office, these clients would

be without the protections of theAdvisers Act or family relationships forpreventing or handling any

discriminatory or fraudulent treatmentof different families.

B. Grandfathering Provisions, TransitionPeriod and Effect of Rule on Previously Issued Exemptive Orders

The Dodd-Frank Act prohibits us fromexcluding from our definition of familyoffice persons not registered or requiredto be registered on January 1, 2010 thatwould meet all of the requiredconditions under rule 202(a)(11)(G)–1

but for their provision of investmentadvice to certain clients specified insection 409(b)(3) of the Dodd-FrankAct.115 We have incorporated thisrequired grandfathering into paragraph(c) of our rule.116 We received twocomments on such incorporation. Onecommenter suggested that weincorporate the grandfathering provisiononly by reference to section 409(b)(3) of the Dodd-Frank Act.117 We believe thatincorporating the grandfatheringprovision of Dodd-Frank Act is a moreuser friendly approach for thoseattempting to comply with the Advisers

Act compared to directing them to lookup the grandfathering provision in aseparate statute. Another commenterrequested clarification of the Dodd-Frank grandfathering provision.118 We

believe clarification or interpretation of this provision would involve applyingthe provision to specific facts, and thisrelease is not an appropriate means toprovide such a clarification. Therefore,we are adopting paragraph (c) of the ruleas proposed.

Several commenters suggested that weprovide a transition period to allowfamily offices time to determinewhether they meet the exclusion or torestructure or register under theAdvisers Act if they do not.119 Werecognize that the time period betweenthe adoption of this rule and the repealof the private adviser exemption fromregistration contained in section203(b)(3) of the Advisers Act, effective

July 21, 2011, may not be sufficient forevery family office to conduct such anevaluation, restructure or register.Accordingly, the rule provides thatfamily offices currently exempt from





120Rule 202(a)(11)(G)–1(e)(2). See also Letterfrom Robert E. Plaze, Associate Director, Divisionof Investment Management, U.S. Securities and

Exchange Commission, to David Massey, DeputySecurities Administrator, North Carolina SecuritiesDivision and President, NASAA (Apr. 8, 2011)available at http://www.sec.gov/rules/proposed/ 2010/ia-3110-letter-to-nasaa.pdf (stating that theCommission would potentially consider extendingthe date by which these advisers must register andcome into compliance with the obligations of aregistered adviser until the first quarter of 2012).Because initial applications for registration can takeup to 45 days to be approved, family offices thatdetermine they will need to register with theCommission should file a complete application, both Part 1 and a brochure(s) meeting therequirements of Part 2 of Form ADV, at least byFebruary 14, 2012.

12144 U.S.C. 3501 et seq.

122See section 409 of the Dodd-Frank Act.123Section V of the Proposing Release.124See, e.g., Jones Day Letter; Withers Bergman

Letter.

125We included the same estimate in theProposing Release. We received no comments onthis estimate.

126

See, e.g., Pamela J. Black, The Rise of theMulti-Family Office, Financial Planning (Apr. 27,2010) (estimating 2,500 to 3,000 single familyoffices); Robert Frank, Minding the Money—‘Family Office’ Chiefs Get Plied with Perks; ClubMembership, Jets, The Wall Street Journal (Sept. 7,2007), at W2 (estimating 3,000 to 5,000 familyoffices in the United States); Second Annual Single-Family Office Study, the Family Wealth Alliance(2010) (estimating 2,500 U.S.-based single familyoffices); Creating a Single Family Office for WealthCreation and Family Legacy Sustainability, FamilyOffice Association (2009) (estimating 1,000 singlefamily offices worldwide).

127$200,000 cost of applying for an exemptiveorder multiplied by a range of 1,000 family officesto 5,000 family offices.

registration under the Advisers Act inreliance on the private adviserexemption and that do not meet the newfamily office exclusion are not requiredto register with the Commission asinvestment advisers until March 30,2012.120 We believe that this aspect of the rule is necessary or appropriate inthe public interest and is consistent

with the protection of investors, and thepurposes fairly intended by the policyand provisions of the Advisers Act.

We have determined not to rescindexemptive orders previously issued tofamily offices under section202(a)(11)(G) of the Advisers Act. Asdiscussed above, the Commission hasissued orders under section202(a)(11)(G) of the Advisers Act tocertain family offices declaring themand their employees acting within thescope of their employment to not beinvestment advisers within the intent of the Act. In some areas these exemptive

orders may be slightly broader than therule we are adopting today, and in otherareas they may be narrower. Weproposed not to rescind these exemptiveorders and requested comment. Allcommenters addressing this subjectsupported our proposal. Thus, familyoffices currently operating under theseorders may continue to rely on them.

III. Paperwork Reduction Act

Rule 202(a)(11)(G)–1 does not containa ‘‘collection of information’’requirement within the meaning of thePaperwork Reduction Act of 1995.121 Accordingly, the Paperwork Reduction

Act is not applicable.IV. Economic Analysis

We are adopting rule 202(a)(11)(G)–1in anticipation of the Dodd-Frank Act’srepeal of section 203(b)(3) of theAdvisers Act, which provides anexemption from registration for certainprivate fund advisers, and in light of theDodd-Frank Act’s directive that theCommission define family offices thatwill be excluded from regulation under

the Advisers Act.122 The rule we areadopting today defines a family office asa company that, with limitedexceptions, has only family clients, iswholly owned by family clients andcontrolled by family members and/orfamily entities, and does not hold itself out to the public as an investmentadviser. The definition of family office

provided in the rule is designed to limitthe exclusion from Advisers Actregulation solely to those privateadvisory offices that we believe theAdvisers Act was not designed toregulate and to prevent circumventionof the Adviser Act’s protections by firmsthat are operating as commercialinvestment advisory firms.

As a preliminary matter, and asdiscussed earlier, as a result of therepeal of section 203(b)(3) of theAdvisers Act a number of privateadvisory offices that may considerthemselves to be family offices and that

are not currently registered asinvestment advisers in reliance on thatprovision will be required to registerunder the Advisers Act after July 21,2011 unless those advisers are eligiblefor a new exemption. The benefits andcosts associated with the elimination of section 203(b)(3) are attributable to theDodd-Frank Act. However, whileCongress also adopted a family officeexclusion, it directed the Commission toadopt rules defining the terms of thatexclusion, subject to the terms of section409 of the Dodd-Frank Act, and thus wediscuss below the costs and benefits of

our determination of which privateadvisory offices are deemed familyoffices and therefore excluded fromregulation.

In proposing the rule, we requestedcomment on all aspects of our cost

benefit analysis, including the accuracyof our estimates of costs and benefits,identification and assessment of anycosts and benefits not discussed in ouranalysis, and data relevant to these costsand benefits.123 While somecommenters predicted that many privateadvisory offices would have torestructure or apply for an exemptiveorder and thus incur substantial costs if

the definition of family office were notexpanded,124 no estimates of such costswere provided. We discuss thesecomments more specifically below.

A. Benefits

As discussed in the ProposingRelease, we expect that rule202(a)(11)(G)–1 will result in several

important benefits. First, family offices,as defined by this rule, will not besubject to the mandatory costs of registering with the Commission as aninvestment adviser and the associatedcompliance costs. Some investmentadvisers currently registered with usmay qualify as family offices under therule and have the choice to deregister.

These reduced regulatory costs shouldresult in direct cost savings to thesefamily offices, and thus to their familyclients.

Second, the rule will benefit familyoffices, as defined by the rule, and theirclients by eliminating the costs of seeking (and considering) individualexemptive orders. Without rule202(a)(11)(G)–1, the repeal of theexemption contained in section203(b)(3) would result in a great numberof family offices having to apply forexemptive relief and thus incurringsignificant costs for these family offices

and their clients. We estimate that atypical family office will incur legal feesof $200,000 on average to engage in theexemptive order application process,including preparation and revision of anapplication and consultations withCommission staff.125 The rule will

benefit family offices and their familyclients by eliminating the costs of applying to the Commission for anexemptive order that the Commissionwould grant and the associateduncertainty that they might not obtainsuch an order. Estimates of the numberof family offices in the United States

vary widely—ranging from less than1,000 to 5,000.126 If all of these familyoffices qualify for the new exclusionand otherwise would have applied foran exemptive order, the rule willprovide a benefit ranging from $200million to $1 billion by eliminating thecosts of applying for those exemptiveorders.127

Finally, the rule also will benefit theCommission by freeing staff resourcesfrom reviewing and processing large


http://www.sec.gov/rules/proposed/2010/ia-3110-letter-to-nasaa.pdf







128Lindquist Letter.129See supra note 126 and accompanying text.130 ($25,000 evaluation cost) × (1,000 family

offices) = $25 million. ($35,000 evaluation cost) ×(5,000 family offices) = $175 million.

131See, e.g., Lindquist Letter; Lee & Stone Letter;Withers Bergman Letter.

132See, e.g., Coalition Letter; Lee & Stone Letter.133See Section II of this Release for discussion of

these expansions. 1345 U.S.C. 604(a).

135See Proposing Release, supra note 2, atSection VI.

13617 CFR 275.0–7(a).137See Proposing Release, supra note 2, at n.2

and accompanying text. One commenter (CommentLetter of Robert Stenson (Oct. 18, 2010)) cited a1999 survey which estimated that 32% of familyoffices had investment assets of less than $100million. However, this commenter did not indicatehow many family offices had assets undermanagement of less than $25 million and thusqualified as ‘‘small entities’’ as defined in AdvisersAct rule 0–7, supra note 136 and accompanyingtext.

numbers of family office exemptiveapplications resulting from the repeal of section 203(b)(3) of the Advisers Actthat the Commission would grant andallowing the staff to target its work moreefficiently, and thus will indirectly

benefit public investors.

B. Costs

We recognize that some privateadvisory offices that today considerthemselves to be family offices likelywill incur expenses to evaluate whetherthey meet the terms of the exclusion.One commenter estimated that such anoffice would incur expenses of $25,000to $35,000 to hire a consulting firm orlaw firm to determine if it meets theexclusion provided by the rule.128 If allfamily offices estimated to exist in theUnited States noted above 129 hire aconsulting firm or law firm to determineif they meet the exclusion at such a cost,they would incur an aggregate cost

ranging from $25 million to $175million for this evaluation.130 Some of these private advisory offices

may decide to restructure their businesses to meet the conditionsimposed by rule 202(a)(11)(G)–1. Manycommenters stated that the proposeddefinition of family office was toonarrow, and that if it was adoptedwithout changes, absent an exemptiveorder, many such advisory officeswould be required to restructurethemselves in order to qualify as familyoffices.131 Restructuring or obtaining anexemptive order, some commentersasserted, would result in substantial

costs to the advisory office and itsclients.132 We expect that each suchoffice will weigh the costs of suchrestructuring under its particularcircumstances against the costs and

burdens of registration or seeking anexemptive order.

Our final rule broadens the definitionof ‘‘family client’’ and ‘‘family office’’from that proposed, particularlyconcerning permissible clients of thefamily office and ownership of thefamily office.133 As a result, we expectthat substantially fewer private advisoryoffices will need to confront these trade-

offs than would have been the caseunder our proposal. Nevertheless, werecognize that some offices may decideto restructure their businesses in order

to meet even the expanded family officedefinition under the final rule, ratherthan register or seek an exemptive order.The costs of any such restructuring will

be highly dependent on the nature andextent of the restructuring, which weunderstand may vary significantly fromoffice to office. No commentersprovided an estimate of the costs to

carry out any necessary restructuring.We do not expect that the rule will

impose any significant costs on familyoffices currently operating under aCommission exemptive order. We arepermitting these family offices tocontinue to rely on their exemptiveorders. They may choose, of course, toqualify for exclusion under the rule. Weexpect that most of these family officeswill satisfy all the conditions of the rulewithout changing their structure oroperations. However, these familyoffices may incur one-time ‘‘learningcosts’’ in determining the differences

between their orders and the rule. Weestimate that such costs will be no morethan $5,000 on average for a familyoffice if it hires an external consultingfirm or law firm to assist in determiningthe differences. Because the terms of these advisers’ exemptive orders weresimilar to rule 202(a)(11)(G)–1, thesefamily offices should incur significantlylower costs to evaluate the new rulethan family offices that do not have anexemptive order. There are 13 familyoffices that have obtained exemptiveorders. Accordingly, we estimate thatthese family offices collectively wouldincur outside consulting or legal

expenses of $65,000 to discern thedifferences between their orders and therule.

Finally, if there were any familyoffices that previously registered withthe Commission, but now may de-register in reliance on the new familyoffice exclusion in the Advisers Act, therule may have competitive effects oninvestment advisers that may competewith the family office for the provisionof investment management services tofamily clients since these third partyinvestment advisers would bear theregulatory costs associated with

compliance with the Advisers Act orstate investment adviser regulatoryrequirements. We do not expect that therule will impact capital formation.

V. Final Regulatory Flexibility Analysis

The Commission has prepared thefollowing Final Regulatory FlexibilityAnalysis (‘‘FRFA’’) regarding rule202(a)(11)(G)–1 in accordance withsection 604 of the Regulatory FlexibilityAct.134 We prepared an Initial

Regulatory Flexibility Analysis(‘‘IRFA’’) in conjunction with theProposing Release in October 2010.135

A. Need for the Rule

We are adopting rule 202(a)(11)(G)–1defining family offices excluded fromregulation under the Advisers Act

because we are required to do so undersection 409 of the Dodd-Frank Act.

B. Significant Issues Raised by PublicComment

In the Proposing Release, werequested comment on the IRFA. Noneof the comment letters we receivedspecifically addressed the IRFA. Noneof the comment letters made specificcomments about the proposed rule’simpact on smaller family offices.

C. Small Entities Subject to the Rule

Under Commission rules, for

purposes of the Advisers Act and theRegulatory Flexibility Act, aninvestment adviser generally is a smallentity if it: (i) Has assets undermanagement having a total value of lessthan $25 million; (ii) did not have totalassets of $5 million or more on the lastday of its most recent fiscal year; and(iii) does not control, is not controlled

by, and is not under common controlwith another investment adviser thathas assets under management of $25million or more, or any person (otherthan a natural person) that had $5million or more on the last day of itsmost recent fiscal year.136

We do not have data and are notaware of any databases that compileinformation regarding how many familyoffices will be a small entity under thisdefinition, but since family offices onlyare established for the very wealthy andgiven the statistics included in theProposing Release showing that theygenerally serve families with at least$100 million or more of investableassets and have an average net worth of $517 million, we believe it is unlikelythat any family offices would be small

entities.137





D. Projected Reporting, Recordkeeping,and Other Compliance Requirements

Rule 202(a)(11)(G)–1 imposes noreporting, recordkeeping or othercompliance requirements.

E. Agency Action To Minimize Effect onSmaller Entities

The Regulatory Flexibility Act directsthe Commission to consider significantalternatives that would accomplish thestated objective, while minimizing anysignificant impact on small entities. Inconnection with the rule, theCommission considered the followingalternatives: (i) The establishment of differing compliance or reportingrequirements or timetables that take intoaccount the resources available to smallentities; (ii) the clarification,consolidation, or simplification of compliance and reporting requirementsunder the rule for small entities; (iii) theuse of performance rather than design

standards; and (iv) an exemption fromcoverage of the rule, or any part thereof,for small entities.

Rule 202(a)(11)(G)–1 is exemptive andcompliance with the rule is voluntary.We therefore do not believe thatdifferent or simplified compliance,timetable, or reporting requirements, oran exemption from coverage of the rulefor small entities, is appropriate. Theconditions in the rule are designed toensure that family offices operatingunder the rule provide advice only tothe family itself and not the generalpublic and, accordingly, the protections

of the Advisers Act are not warranted.Reducing these conditions for smallerfamily offices would be inconsistentwith the policy underlying theexclusion and would harm investorprotection.

Our prior exemptive orders have notmade any differentiation based on thesize of the family office. In addition, asdiscussed above, we expect that veryfew, if any, family offices are smallentities. The Commission also believesthat rule 202(a)(11)(G)–1 will decrease

burdens on small entities by making itunnecessary for most of them to seek an

exemptive order from the Commissionto operate without registration under theAdvisers Act. As a result, we do notanticipate that the potential impact of the rule on small entities will besignificant.

The rule specifies broad conditionswith which a family office must complyto rely on the exclusion; the rule leavesto each family office how to structure itsspecific operations to meet theseconditions. The rule thus alreadyincorporates performance rather thandesign standards. For these reasons,

alternatives to the rule appearunnecessary and in any event areunlikely to minimize any impact thatthe rule might have on small entities.

VI. Statutory Authority

We are adopting rule 202(a)(11)(G)–1[17 CFR 275.202(a)(11)(G)–1] pursuantto our authority set forth in sections

202(a)(11)(G) and 206A of the AdvisersAct [15 U.S.C. 80b–2(a)(11)(G) and 80b–6A].

List of Subjects in 17 CFR Part 275

Reporting and recordkeepingrequirements, Securities.

Text of Rule

For the reasons set out in thepreamble, Title 17, Chapter II of theCode of Federal Regulations is amendedas follows.

PART 275—RULES ANDREGULATIONS, INVESTMENT

ADVISERS ACT OF 1940

■ 1. The authority citation for Part 275continues to read in part as follows:

Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b–2(a)(17), 80b–3, 80b–4, 80b–4a, 80b–6(4),80b–6a, and 80b–11, unless otherwise noted.

* * * * *■ 2. Section 275.202(a)(11)(G)–1 isadded to read as follows:

§ 275.202(a)(11)(G)–1 Family offices.

(a) Exclusion. A family office, asdefined in this section, shall not beconsidered to be an investment adviser

for purpose of the Act.(b) Family office. A family office is a

company (including its directors,partners, members, managers, trustees,and employees acting within the scopeof their position or employment) that:

(1) Has no clients other than familyclients; provided that if a person that isnot a family client becomes a client of the family office as a result of the deathof a family member or key employee orother involuntary transfer from a familymember or key employee, that personshall be deemed to be a family client forpurposes of this section for one year

following the completion of the transferof legal title to the assets resulting fromthe involuntary event;

(2) Is wholly owned by family clientsand is exclusively controlled (directly orindirectly) by one or more familymembers and/or family entities; and

(3) Does not hold itself out to thepublic as an investment adviser.

(c) Grandfathering. A family office asdefined in paragraph (a) of this sectionshall not exclude any person, who wasnot registered or required to beregistered under the Act on January 1,

2010, solely because such personprovides investment advice to, and wasengaged before January 1, 2010 inproviding investment advice to:

(1) Natural persons who, at the timeof their applicable investment, areofficers, directors, or employees of thefamily office who have invested withthe family office before January 1, 2010

and are accredited investors, as definedin Regulation D under the Securities Actof 1933;

(2) Any company owned exclusivelyand controlled by one or more familymembers; or

(3) Any investment adviser registeredunder the Act that provides investmentadvice to the family office and whoidentifies investment opportunities tothe family office, and invests in suchtransactions on substantially the sameterms as the family office invests, butdoes not invest in other funds advised

by the family office, and whose assets as

to which the family office directly orindirectly provides investment advicerepresents, in the aggregate, not morethan 5 percent of the value of the totalassets as to which the family officeprovides investment advice; providedthat a family office that would not be afamily office but for this paragraph (c)shall be deemed to be an investmentadviser for purposes of paragraphs (1),(2) and (4) of section 206 of the Act.

(d) Definitions. For purposes of thissection:

(1) Affiliated family office means afamily office wholly owned by familyclients of another family office and that

is controlled (directly or indirectly) byone or more family members of suchother family office and/or family entitiesaffiliated with such other family officeand has no clients other than familyclients of such other family office.

(2) Control means the power toexercise a controlling influence over themanagement or policies of a company,unless such power is solely the result of

being an officer of such company.(3) Executive officer means the

president, any vice president in chargeof a principal business unit, division orfunction (such as administration or

finance), any other officer who performsa policy-making function, or any otherperson who performs similar policy-making functions, for the family office.

(4) Family client means:(i) Any family member;(ii) Any former family member;(iii) Any key employee;(iv) Any former key employee,

provided that upon the end of suchindividual’s employment by the familyoffice, the former key employee shallnot receive investment advice from thefamily office (or invest additional assets





with a family office-advised trust,foundation or entity) other than withrespect to assets advised (directly orindirectly) by the family officeimmediately prior to the end of suchindividual’s employment, except that aformer key employee shall be permittedto receive investment advice from thefamily office with respect to additional

investments that the former keyemployee was contractually obligated tomake, and that relate to a family-officeadvised investment existing, in eachcase prior to the time the person becamea former key employee.

(v) Any non-profit organization,charitable foundation, charitable trust(including charitable lead trusts andcharitable remainder trusts whose onlycurrent beneficiaries are other familyclients and charitable or non-profitorganizations), or other charitableorganization, in each case for which allthe funding such foundation, trust or

organization holds came exclusivelyfrom one or more other family clients;(vi) Any estate of a family member,

former family member, key employee,or, subject to the condition contained inparagraph (d)(4)(iv) of this section,former key employee;

(vii) Any irrevocable trust in whichone or more other family clients are theonly current beneficiaries;

(viii) Any irrevocable trust fundedexclusively by one or more other familyclients in which other family clients andnon-profit organizations, charitablefoundations, charitable trusts, or othercharitable organizations are the only

current beneficiaries;(ix) Any revocable trust of which one

or more other family clients are the solegrantor;

(x) Any trust of which: Each trustee orother person authorized to makedecisions with respect to the trust is akey employee; and each settlor or otherperson who has contributed assets to thetrust is a key employee or the keyemployee’s current and/or formerspouse or spousal equivalent who, at thetime of contribution, holds a joint,community property, or other similarshared ownership interest with the key

employee; or(xi) Any company wholly owned(directly or indirectly) exclusively by,and operated for the sole benefit of, oneor more other family clients; providedthat if any such entity is a pooledinvestment vehicle, it is excepted fromthe definition of ‘‘investment company’’under the Investment Company Act of 1940.

(5) Family entity means any of thetrusts, estates, companies or other

entities set forth in paragraphs (d)(4)(v),(vi), (vii), (viii), (ix), or (xi) of thissection, but excluding key employeesand their trusts from the definition of family client solely for purposes of thisdefinition.

(6) Family member means all linealdescendants (including by adoption,stepchildren, foster children, and

individuals that were a minor whenanother family member became a legalguardian of that individual) of acommon ancestor (who may be living ordeceased), and such lineal descendants’spouses or spousal equivalents;provided that the common ancestor isno more than 10 generations removedfrom the youngest generation of familymembers.

(7) Former family member means aspouse, spousal equivalent, or stepchildthat was a family member but is nolonger a family member due to a divorceor other similar event.

(8) Key employee means any naturalperson (including any key employee’sspouse or spouse equivalent who holdsa joint, community property, or othersimilar shared ownership interest withthat key employee) who is an executiveofficer, director, trustee, general partner,or person serving in a similar capacityof the family office or its affiliatedfamily office or any employee of thefamily office or its affiliated familyoffice (other than an employeeperforming solely clerical, secretarial, oradministrative functions with regard tothe family office) who, in connectionwith his or her regular functions or

duties, participates in the investmentactivities of the family office oraffiliated family office, provided thatsuch employee has been performingsuch functions and duties for or on

behalf of the family office or affiliatedfamily office, or substantially similarfunctions or duties for or on behalf of another company, for at least 12months.

(9) Spousal equivalent means acohabitant occupying a relationshipgenerally equivalent to that of a spouse.

(e) Transition. (1) Any companyexisting on July 21, 2011 that wouldqualify as a family office under thissection but for it having as a client oneor more non-profit organizations,charitable foundations, charitable trusts,or other charitable organizations thathave received funding from one or moreindividuals or companies that are notfamily clients shall be deemed to be afamily office under this section untilDecember 31, 2013, provided that suchnon-profit or charitable organization(s)do not accept any additional funding

from any non-family client after August31, 2011 (other than funding receivedprior to December 31, 2013 andprovided in fulfillment of any pledgemade prior to August 31, 2011).

(2) Any company engaged in the business of providing investmentadvice, directly or indirectly, primarilyto members of a single family on July21, 2011, and that is not registeredunder the Act in reliance on section203(b)(3) of this title on July 20, 2011,is exempt from registration as aninvestment adviser under this title untilMarch 30, 2012, provided that thecompany:

(i) During the course of the precedingtwelve months, has had fewer thanfifteen clients; and

(ii) Neither holds itself out generallyto the public as an investment advisernor acts as an investment adviser to anyinvestment company registered under

the Investment Company Act of 1940(15 U.S.C. 80a), or a company which haselected to be a business developmentcompany pursuant to section 54 of thatAct (15 U.S.C. 80a–54) and has notwithdrawn its election.

Dated: June 22, 2011.

By the Commission.

Elizabeth M. Murphy,

Secretary.

Note: The following Annex will not appearin the Code of Federal Regulations.

Annex A

The following diagram illustrates theeffect of a family office redesignating itscommon ancestor. In the first chart, theshaded boxes indicate persons invarious generations that are ‘‘familymembers’’ of the family office. Thedouble-outlinedboxes indicate personsin various generations that are outsidethe 10-generation limit and thus maynot be advised by the family officeunder the exclusion. The lower diagramshows the impact of redesignating thecommon ancestor from an individual ingeneration 1 to an individual ingeneration 5. The single-outlined boxesindicate the new group of family clientsthat the family office may advise andmaintain its exclusion. The shaded

boxes indicate individuals thatpreviously the family office couldadvise, but that are no longer ‘‘familymembers’’ due to the redesignation. Thedouble-outlined boxes indicateindividuals that were too remote fromthe common ancestor in both cases to beconsidered ‘‘family members.’’





[FR Doc. 2011–16117 Filed 6–28–11; 8:45 am]

BILLING CODE 8011–01–P

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamationand Enforcement

30 CFR Part 948

[WV–117–FOR; OSM–2011–0006]

West Virginia Regulatory Program

AGENCY: Office of Surface MiningReclamation and Enforcement (OSM),Interior.ACTION: Interim rule with publiccomment period and opportunity forpublic hearing.

SUMMARY: We are announcing receipt of a proposed amendment to the WestVirginia permanent regulatory programunder the Surface Mining Control andReclamation Act of 1977 (SMCRA or theAct). On May 2, 2011, the West VirginiaDepartment of Environmental Protection

(WVDEP) submitted a programamendment to OSM that includes bothstatutory and regulatory revisions. WestVirginia submitted proposed permit feerevisions to the Code of West Virginiaas authorized by House Bill 2955 thatpassed during the State’s regular 2011legislative session. In addition, WestVirginia is amending its Code of StateRegulations (CSR) to provide for theestablishment of a minimumincremental bonding rate as authorized

by Senate Bill 121. The changes, due tothe passage of House Bill 2995, willincrease the filing fee for the State’ssurface mining permit to $3,500 andestablish various fees for otherpermitting actions. Senate Bill 121authorizes regulatory revisions whichincludes, among other things, theestablishment of a minimumincremental bonding rate of $10,000 perincrement at CSR 38–2–11.4.a.2.Because these revisions have aneffective date of June 16, 2011, we areapproving the permit fees and theminimum incremental bonding rate on

an interim basis, with our approvaltaking effect upon publication of thisinterim rule. This rule also requestspublic comments and provides anopportunity for a public hearing on theproposed statutory and regulatoryrevisions described herein. The otherState regulatory revisions submitted byWVDEP with this amendment will beannounced in another Federal Registernotice and follow our normal programamendment procedures.

DATES: We will accept writtencomments on this amendment until4 p.m. EDT, on July 29, 2011. If requested, we will hold a public hearingon the amendment on July 25, 2011. Wewill accept requests to speak until4 p.m. EDT, on July 14, 2011.

ADDRESSES: You may submit comments,identified by ‘‘WV–117–FOR; Docket ID:OSM–2011–0006’’ by any of thefollowing two methods:• Federal eRulemaking Portal: http://

www.regulations.gov. The rule has beenassigned Docket ID OSM–2011–0006. If you would like to submit comments

http://www.regulations.gov/




family offices final

Documents