Introduction
In managing the wealth and investments of a family, a family office frequently provides advice regarding investments in securities, manages investment portfolios, and oversees other financial matters on behalf of family members. While these activities are central to the purpose of many family offices, they may also cause a family office to fall within the broad regulatory framework of the Investment Advisers Act of 1940, as amended (Advisers Act).
The Advisers Act generally regulates people and entities that provide investment advice regarding securities for compensation. Because a family office often provides investment advice to family members and related entities, it may be considered an “investment adviser” unless it qualifies for an applicable exemption or exclusion.1
Historically, many family offices relied on the private adviser exemption under Section 203(b)(3) of the Advisers Act, which allowed certain advisers with fewer than 15 clients to avoid registration. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) eliminated that exemption and directed the Securities and Exchange Commission (SEC) to establish a separate exclusion specifically for family offices.2
In response, the SEC adopted Rule 202(a)(11)(G)-1 under the Advisers Act, commonly referred to as the “Family Office Rule.” The rule excludes qualifying family offices from the definition of investment adviser, allowing them to avoid registration and most substantive requirements applicable to registered investment advisers.
Because the Family Office Rule provides an exclusion rather than merely an exemption from registration, understanding its requirements is essential. A family office that does not satisfy the Rule may need to restructure its operations, seek exemptive relief from the SEC, or register as an investment adviser.
The Investment Advisers Act
The Advisers Act was enacted to protect investors by establishing a regulatory framework for people and entities engaged in the business of providing investment advice. The Act imposes registration, disclosure, recordkeeping and conduct requirements intended to promote transparency and prevent fraudulent practices.
Section 202(a)(11) of the Advisers Act defines an “investment adviser” broadly as any person or firm that:
for compensation
is engaged in the business of
providing advice to others or issuing reports or analyses regarding securities.
A person or entity generally must satisfy all three elements to fall within the definition of “investment adviser. The term “securities” is broadly interpreted and includes common investment instruments such as stocks, bonds and other financial products. It also includes investment contracts, as described under the Howey Test.3
Investment advisers that fall within this definition generally must register with the SEC or applicable state securities regulators unless an exclusion or exemption applies.
1Institutional investment manager” is an entity that either invests in, or buys and sells, securities for its own account, and or a natural person or an entity that exercises investment discretion over the account of any other natural person or entity. Section 3(a)(9) of the Securities Exchange Act and Section 13(f)(6)(A) of the Advisers Act.
2Section 202(a)(11)(G) of the Advisers Act.
3SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (establishing the “Howey test” for determining whether a transaction constitutes an investment contract under US securities law).
