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Dodd-Lincoln Colloquy Clarifies Scope of Family Office Exemption from Advisers Act

By Jim Hamilton

Section 409 of the Dodd-Frank Act excludes family offices from the definition of investment adviser under the Investment Advisers Act. The SEC is directed to define the term family offices and provide exemptions that recognize the range of organizational, management, and employment structures and arrangement employed by family offices. For many decades, family offices have managed money for members of individual families, and they do not pose systemic risk or any other regulatory issues. The SEC has provided exemptive relief to some family offices in the past, but many family offices have simply relied on the under15 clients exception to the Investment Advisers Act. In a colloquy with Senator Blanche Lincoln, Senate Banking Committee Chair Christopher Dodd confirmed that when Dodd-Frank eliminated the 15 clients exception, it was not the intent of Congress to include family offices in the legislation. (Cong.
Record, July 15, 2010, p. S5904).

Further, it is the desire of Chairman Dodd that the SEC write rules to exempt certain family offices already in operation from the definition of investment adviser, regardless of whether they had previously received an SEC exemptive order. Congress intends that the rule would exempt family offices, provided that they operated in a manner consistent with the previous exemptive policy of the Commission as reflected in exemptive orders for family offices in effect on the date of enactment of the Dodd-Frank Act; reflect a recognition of the range of organizational, management and employment structures and arrangements employed by family offices; and not exclude any person who was not registered or required to be registered under the Advisers Act from the definition of the term family office solely because such person provides investment advice to natural persons who, at the time of their applicable investment, are officers, directors or employees of the family office who have previously invested with the family office and are accredited investors, any company owned exclusively by such officers, directors or employees or their successors-in-interest and controlled by the family office, or any other natural persons who identify investment opportunities to the family office and invest in such transactions on substantially the same terms as the family office invests, but do not invest in other funds advised by the family office, and whose assets to which the family office provides investment advice represent, in the aggregate, not more than 5 percent of the total assets as to which the family office provides investment advice.

Senators Dodd and Lincoln both agreed to make this point in a future technical corrections bill.

Full post as published by Jim Hamilton's World of Securities Regulation on July 22, 2010 (boomark / email).