FAMILY OFFICES and INVESTMENT ADVISER REGULATION after DODDFRANK

FAMILY OFFICES and INVESTMENT ADVISER REGULATION after DODD-FRANK Matthew C. Dallett mdallett@eapdlaw. com (617) 239 -0303

Background “Family Office” – a company operated by a family that is managing its own wealth Historically, family offices have avoided investment adviser registration by: § Obtaining individual exemptive order from SEC § Meeting “Private Investment Adviser” exemption (14 clients or fewer) Or by ignoring it. . .

Background Dodd-Frank Act § Eliminates Private Investment Adviser exemption § Requires registered advisers with AUM less than $100 M to register with state(s) instead of SEC § N/A to advisers based in NY, MN and WY § Formalizes “Family Office” exclusion from “investment adviser” status § Excluded Family Offices also outside state regulation

Family Office Exclusion 1. Only “Family Clients” § Involuntary transferee included for 1 year 2. Owned only by Family Clients 3. Controlled only by “Family Members” 4. Does not “hold itself out to the public” as an investment adviser

Family Office Exclusion Family Members § Descendants of a common ancestor no more than 10 generations back from youngest generation § The common ancestor may be changed to adapt to circumstances over time § Includes § Adoptive, step- and foster-children § Spouses and spousal equivalents

Family Office Exclusion Family Clients 1. Family Members 2. Former Family Members 3. Key Employees § Incl. spouse with joint interest in AUM 4. Former Key Employees § Limited to AUM at termination of employment 5. Estates of (1) – (4)

Family Office Exclusion Family Clients (cont. ) 6. Irrevocable trusts: § Family Clients are sole current beneficiaries or § Funded solely by Family Client(s) and Family Clients and Non-Profit/Charities are sole current beneficiaries 7. Revocable trust § Family Client(s) is sole grantor 8. Certain trusts established by Key Employees

Family Office Exclusion Family Clients (cont. ) 9. Non-profit, charitable foundation, charitable trust or other charitable organization if: § All funding came exclusively from Family Client(s) § For charitable lead and charitable remainder trusts, current beneficiaries must be other Family Clients or charitable/nonprofit organizations 10. Any company (other than an “investment company”) that is wholly-owned by, and operated only for the benefit of, Family Clients.

Family Office Exclusion Wholly owned by Family Clients § Permits Key Employees to hold equity as an incentive Exclusively controlled by Family Members § Officer’s authority ≠ “control” No “holding out to public as an investment adviser” § Includes identifying the company as an investment adviser in public communications

Family Office Exclusion A company is grandfathered under the exclusion if it meets the definition except that it provides investment advice to: § An “accredited investor” who invested with the Family Office before 1/1/10 when he or she was a director, officer or employee § Any company owned exclusively and controlled by a Family Member that has received advice from the Family Office since before 1/1/10 § Certain investment advisers that have provided advice to and invested alongside the Family Office since before 1/1/10

Transition § § New exclusion is now in effect Family Offices that have been relying on former Private Investment Adviser exemption have grace period until 3/30/12 to: § Restructure (if necessary) to comply with the exclusion § Register with the SEC or state(s), as applicable (file by 2/14/12) Registration requires substantial advance planning: § Compliance procedures § SEC/client disclosures § Exam requirements for personnel