The Family Office Exclusion Under the Investment Advisers Act of 1940

Gregory S. Crespi

Abstract

A family office is a private firm that manages the wealth of a high net worth family. This article explores Advisers Act Rule 202(a)(11)(G)-l, the "Family Office Rule," which excludes qualifying family offices from regulation under the Investment Advisers Act of 1940. Section I discusses the business role family offices play and general trends in family office governance. Section H provides an overview of the Investment Advisers Act of 1940, in order to put the Family Office Rule in context. Section III comprehensively discusses the Family Office Rule, including its origins in the Dodd-Frank Act of 2010 as well as the specific requirements of the rule promulgated by the SEC in 2011. The rule's definition of "family client" and its restrictions on the ownership and control of family offices are discussed in detail.

While this article fully supports the policy behind the Family Office Rule-of allowing families to conduct their personal investment activities privately and free of Advisers Act regulation-this article is critical of the SEC's narrow interpretation of the rule's "control" requirement. The staff of the SEC Division of Investment Management currently interprets the rule to require a majority of a family office's board of directors to be family members, even though the rule's text does not compel such an interpretation.

This article argues that the SEC should broaden its interpretation of the control requirement to allow family offices to use the governance structure that best suits their particular needs, including a board of directors consisting of a majority of non-family members.