Family Client Definition Expands

WASHINGTON BUREAU — The final version of a new federal "family office" regulation includes a broader definition of the term "family client" than the U.S. Securities and Exchange Commission (SEC) included in the version originally proposed.

A family office is an office that manages a wealthy family's financial portfolios and other affairs.

The new rule, adopted to implement family office provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, defines the term "family office." The definition will help family offices remain exempt from the SEC registration requirements that apply to money managers classified as investment advisors.

The family office rule is set to take effect 60 days after the official Federal Register publication date.

The SEC approved the rule at a meeting Wednesday.

Family offices have been using an exemption for advisors with fewer than 15 clients to avoid having to meet the SEC registration requirements included in the Investment Advisers Act of 1950.

The Dodd-Frank Act removed the under-15-client exemption to give the SEC the ability to regulate hedge funds and hedge funds' private fund advisors.

The act also includes a provision requiring the SEC to define family offices, to continue to exempt the offices from regulation under the Investment Advisers Act.

The new rule adopted by the SEC will enable family portfolio managers to determine whether their family offices can continue to be excluded from the Investment Advisers Act.

The SEC has extended the end of the family office rule transition period to Dec. 31, 2013. Originally, the SEC had proposed allowing only a 4-month transition period, officials say.

A Family Is …

When SEC officials set about defining "family office," they discovered that "family member" was a little harder than they had expected.

The family office rule drafters had proposed to define the term "family member" by referring to the "founder" of the family office, "and generally to include the founder's spouse (or spousal equivalent), their parents, their lineal descendants, and their siblings and their lineal descendants," officials say in the preamble to the proposed rule.

"Commenters observed that the proposed rule implicitly assumed that the founder of the family office is the initial generator of the family's wealth and is an individual or couple," officials say. "They noted that in many cases, however, family offices are established by persons several generations remote from the initial wealth generator."

The original definition could have allowed a family office that was formed years ago to provide services to individuals who are now third or fourth cousins to one another, but that a new family office would have to wait two or three generations to serve a group of third or fourth cousins.

Some commenters suggested that the SEC not define the term "family" at all; others recommended that the SEC "expand the rule to treat as family members grandparents, great-grandparents, aunts, uncles, great aunts, and great uncles of the founders and their spouses and children."

The SEC has decided to let a family choose a common ancestor, who may be dead, and define family members by reference to the degree of kinship to the designated ancestor, officials say.

"In order to prevent families from choosing an extremely remote ancestor, which could allow commercial advisory businesses to rely on the rule, we are imposing a 10 generation limit between the oldest and youngest generation of family members, officials say.

- Allison Bell