In 2011, the Securities and Exchange Commission (SEC) adopted its final rule (the Family Office Rule) under the Investment Advisers Act of 1940 (the Advisers Act) defining the term "family office" for purposes of the Advisers Act exemption of family offices from the definition of an "investment adviser."  The Family Office Rule took effect August 29, 2011.
Congress inserted the family office exemption into the Advisers Act as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), leaving it to the SEC to specify the family offices that would qualify for the exemption. A qualifying family office is altogether exempt from regulation by the SEC and cannot be required to register as an investment adviser by a state, but is subject to state antifraud regulation. Under the Family Office Rule a family office includes any type of qualifying entity that provides investment advice to a single family (as defined by the SEC), including traditional family offices and private trust companies.
A family office that does not meet the new definition may reorganize to meet its requirements. If a family office has been validly relying, and continues to validly rely, on the now-expired "private adviser exemption" (described below) and does not qualify, or reorganize to qualify, for the new exemption, it may be required to register with the SEC by March 30, 2012, unless it (i) qualifies for a different exemption under the Advisers Act, (ii) relies on relief granted by the SEC in an existing or newly obtained exemptive order or (iii) qualifies to be grandfathered as a family office under a narrow provision of the Family Office Rule specifically required by the Dodd-Frank Act (described further below). Depending on its level of assets under management and the investment advisory laws of the state where a family office is located or provides advice, a family office that does not meet the new definition may instead be required to register (either currently or in the future) as an investment adviser in one or more states. 
Background. Many wealthy families have created and utilized family offices, private trust companies and similar entities to manage their investments and provide fiduciary and other services. Most did not register with the SEC in reliance upon the "private adviser exemption" previously set forth in Section 203(b)(3)of the Advisers Act.  However, the Dodd-Frank Act repealed the private adviser exemption, effective July 21, 2011. In its place, the Dodd-Frank Act established several new exemptions and exclusions, including an exclusion from the definition of investment adviser for family offices.  The Family Office Rule defines and implements that exclusion.
Family office exclusion. Under the Family Office Rule, a family office is a "company" (i.e., any kind of entity) that (1) provides investment advice only to "family clients," (2) is wholly owned by family clients and controlled (directly or indirectly) exclusively by "family members" and/or "family entities" and (3) does not hold itself out to the public as an investment adviser. We explain these requirements below.
Family clients. Family clients include the following persons:
Involuntary transfers: One-year grace period. The Family Office Rule provides that a person that otherwise is not a family client but receives assets due to an involuntary transfer (such as death) is deemed to be a family client for one year following completion of the transfer of legal title to assets resulting from the involuntary transfer. The SEC concluded that this period is necessary to facilitate the orderly transition of management of the transferred assets to a new investment adviser.
Ownership and control. A family office must be owned entirely by family clients and controlled  exclusively by one or more family members and/or family entities (entities that are family clients, excluding key employees and their trusts). As a result, key employees may own non-controlling interests in a family office, enabling a family office to attract and retain talented professionals.
Profits. A family office may be a profit-making enterprise.
Holding out to the public. A family office may not hold itself out to the public as an investment adviser. However, the SEC clarified that a family office currently registered as an investment adviser that de-registers in reliance on the Family Office Rule will not be prohibited from qualifying under the Family Office Rule solely because it held itself out to the public as an investment adviser while it was registered under the Advisers Act.
Exemption limited to single family offices. The Family Office Rule limits the definition of "family office" to family offices that advise only a single family. The SEC warned in the Family Office Rule promulgating release that the exclusion would not exempt a de facto multi-family office if several families attempt to circumvent the Family Office Rule by establishing separate family offices but staffing them with "the same or substantially the same employees."
Grandfathered companies. The Dodd-Frank Act required the SEC not to exclude from the definition of "family office" offices that were not registered or required to be registered under the Advisers Act on January 1, 2010, and would not meet all of the Family Office Rule's generally applicable requirements solely because those offices provide investment advice to certain persons.  A grandfathered family office meeting this narrow exclusion is not required to register as an investment adviser but, unlike family offices meeting the Family Office Rule's generally applicable requirements, is subject to the anti-fraud provisions of the Advisers Act.
Exemptive orders. The SEC has in the past issued exemptive orders to approximately a dozen family offices. The SEC stated in its Family Office Rule promulgating release that a family office that is currently relying on such an order may continue to do so even if the order permits activities that are not covered by the Family Office Rule. A family office may also apply for an exemption for services and activities not covered by the Family Office Rule but, if not registered as an investment adviser, should not provide unexempted services unless and until such an exemption is granted.
Ryan M. Harding, Partner, email@example.com
Ryan M. Harding is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Chicago office.
Ryan focuses his practice on tax, estate planning, and family and closely held business governance and succession issues. He also regularly advises family offices on a wide range of business, corporate, real estate and tax matters. Ryan frequently represents clients on complex estate administration and sophisticated wealth transfer planning as well as the formation and operation of private trust companies.
Edwin C. Laurenson, Partner, firstname.lastname@example.org
Edwin ("Ted") Charles Laurenson is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's New York office. Ted focuses his practice on public and private investment funds and investment advisory matters (including the Investment Company Act).
His experience covers the formation, SEC registration, offering, regulation and operation of public funds, as well as the formation, offering and regulation of private funds, both hedge funds and private equity funds. He also advises on so-called "inadvertent investment company" issues relating to exemptions from the application of the Investment Company Act, corporate "takeover" matters relating to publicly offered closed-end investment companies, the establishment, federal registration and governance of investment managers and all other aspects of the application of and exemption from the Investment Advisers Act. His other areas of expertise include the law of business trusts, broker-dealer registration requirements, securities lending, the securities aspects of investments in bank-established funds and pension funds and many other related areas of corporate and securities law. Separately, he has a substantial background as a generalist securities and mergers and acquisitions lawyer.
Carol A. Harrington, Partner, email@example.com
Carol A. Harrington is a partner in the law firm of McDermott Will & Emery LLP, resident in the Firm's Chicago office, where she heads the Firm's Private Client Practice Group. She advises clients on a variety of matters, including estate, gift and generation-skipping tax issues, closely-held businesses and succession planning, family office structures and issues, private trust companies, private foundations, trust and estate administration, and contested trust and tax matters.
As a national authority on the federal generation-skipping tax, Carol has advised attorneys, tax professionals, executors, trustees and others nationwide on this issue. She is a co-author of a tax treatise, Generation-Skipping Transfer Tax (Harrington, Plaine & Zaritsky) and has published many articles on the federal generation-skipping tax. Carol is a frequent speaker for professional groups.
Julie K. Kwon, Partner, firstname.lastname@example.org
Julie K. Kwon is a partner for the law firm of McDermott Will & Emery LLP and is based in the Firm's Silicon Valley office. She focuses her practice on advising clients regarding a broad range of estate planning issues, including estate, gift and generation-skipping transfer tax issues; charitable planning and exempt organization compliance; trust and estate administration; contested trust and tax matters; and construction and reformation of wills and trusts.
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 Family Offices, Investment Advisers Act Release No. 3220 (June 22, 2011), promulgating Advisers Act rule 202(a)(11)(G)-1. The Family Office Rule reflects substantial revisions to the SEC's proposed rule, based on numerous comment letters from the public. See Family Offices, Investment Advisers Act Release No. 3098 (October 12, 2010).
 A description of the manner in which federal and state investment advisory registration requirements interact is beyond the scope of this white paper. We would be pleased to provide such a description to interested clients.
 The private adviser exemption exempted from registration with the SEC (although not from the Advisers Act's antifraud provisions) an entity that did not hold itself out to the public as an investment adviser and had fewer than 15 clients during the preceding 12 months. Because a pooled investment vehicle generally qualified as a single client, even a family with many members could frequently take advantage of the private adviser exemption by offering family members the ability to invest through private investment funds organized by the family's family office. The private adviser exemption did not provide an exemption from state registration requirements.
 Section 202(a)(11)(G) of the Advisers Act.
 "Lineal descendants" include adopted children, step-children, foster children and any individual who was a minor when another family member became that individual's legal guardian.
 "Spousal equivalent" means a cohabitant in a relationship generally equivalent to a spousal relationship.
 On a strict reading of the Family Office Rule, a family office's provision of investment advisory services to a former stepchild's spouse (or spousal equivalent) or descendants is arguably not permitted; however, senior members of the SEC staff have stated orally that this result was not intended and that it may be cured by subsequent staff interpretations.
 An "executive officer" is the family office's president, a vice president in charge of a principal business unit, division or function (such as administration or finance), any other officer who performs a policy-making function or any other person who performs similar policy-making functions.
 An affiliated family office is an entity wholly owned by family clients of another family office and controlled (directly or indirectly) by one or more family members of that other family office and/or family entities affiliated with the other family office and that only serves the family clients of the other family office.
 The family office also may advise as to investments that a former key employee was contractually obligated to make pursuant to agreements in effect before he or she ceased to be a key employee.
 "Control" means the power to exercise a controlling influence over the company's management or policies unless such power results solely from being a company officer.
 These include the following kinds of persons for whom a family office was engaged in providing advice before January 1, 2010: (i) individuals who, at the time of the applicable investment, were officers, directors or employees of the family office who invested with the family office before January 1, 2010 and are accredited investors under the Securities Act of 1933, Regulation D; (ii) any company owned exclusively and controlled by one or more family members; and (iii) any investment adviser registered under the Advisers Act that provides investment advice and identifies investment opportunities to the family office and invests in such transactions on substantially the same terms as the family office but does not invest in other funds advised by the family office, and whose assets as to which the family office directly or indirectly advises represents 5 percent or less of the total assets as to which the family office provides investment advice. Of course, the second, and to some extent the first, of these grandfathered categories of persons overlap with the definition of family clients under the Family Office Rule's generally applicable provisions.
Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from McDermott Will & Emery. This work reflects the law at the time of writing September 2011.