SEC Staff Responds to Questions About the Family Office Rule

Lawrence D. Frishman and Anastasia T. Rockas of Skadden, Arps, Slate, Meagher & Flom LLP

Earlier this year, the staff of the Division of Investment Management (the “Staff”) of the Securities and Exchange Commission (the “SEC”) provided a set of responses to questions about rule 202(a)(11)(G)-1, the “family office rule” under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The family office rule was formally adopted on June 22, 2011, and it exempts certain investment advisers from regulation under the Advisers Act. The Staff expects to up- date its responses from time to time.

I. Ownership and Control of Family Office

The Staff provided guidance on the rule 202(a)(11)(G)-1(b)(2) requirement that a family office be “exclusively controlled” by family members and/or family entities. Specifically, the Staff stated that (i) a family office with a board of directors consisting of a majority of members who are family members or family entities would satisfy the “exclusively controlled” requirement (as long as no special shareholders agreements or other arrangements existed that would give someone that is neither a family member nor a family entity control over the management or policies of the family office) and (ii) the right of family members to appoint, terminate or replace all of the board members of a family office, by itself, would not satisfy the “exclusively controlled” standard (although such a family office would satisfy this requirement if the governing documents of the family office provided that matters relating to management and policy were to be decided by shareholders who are family members or family entities). In addition, the Staff clarified that the requirement that a family office be wholly owned by family clients (as defined under the rule) would not be satisfied if a non-family client were to own non-voting shares of the family office.

II. Key Employees

The Staff reiterated its position that a key employee of a family-owned operating entity that is not a family office would not be considered a key employee. The Staff also stated that a trust of a former key employee may remain a family client as long as no new funds are transferred to the trust after the key employee became a former key employee. In addition, for purposes of determining the amount of a former key employee’s assets that a family office may advise as of the effective date of the family office rule (August 29, 2011), the family office need only consider the amount of as- sets this former key employee had invested through the family office as of August 29, 2011, plus any additional investments that such person was contractually obligated to make, and that relate to a family-office advised investment existing, in each case prior to August 29, 2011.

III. Family Members

Regarding one of the issues giving rise to controversy among family offices, the Staff stated that the rule does not include in-laws as family members or family clients. The Staff also stated that a “family client” does not include the spouse or descendant of a former family member, such as a descendant of a stepchild whose parent later divorced the family member step-parent. The Staff explained that the term “cohabitant occupying a relation- ship generally equivalent to that of a spouse” includes same-sex domestic partners as well as opposite sex partners that have determined not to marry, even though they live together in a relationship generally equivalent to married couples.

IV. Non-Advisory Services

The Staff recognized that certain family office employees that do not meet the definition of “key employees” but who meet the “grandfathering provision” may make new investments with the family office without affecting such office’s exemption under the Advisers Act.

Further details about this release may be obtained at and on the SEC’s website at

Lawrence D. Frishman, Partner,

Lawrence D. Frishman is a corporate partner in the firm's New York office, with practice concentrations in investment management and finance.

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Anastasia T. Rockas, Partner,

Anastasia Rockas is a partner in Skadden's Investment Management Group, focusing her practice on private investment funds and private equity investments.

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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, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Skadden, Arps, Slate, Meagher & Flom LLP. This work reflects the law at the time of writing.