Family Offices: Exemption from Registration as an Investment Adviser
February 21, 2003
Family offices and their investment officers may be exempt from registration under the U.S. Investment Advisers Act of 1940 under certain circumstances. These exemptions provide families with incentives to have their investments professionally managed by a family office without the added burden of regulatory impediments. This advisory pertains to U.S. federal law only. Several states also regulate investment advisers and, accordingly, each state’s laws must be consulted.
The Investment Advisers Act requires that investment advisers register with the U.S. Securities and Exchange Commission (SEC). The act defines investment advisers as "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities." This definition has been broadly interpreted to cover more than simply advising a client to buy or to sell specific securities and includes, among other issues, activities such as assisting clients in selecting investment managers and advising them on the desirability of investing in securities versus real estate. This section, however, excludes certain persons and entities such as banks, lawyers and accountants and permits the SEC by order to exclude other persons "not within the intent" of the section.
If the family office provides investment services to fewer than 15 family members, trusts or entities and does not offer its services to the general public, a specific exemption from registration under the act applies to the family office. Counting the number of clients under the act’s definitions, however, occasionally proves to be complicated. For example, each individual and trust is normally counted as one client, but family members living in the same house only count as one client, as are multiple trusts with identical beneficiaries. However, an individual and a corporation or company owned solely by the individual count as two clients. These interpretations often assist family office investment advisers to stay below the 14-client maximum provided in the exemption, but need to be examined carefully.
If the family office provides investment services to 15 or more clients, however, there is no statutory exemption. But relief may be available from the SEC under a provision of the act authorizing the SEC to exempt a person from registration by order. Provided the adviser furnishes investment advice exclusively to one family and does not hold himself out as an adviser to the general public, the SEC has held that such an adviser is not required to register under the act.
In a 1941 SEC order, In re Donner Estates, Inc., a corporation was organized to furnish investment advice to trusts created by and for the benefit of the members of one family and to charitable entities created by a member of such a family. The corporation did not provide investment advice to the general public. The SEC reasoned that individuals or entities giving investment advice solely to the members of one family were not intended to fall within the intent of the definition of investment adviser in the act and, accordingly, were exempt from the act’s registration requirements. The Donner Estates order continues to be good law. The SEC has issued several similar orders in the past few years exempting family offices from registration. However, these orders do not provide a general exemption to family offices and only exempt the specific family office or adviser who applied for exemption from registration.
