On June 22, 2011, the Securities and Exchange Commission (“SEC” or the “Commission”) issued Release No. IA-3220 (the “Final Release”), adopting rule 202(a)(11)(G)-1 (the “Final Rule”) which defines “family offices” that would be excluded from the definition of “investment adviser” under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The SEC received and considered approximately 90 comment letters on the proposed rule (the “Proposed Rule”) issued on October 12, 2010 and, as a result, modified the Proposed Rule in certain respects, as detailed in this article. While family offices generally meet the Advisers Act’s definition of “investment adviser,” in that they provide investment advice for compensation, they have historically avoided registration by availing themselves of the private adviser exemption found in section 203(b)(3) of the Advisers Act or by seeking and obtaining exemptive relief from the Commission. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010 (the “Dodd-Frank Act”), Congress eliminated the private adviser exemption and directed the Commission to adopt a definition of single family offices that would be “consistent with previous exemptive policy” and recognize “the range of organizational, management, and employment structures and arrangements employed by family offices.” The Final Rule contains three general conditions: that (1) the family office has only family clients; (2) the family office is wholly owned and exclusively controlled by family members and/or family entities; and (3) the family office does not hold itself out to the public as an investment adviser. Each of the foregoing is subject to definitions and as usual, the “devil is in the details.” In a guest article, Michael G. Tannenbaum and Christina Zervoudakis, Founding Partner and Associate, respectively, at Tannenbaum Helpern Syracuse & Hirschtritt LLP, provide a thorough analysis of the Final Rule. This is the final installation of a three-part series by Tannenbaum and Zervoudakis in Hedge Fund Law Report addressing the regulation of family offices under the Advisers Act, by the Dodd-Frank Act and the Final Rule. Part One of this series, entitled Developments in Family Office Regulation: Part One
, presented the SEC’s position on the regulation of family offices prior to the Dodd-Frank Act as reflected by SEC exemptive orders, and Part Two, entitled 2010 Developments in Family Office Regulation: Part Two
, discussed the Proposed Rule.