[Federal Register Volume 76, Number 125 (Wednesday, June 29, 2011)]
[Rules and Regulations]
[Pages 37983-37996]
[FR Doc No: 2011-16117]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-3220; File No. S7-25-10]
RIN 3235-AK66

Family Offices

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is
adopting a rule to define ``family offices'' that will be excluded from
the definition of an investment adviser under the Investment Advisers
Act of 1940 (``Advisers Act'') and thus will not be subject to
regulation under the Advisers Act.

DATES: Effective Date: August 29, 2011.

FOR FURTHER INFORMATION CONTACT: Sarah ten Siethoff, Senior Special
Counsel, or Vivien Liu, Senior Counsel, at<PHONE_NUMBER> or
<EMAIL_ADDRESS>Office of Investment Adviser Regulation, Division of
Investment Management, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is
adopting rule 202(a)(11)(G)-1 [17 CFR 275.202(a)(11)(G)-1] under the
Investment Advisers Act of 1940 [15 U.S.C. 80b] (the ``Advisers Act''
or ``Act'').\1\
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    \1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act, we are referring
to 15 U.S.C. 80b of the United States Code, at which the Advisers
Act is codified.
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Table of Contents

I. Background
II. Discussion
III. Paperwork Reduction Act
IV. Economic Analysis
V. Final Regulatory Flexibility Analysis
VI. Statutory Authority
Text of Rule

I. Background

    On October 12, 2010, the Commission issued a release proposing new
rule 202(a)(11)(G)-1 that would exempt ``family offices'' from
regulation under the Advisers Act.\2\ We proposed this rule in
anticipation of the Dodd-Frank Wall Street Reform and Consumer
Protection Act's (the ``Dodd-Frank Act'') \3\ repeal of the private
adviser exemption from registration contained in section 203(b)(3) of
the Advisers Act, effective July 21, 2011, upon which many family
offices currently rely.\4\
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    \2\ See Family Offices, Investment Advisers Act Release No. 3098
(Oct. 12, 2010) [75 FR 63753 (Oct. 18, 2010)] (``Proposing
Release''). ``Family offices'' are entities established by wealthy
families to manage their wealth and provide other services to family
members. See section I of the Proposing Release for a discussion of
family offices.
    \3\ Public Law 111-203, 124 Stat. 1376 (2010), at section 403.
    \4\ 15 U.S.C. 80b-2(b)(3). This provision exempts from
registration any adviser that during the course of the preceding 12
months had fewer than 15 clients and neither held itself out to the
public as an investment adviser nor advised any registered
investment company or business development company.
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    The Dodd-Frank Act creates in its place a new exclusion from the
Advisers Act in section 202(a)(11)(G) under which family offices, as
defined by the Commission, are not investment advisers subject to the
Advisers Act.\5\ Historically, family offices that fell outside the
private adviser exemption have sought and obtained from us orders under
the Advisers Act declaring those offices not to be investment advisers
within the intent of section

202(a)(11) of the Advisers Act.\6\ Recognizing this past practice,
section 409 of the Dodd-Frank Act instructs that any family office
definition the Commission adopts should be ``consistent with the
previous exemptive policy'' of the Commission and recognize ``the range
of organizational, management, and employment structures and
arrangements employed by family offices.'' \7\
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    \5\ See section 409 of the Dodd-Frank Act.
    \6\ See, e.g., Bear Creek Inc., Investment Advisers Act Release
Nos. 1931 (Mar. 9, 2001) (notice) [66 FR 15150 (Mar. 15, 2001)] and
1935 (Apr. 4, 2001) (order); Riverton Management, Inc., Investment
Advisers Act Release Nos. 2459 (Dec. 9, 2005) [70 FR 74381 (Dec. 15,
2005)] and 2471 (Jan. 6, 2006) (order). We are troubled by comment
letters we receive by counsel to some family offices that appear to
acknowledge that their clients were operating as unregistered
investment advisers, although they were not eligible for the private
adviser exemption and had not obtained an exemptive order from us.
We note that an adviser may not ``rely'' on exemptive orders issued
to other persons.
    \7\ Section 409(b) of the Dodd-Frank Act. Section 409 also
includes a ``grandfathering clause'' that precludes us from
excluding certain family offices from the definition solely because
they provide investment advice to certain clients and had provided
investment advice to those clients before January 1, 2010. See
section 409(b)(3) of the Dodd-Frank Act.
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    We received approximately 90 comments on the proposed rule, most of
which were submitted by law firms representing family offices.\8\ Many
urged that we adopt a broader exemption to accommodate typical family
office structures that were not reflected in our previous exemptive
orders.\9\ Some urged us to include exceptions in various aspects of
the rule to allow individuals or entities with no family relations to
nevertheless receive investment advice from the family office without
the protections of the Advisers Act.\10\ Some disputed our
interpretation of the legislative direction we received to define the
term ``family office'' consistent with our previous exemptive
orders.\11\ After careful consideration of these comment letters, we
are adopting rule 202(a)(11)(G)-1, with certain modifications from our
proposal as further described below.
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    \8\ The public comments we received on the Proposing Release are
available on our website at http://www.sec.gov/comments/s7-25-10/s72510.shtml.
    \9\ See, e.g., Comment Letter of the American Bar Association,
Section of Business Law and Section of Real Property, Trust and
Estate Law (Nov. 18, 2010) (``ABA Letter''); Comment Letter of
Perkins Coie/Private Investor Coalition Inc. (Nov. 11, 2010)
(``Coalition Letter''); Comment Letter of Tannenbaum, Helpern,
Syracuse & Hirschtritt LLP (Nov. 18, 2010) (``Tannenbaum Letter'').
    \10\ See, e.g., Comment Letter of Miller & Martin PLLC (Nov. 18,
2010) (``Miller Letter'') (recommending that non-family clients be
permitted de minimis investments in family limited liability
companies, partnerships, corporations and other entities and be
permitted de minimis ownership stakes in the family office itself);
Comment Letter of Porter Wright (Nov. 10, 2010) (supporting various
forms of non-family client investment through the family office with
five percent de minimis maximums for each type of exception).
    \11\ See, e.g., Coalition Letter.
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II. Discussion

    We are adopting new rule 202(a)(11)(G)-1 under the Advisers Act to
define the term ``family office'' for purposes of the Act. Family
offices, as so defined, are excluded from the Act's definition of
``investment adviser,'' and are thus not subject to any of the
provisions of the Act. The scope of the rule is generally consistent
with the conditions of exemptive orders that we have issued to family
offices. As with the proposal, and as discussed in more detail below,
our final rule in some cases has modified those conditions to turn the
fact-specific exemptive orders into a rule of general applicability and
to take into account the need for certain clarifications and further
modifications identified by commenters.
    As we discussed in the Proposing Release, our orders have provided
an exclusion for family offices because we viewed them as not the sort
of arrangement that the Advisers Act was designed to regulate.\12\
Disputes among family members concerning the operation of the family
office could, as we noted in the Proposing Release, be resolved within
the family unit or, if necessary, through state courts under laws
designed to govern family disputes. In light of the purpose of the
exclusion and the legislative instructions we received, we have not
expanded the exclusion, as several commenters suggested, to permit
family offices to provide advisory services to multiple families or to
clients who are not family members, other than certain key employees.
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    \12\ See Proposing Release, supra note 2, at sections I and II
for a discussion of the rationale for the family office exclusion.
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    The failure of a family office to be able to meet the conditions of
the rule will not preclude the office from providing advisory services
to family members either collectively or individually. Rather, the
family office will need to register under the Advisers Act (unless
another exemption is available) or seek an exemptive order from the
Commission. A number of family offices currently are registered under
the Advisers Act.

A. Family Office Structure and Scope of Activities

    As proposed, rule 202(a)(11)(G)-1 contains three general
conditions. First, the exclusion is limited to family offices that
provide advice about securities only to certain ``family clients.''
Second, it requires that family clients wholly own the family office
and family members and/or family entities control the family office.
Third, it precludes a family office from holding itself out to the
public as an investment adviser. In addition to these conditions, we
have incorporated into the rule the ``grandfathering'' provision
required by section 409 of the Dodd-Frank Act.\13\
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    \13\ See supra note 7 and section II.A.5 of this Release.
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1. Family Clients
    A family office excluded from the Act is limited to an office that
advises only ``family clients.'' \14\ As discussed in more detail
below, family clients include current and former family members,
certain employees of the family office (and, under certain
circumstances, former employees), charities funded exclusively by
family clients, estates of current and former family members or key
employees, trusts existing for the sole current benefit of family
clients or, if both family clients and charitable and non-profit
organizations are the sole current beneficiaries, trusts funded solely
by family clients, revocable trusts funded solely by family clients,
certain key employee trusts, and companies wholly owned exclusively by,
and operated for the sole benefit of, family clients (with certain
exceptions).\15\
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    \14\ Rule 202(a)(11)(G)-1(b)(1).
    \15\ The term ``company'' used throughout this Release and rule
202(a)(11)(G)-1 has the same meaning as in section 202(a)(5) of the
Advisers Act, which defines ``company'' as ``a corporation, a
partnership, an association, a joint-stock company, a trust, or any
organized group of persons, whether incorporated or not; or any
receiver, trustee in a case under title 11, or similar official, or
any liquidating agent for any of the foregoing, in his capacity as
such.''
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a. Family Member
    Under the rule, a ``family member'' includes all lineal descendants
of a common ancestor (who may be living or deceased) as well as current
and former spouses or spousal equivalents of those descendants,
provided that the common ancestor is no more than 10 generations
removed from the youngest generation of family members.\16\ All
children by adoption and current and former stepchildren also are
considered family members.
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    \16\ Rule 202(a)(11)(G)-1(d)(6).
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    We have expanded persons who may be considered family members in
response to several comments we received. We had proposed to define the
term ``family member'' by reference 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.\17\
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.\18\ They noted that in many
cases, however, family offices are established by persons several
generations remote from the initial wealth generator.\19\ Some
commenters also criticized our proposed approach because it would treat
who could be a family member differently depending on when the family
office was established.\20\ For example, one commenter stated that our
proposal would have allowed a family office that was formed a long time
ago to provide services to persons that are currently third or fourth
cousins to each other, but that a family office established today may
need to wait at least 40 or 50 years before being able to provide
services to equivalent types of family members.\21\
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    \17\ Proposed rule 202(a)(11)(G)-1(d)(5) (defining the founders
as the ``natural person and his or her spouse or spousal equivalent
for whose benefit the family office was established and any
subsequent spouse of such individuals.'' Proposed rule
202(a)(11)(G)-1(d)(3) (defining family members as ``the founders,
their lineal descendants (including by adoption and stepchildren),
and such lineal descendants' spouses or spousal equivalents; the
parents of the founders; and the siblings of the founders and such
siblings' spouses or spousal equivalents and their lineal
descendants (including by adoption and stepchildren) and such lineal
descendants' spouses or spousal equivalents'').
    \18\ See, e.g., Comment Letter of Dechert LLP (Nov. 29, 2010)
(``Dechert Letter''); Comment Letter of Fried, Frank, Harris,
Shriver & Jacobs LLP (Nov. 18, 2010) (``Fried Frank Letter'').
    \19\ See, e.g., Coalition Letter; Comment Letter of the New York
State Bar Association, Business Law Section, Securities Regulation
Committee (Dec. 10, 2010) (``NY Bar Letter'').
    \20\ See, e.g., NY Bar Letter; Comment Letter of Skadden, Arps,
Slate, Meagher & Flom LLP (Nov. 17, 2010) (``Skadden Letter'').
    \21\ Skadden Letter.
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    Some commenters recommended that the Commission address these
concerns by leaving the term ``family member'' undefined,\22\ while
others recommended that the Commission retain the approach of the
proposed rule, but 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.\23\ Leaving the
term family member undefined could allow typical commercial investment
advisory businesses to rely on the exclusion (by, for example,
designating an extremely remote family member as a common ancestor). On
the other hand, attempting to expand the family member definition by
ascending up the family tree from the founders would not address the
difficulty in identifying the founders of the family office as
identified by commenters and would not address the concern, depending
on when the family office was founded, that the definition will not
capture many family members of family offices established several
generations after the initial family wealth was created.
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    \22\ See, e.g., Comment Letter of Foley & Lardner LLP (Nov. 18,
2010) (``Foley Letter''); Miller Letter; Comment Letter of Northern
Trust (Nov. 18, 2010) (``Northern Trust Letter'').
    \23\ See, e.g., Comment Letter of the American Institute of
Certified Public Accountants (Nov. 16, 2010) (``AICPA Letter'');
Comment Letter of The Blum Firm, P.C./Blum (Nov. 18, 2010) (``Blum
Letter''); Comment Letter of Hogan Lovells US LLP (Nov. 18, 2010)
(``Hogan Letter'').
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    We are adopting, instead, an approach suggested in several comment
letters that permits a family to choose a common ancestor (who may be
deceased) and define family members by reference to the degree of
lineal kinship to the designated relative.\24\ This approach avoids any
assumptions regarding the source of family wealth and the inconsistent
treatment of extended family members compared to the approach we
proposed.\25\ 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. Such a limit,
suggested by several commenters, would constrain the scope of persons
considered family members while accommodating the typical number of
generations served by most family offices.\26\
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    \24\ See, e.g., ABA Letter; Comment Letter of Duncan Associates
(Nov. 18, 2010) (``Duncan Letter''); Comment Letter of Kozusko
Harris Vetter Wareh LLP (Nov. 18, 2010) (``Kozusko Letter'').
    \25\ Moreover, the approach we are adopting has been used in
other contexts to delimit members of a family for purposes of
special regulatory treatment. See, e.g., Section 1361(c)(1)(B) of
the Internal Revenue Code of 1986, as amended (treating members of a
family as a single shareholder of an S Corporation and defining
family members as ``a common ancestor, any lineal descendant of such
common ancestor, and any spouse or former spouse of such common
ancestor or any such lineal descendant'' but providing that an
``individual shall not be considered to be a common ancestor if, on
the applicable date, the individual is more than 6 generations
removed from the youngest generation of shareholders''); Nevada
Revised Statutes section 669.042 (defining a family trust company
subject to special trust company regulation as having family members
within 10 degrees of lineal kinship or 9 degrees of collateral
kinship to the designated relative); New Hampshire Revised Statutes
section 392-B:1 (defining a family trust company subject to special
banking regulation as having family members within 5 degrees of
lineal kinship or 9 degrees of collateral kinship to a designated
relative).
    \26\ See, e.g., ABA Letter (suggesting a 9 generation limit);
Duncan Letter (recommending that the Commission follow that used for
Nevada family trust companies, which allows for 10 degrees of lineal
kinship and 9 degrees of collateral kinship and stating that other
states' family trust company laws with fewer degrees of kinship
allowed had resulted in some family office clientele being outside
the limitations); Kozusko Letter (recommending 10 generations (but
not counting minors as a separate generation from their parents) as
a size that, based on its experience and client base and on studies
of family businesses, would comfortably accommodate most family
offices but that would not open up the family office to abuse as a
disguised commercial enterprise); Northern Trust Letter (stating
that of the over 400 family offices they represent, some are now
focused on their fifth through seventh generations). We have
determined not to include a separate limit on degrees of permissible
collateral kinship because, given our relatively expansive 10
generation lineal limit, a reasonable collateral limit would not in
practice expand the range of family members covered by the rule.
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    Under this approach, the family office will be able to choose the
common ancestor and may change that designation over time such that the
family office clientele is able to shift over time along with the
family members served by the family office. A family office exempt
under the rule with a common ancestor several generations up from
current family members will be able to serve a greater number of
current collateral family members but fewer future lineal members.
    For example, G1 (who is deceased) founded a business and placed his
fortune into a trust for the benefit of his heirs. G4 founded a family
office to manage that wealth for the ever growing number of family
members descended from G1 and treated G1 as the common ancestor for
purposes of which family members the family office could advise under
the exclusion. At the time G4 created the family office, current
clients extended as far as G4's great-grandchildren (or G7). Over time
the family grows and additional generations are born. Eventually, to
allow the family office to serve later generations that would otherwise
extend beyond the 10 generation limit, the family office redesignates
its common ancestor to an individual in G3.\27\ The family office can
do this under rule 202(a)(11)(G)-1 because the rule does not specify
which individual the common ancestor is and it does not specify that it
always has to be the same common ancestor. As a result of this
redesignation, the family office is able to advise clients two
generations younger, but would no longer be able to advise certain
branches

of G1's family tree without registering under the Advisers Act.\28\
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    \27\ No formal documentation or procedure is required for
designating or redesignating a common ancestor.
    \28\ See Annex A for an illustration of the impact of
redesignating the common ancestor.
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    The rule, as proposed, treats lineal descendants and their spouses,
spousal equivalents, stepchildren, and adopted children as family
members.\29\ Most commenters generally supported our inclusion of
spousal equivalents, stepchildren and children by adoption,\30\ but two
commenters \31\ opposed the inclusion of spousal equivalents, invoking
the Defense of Marriage Act (``DOMA'').\32\ Because the term ``spouse''
is not defined in the rule and a ``spousal equivalent'' is identified
as a category of person, separate and distinct from a ``spouse,'' that
meets the definition of a ``family member,'' we do not believe that the
rule violates that Act.
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    \29\ Rule 202(a)(11)(G)-1(d)(6). As proposed, we are using the
definition of spousal equivalent currently used under our auditor
independence rules. See Proposing Release, supra note 2, at n.24.
    \30\ See, e.g., Coalition Letter; NY Bar Letter.
    \31\ Comment Letter of Alliance Defense Fund (Nov. 18, 2010);
Comment Letter of Thomas V. Cliff (Nov. 1, 2010).
    \32\ 1 U.S.C. 7. The Act provides that in ``determining the
meaning of any Act of Congress, or of any ruling, regulation, or
interpretation of the various administrative bureaus and agencies of
the United States * * * the word `spouse' refers only to a person of
the opposite sex who is a husband or wife.''
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    In response to comments we have expanded the definition to include
foster children and persons who were minors when another family member
became their legal guardian.\33\ We are persuaded by the commenters
that argued that foster children and children in a guardianship
relationship often have familial ties indistinguishable from that of
children and stepchildren, and that including such individuals would
not cause the family office to resemble a typical commercial investment
adviser.\34\
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    \33\ See, e.g., ABA Letter; Dechert Letter; Tannenbaum Letter.
    \34\ See, e.g., Hogan Letter; Tannenbaum Letter. Guardianship
arrangements for adults, however, can raise unique conflicts and
issues as compared to guardianships for minors that we believe are
more appropriately addressed through an exemptive order process
where the Commission can consider the specific facts and
circumstances, than through a rule of general applicability.
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    Finally, the rule treats former family members (i.e., former
spouses, spousal equivalents and stepchildren) as family members.\35\
We had proposed permitting former family members to retain any
investments held through the family office at the time they became a
former family member, but to limit them from making any new investments
through the family office.\36\ Commenters pointed out that a former
spouse's financial arrangements often remain intertwined with those of
the family, particularly if they provide for children who remain family
members.\37\ Some argued that stepchildren of a divorced spouse may
remain close to the family after the divorce.\38\ We are persuaded by
these arguments and have modified the definition of former family
member to include stepchildren.\39\
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    \35\ Rule 202(a)(11)(G)-1(d)(4)(ii).
    \36\ Proposed rule 202(a)(11)(G)-1(d)(2)(vi), and (d)(4).
    \37\ See, e.g., Comment Letter of Perkins Coie/Lindquist (Nov.
18, 2010) (``Lindquist Letter''); Comment Letter of Proskauer Rose
LLP (Nov. 16, 2010).
    \38\ See, e.g., Coalition Letter; Comment Letter of Kramer Levin
Naftalis & Frankel LLP (Nov. 17, 2010) (``Kramer Levin Letter'').
    \39\ Rule 202(a)(11)(G)-1(d)(7).
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b. Involuntary Transfers
    As proposed, rule 202(a)(11)(G)-1 prevents an involuntary transfer
of assets to a person who is not a family client (e.g., a bequest to a
friend of assets in a family office-advised private fund) from causing
the family office to lose its exclusion. Under the rule, a family
office may continue to provide advice with respect to such assets
following an involuntary transfer for a transition period of up to one
year.\40\ The transition period permits the family office to orderly
transition that client's assets to another investment adviser or
otherwise restructure its activities to comply with the Advisers Act.
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    \40\ Rule 202(a)(11)(G)-1(b)(1).
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    We proposed to allow the family office to continue to advise a non-
family client for four months following the transfer of assets
resulting from the involuntary event.\41\ A number of commenters argued
that four months is an inadequate period of time to transition
investment advice arrangements as a result of an involuntary
transfer,\42\particularly for illiquid assets such as investments in
private funds.\43\ Some suggested that the family office be required to
transfer the assets as soon as legally and practically feasible.\44\
Others suggested that we treat involuntary transfers in the same manner
as we had proposed treating former family members--permitting their
existing investments to remain with the family office but prohibiting
new investments.\45\ Still others suggested that the transfer period be
lengthened to anywhere from one year to three years.\46\
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    \41\ Proposed rule 202(a)(11)(G)-1(b)(1).
    \42\ See, e.g., Comment Letter of Davis Polk (Nov. 18, 2010)
(``Davis Polk Letter''); Fried Frank Letter.
    \43\ See, e.g., ABA Letter; Comment Letter of Withers Bergman
LLP (Nov. 17, 2010) (``Withers Bergman Letter'').
    \44\ See, e.g., Comment Letter of Barnes & Thornburg LLP (``as
soon as legally and reasonably practical, or in the alternative,
within one year''); Coalition Letter (``as soon as it is both
legally and practically feasible, and in any event would have a
grace period of at least one year'').
    \45\ See, e.g., Fried Frank Letter; Comment Letter of Sidley
Austin LLP (Nov. 18, 2010).
    \46\ See, e.g., AICPA Letter (1 year); Comment Letter of
Bessemer Securities Corporation (Nov. 17, 2010) (``Bessemer
Letter'') (1 year); Davis Polk Letter (3 years); Dechert Letter (2
years); Hogan Letter (2 years); Comment Letter of Kleinberg, Kaplan,
Wolff & Cohen, P.C. (Nov. 17, 2010) (``Kleinberg Letter'') (2
years); Kramer Levin Letter (1 year).
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    After an involuntary transfer, such as a bequest, the office would
no longer be providing advice solely to members of a single family, and
after several such bequests the office could cease to operate in any
way as a family office. Thus, we believe that relief for involuntary
transfers must be temporary. We are persuaded, however, that the four
month transition period we proposed would be inadequate and have
extended the period to one year.\47\
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    \47\ The one year period would not begin to run until completion
of the transfer of legal title to the assets resulting from the
involuntary event. We note also that if the involuntary transferee
does not receive investment advice about securities for compensation
from the family office, then the availability of rule 202(a)(11)(G)-
1 would be unaffected. For a discussion of the Commission's and the
staff's views on when investment advice about securities for
compensation is provided under the Advisers Act, see  Applicability
of the Investment Advisers Act to Financial Planners, Pensions
Consultants, and Other Persons Who Provide Investment Advisory
Services as a Component of Other Financial Services, Investment
Advisers Act Release No. 1092 (Oct. 8, 1987) [52 FR 38400 (Oct. 16,
1987)] (``Release 1092'').
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c. Family Trusts and Estates
    Rule 202(a)(11)(G)-1 treats as a family client certain family
trusts established for testamentary and charitable purposes. We have
expanded the types of trusts that may be treated as a family client in
response to several comments that our proposal failed to take into
account certain aspects of trust and estate planning.\48\ As discussed
in more detail below, these expansions accommodate common estate
planning and charitable giving plans and do not suggest that the family
office is engaging in a commercial enterprise.
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    \48\ See rule 202(a)(11)(G)-1(d)(4). Several commenters
questioned whether the identity of the trustee matters under the
rule. See, e.g., Comment Letter of SchiffHardin LLP/Debra L. Stetter
(Nov. 18, 2010) (``Schiff/Stetter Letter''); Comment Letter of
Vinson & Elkins LLP (Nov. 15, 2010). A trust that meets the
conditions in the rule for qualifying as a family client is
unaffected by whether the trust is managed by an independent
trustee.
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    Irrevocable trusts. The rule treats as a family client any
irrevocable trust in which one or more family clients are the only
current beneficiaries.\49\ We proposed including as a family client

any trust or estate existing for the sole benefit of one or more family
clients.\50\
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    \49\ Rule 202(a)(11)(G)-1(d)(4)(vii).
    \50\ Proposed rule 202(a)(11)(G)-1(d)(2)(iv).
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    As suggested by commenters, the final rule disregards contingent
beneficiaries of trusts, which commenters explained are often named in
the event that all family members are deceased to prevent the trust
from distributing assets to distant relatives or escheating to the
state.\51\ If the contingent beneficiary later becomes an actual
beneficiary and is not a permitted current beneficiary of a family
trust under the exclusion (such as a family friend), the rule's
provisions concerning involuntary transfers allow for an orderly
transition of investment advice regarding those assets away from the
family office.
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    \51\ See, e.g., Comment Letter of Arnold & Porter LLP (Nov. 11,
2010); Bessemer Letter.
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    Also in response to commenters, the rule permits the family office
to advise irrevocable trusts funded exclusively by one or more other
family clients in which the only current beneficiaries, in addition to
other family clients, are non-profit organizations, charitable
foundations, charitable trusts, or other charitable organizations.\52\
Several commenters noted that families often establish and fund trusts
whose sole current beneficiaries are both family clients and public
charities.\53\ Such an entity may not be a ``charitable trust'' as a
technical manner, but we see no reason for treating them differently
under the rule from charitable trusts funded exclusively by family
clients.
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    \52\ Rule 202(a)(11)(G)-1(d)(4)(viii).
    \53\ See, e.g., Comment Letter of Jones Day (Nov. 11, 2010)
(``Jones Day Letter''); Comment Letter of McDermott Will & Emery/
Edwin C. Laurenson (Nov. 18, 2010) (``McDermott/Laurenson Letter'').
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    Other commenters argued that a trust should be permitted to have
current beneficiaries that are not family clients and that the rule
instead should merely require that the trust be for the primary benefit
of one or more family clients.\54\ These commenters argued that the
family office's provision of investment advice to these kinds of trusts
would not change the family office's character and that it is the trust
that is the client of the family office, rather than the beneficiary.
We disagree. Current beneficiaries of a trust are greatly affected by
the nature and quality of investment advice provided to the trust and
would be harmed if there were fraud committed by the family office in
managing trust assets. Even if in small numbers, these individuals and
entities stand to benefit substantially from the protections of the
Advisers Act and do not necessarily have any family ties or investment
sophistication to stand in the Act's stead.
---------------------------------------------------------------------------

    \54\ See, e.g., Comment Letter of Dorsey & Whitney LLP/Bruce A.
MacKenzie (Nov. 17, 2010) (``Dorsey Letter''); McDermott/Laurenson
Letter.
---------------------------------------------------------------------------

    Revocable Trusts. The rule also treats as a family client a
revocable trust of which one or more family clients are the sole
grantors.\55\ Accordingly, a revocable trust may be advised by a family
office relying on the rule regardless of whether the beneficiaries of
the trust are family members. We received several comments that argued
that revocable trusts should be treated differently than irrevocable
trusts, since the grantor of a revocable trust effectively controls the
trust and the beneficiaries of the trust have no reasonable expectation
of obtaining any benefit from the trust until the trust becomes
irrevocable (generally upon the death of the grantor).\56\ Therefore,
the identity of the beneficiaries of the trust should not matter so
long as one or more family clients are the sole grantors of the trust.
We agree that in the case of a revocable trust, the contingent nature
of any beneficiary's expectation that it will benefit from the trust's
assets supports disregarding a revocable trust's beneficiaries under
the exclusion, just as other contingent beneficiaries are disregarded.
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    \55\ Rule 202(a)(11)(G)-1(d)(4)(ix).
    \56\ See, e.g., Davis Polk Letter; Comment Letter of Lee & Stone
(Nov. 17, 2010) (``Lee & Stone Letter'').
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    Estates. The final rule treats as a family client an estate of a
family member, former family member, key employee or former key
employee.\57\ As suggested by several commenters, this provision
permits a family office to advise the executor of a family member's
estate even if that estate will be distributed to (and thus be for the
benefit of) non-family members.\58\ The executor of an estate is acting
in lieu of the deceased family client in managing and distributing the
family client's assets. Therefore, advice to the executor is equivalent
to providing advice to that family client.\59\
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    \57\ Rule 202(a)(11)(G)-1(d)(4)(vi). For former key employees,
the advice is subject to the condition contained in rule
202(a)(11)(G)-1(d)(4)(iv).
    \58\ See, e.g., ABA Letter; AICPA Letter.
    \59\ See, e.g., Comment Letter of K&L Gates/Paul T. Metzger
(Nov. 17, 2010); Comment Letter of Levin Schreder & Carey Ltd (Nov.
18, 2010) (``Levin Schreder Letter'').
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d. Non-Profit and Charitable Organizations
    The rule treats as a family client any non-profit organization,
charitable foundation, charitable trust (including charitable lead
trusts and charitable remainder trusts whose only current beneficiaries
are other family clients and charitable or non-profit organizations),
or other charitable organization, in each case funded exclusively by
one or more other family clients.\60\ We understand that some family
offices currently advise charitable or non-profit organizations that
have accepted funding from non-family clients.\61\ So that these family
offices have sufficient time to transition such advisory arrangements
or restructure the charitable or non-profit organization, we are
including a transition period of until December 31, 2013 before family
offices have to comply with this aspect of the exclusion.\62\
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    \60\ Rule 202(a)(11)(G)-1(d)(4)(v).
    \61\ See, e.g., Foley Letter; Comment Letter of Morgan, Lewis &
Bockius LLP (Nov. 18, 2010) (``Morgan Lewis Letter'').
    \62\ Rule 202(a)(11)(G)-1(e)(1).
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    We had proposed treating as a family client any charitable
foundation, charitable organization, or charitable trust established
and funded exclusively by one or more family members.\63\ Some
commenters recommended that the Commission change the requirement that
charities be established and funded ``by family members'' to ``by
family clients'' because they asserted that family charities are often
established and funded by family trusts, corporations or estates, and
not exclusively by family members.\64\ We agree that making this change
is consistent with our view of the scope of persons that should be
permitted to be served by the family office. Several commenters also
believed that we should not require that a charitable organization be
established by family members or family clients in order to receive
investment advice from the family office under the exclusion because in
some cases such charitable organizations may have been originally
established by distant relatives that do not currently qualify as
``family members.'' \65\ We agree that as long as all the funding
currently held by the charitable organization came solely from family
clients, the individuals or entities that originally established it are
not of import for our policy rationale.\66\ We have changed the rule
accordingly.
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    \63\ Proposed rule 202(a)(11)(G)-1(d)(2)(iii).
    \64\ See, e.g., Dorsey Letter; Levin Schreder Letter.
    \65\ See, e.g., Comment Letter of Goodwin Procter LLP (Nov. 17,
2010) (``Goodwin Letter''); Comment Letter of Willkie Farr &
Gallagher LLP (Nov. 17, 2010).
    \66\ We note that only the actual contributions to the non-
profit or charitable organization need be examined for this purpose,
and not any income, gains or losses relating to those contributions.
For purposes of determining whether funding provided by a non-family
client to the non-profit or charitable organization is ``currently
held'' by the organization, the non-profit or charitable
organization may offset any spending by the organization occurring
at any time in the year of that non-family client contribution or
any subsequent year against the non-family client contribution
(i.e., the organization may treat the non-family client
contributions as the first funding spent).

---------------------------------------------------------------------------

    A number of commenters stated that ``charitable organization'' can
have varying meanings when considered under trust and estate law versus
under tax law.\67\ Some of these commenters suggested that we add the
term ``non-profit organization'' to ensure that we capture what is
generally considered a charitable organization under both trust and tax
law and based on their view that, as long as the non-profit
organization is solely funded by family clients, the family office
providing it with investment advice under the exclusion should not be
of concern as a policy matter.\68\ We intended to broadly capture
charitable and non-profit organizations as commonly understood under
both trust law and tax law and have modified the rule as suggested.
Other commenters asked that we clarify that charitable lead trusts and
charitable remainder trusts are included as family clients under the
exclusion.\69\ The rule we are adopting today clarifies that such
trusts are included if their sole current beneficiaries are other
family clients and charitable or non-profit organizations and if they
meet the terms of other charitable organizations that may be advised by
the family office--namely that they are funded exclusively by other
family clients.\70\ We believe this treatment of charitable lead trusts
and charitable remainder trusts ensures that they are treated
consistently with other trusts and charitable or non-profit
organizations under the exclusion.
---------------------------------------------------------------------------

    \67\ See, e.g., Goodwin Letter; Kozusko Letter.
    \68\ See, e.g., Coalition Letter; Kozusko Letter.
    \69\ See, e.g., Dechert Letter; Fried Frank Letter. Charitable
lead trusts are entities in which a charity receives payments from
the trust for a specified period as a current beneficiary, but the
remainder of the trust is distributed to specified beneficiaries.
Charitable remainder trusts are entities in which specified
individuals or entities receive payments from the trust for a
specified period as a current beneficiary, but a charity receives
the remainder of the trust.
    \70\ See our discussion about family trusts in section II.A.1.c
of this Release.
---------------------------------------------------------------------------

    Finally, several commenters stated that the Commission should
permit the family office to provide investment advice under the
exclusion to charitable organizations even if funded in part by non-
family clients.\71\ They argued that because the contributed assets
will not be invested for the benefit of the donors, as long as the
family controlled the charitable entity or was its substantial
contributor, it served no public policy purpose to preclude third party
contributions.\72\ We are leaving this aspect of the proposal unchanged
because a non-profit or charitable organization that currently holds
non-family funding lacks the characteristics necessary to be viewed as
a member of a family unit. Permitting such organizations to be advised
by a family office would be inconsistent with the exclusion's
underlying rationale that recognizes that the Advisers Act is not
designed to regulate families managing their own wealth.
---------------------------------------------------------------------------

    \71\ See, e.g., Foley Letter; Kleinberg Letter.
    \72\ See, e.g., Ropes & Gray Letter; Skadden Letter.
---------------------------------------------------------------------------

    As noted above, however, we do recognize that some non-profit or
charitable organizations advised by family offices have accepted non-
family client funding. Such organizations may need time to spend the
non-family funding so that none of it is ``currently held'' by the
organization or to transition advisory arrangements. The rule provides
until December 31, 2013 before this condition to the exclusion becomes
applicable to family offices (i.e., if the only reason the family
office would not meet the exclusion is because it advises a non-profit
or charitable organization that currently holds non-family client
funding, the family office generally may nevertheless rely on the
exclusion until December 31, 2013).\73\ To rely on this transition
period, a non-profit or charitable organization advised by the family
office must not accept any additional funding from any non-family
clients after August 31, 2011, except that during the transition period
the non-profit or charitable organization may accept funding provided
in fulfillment of any pledge made prior to August 31, 2011.
---------------------------------------------------------------------------

    \73\ Rule 202(a)(11)(G)-1(e)(1).
---------------------------------------------------------------------------

e. Other Family Entities
    To allow the family office to structure its activities through
typical investment structures, rule 202(a)(11)(G)-1 treats as a family
client any company including a pooled investment vehicle, that is
wholly owned, directly or indirectly, by one or more family clients and
operated for the sole benefit of family clients.\74\ Some commenters
objected to the requirement in our proposal that these entities be
wholly owned and controlled by, and operated for the sole benefit of,
family clients to qualify for the exclusion.\75\ These commenters
generally suggested modifying this aspect of the family client
definition to require only that the entity be majority owned or
controlled and operated for the primary benefit of family clients or
similar variations.\76\ One commenter suggested such an expansion to
allow employees of the family that do not qualify as ``key employees''
to have a management role in the entity.\77\ Others believed that non-
family clients more broadly should be able to have a greater role in
family office-advised entities.\78\
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    \74\ Rule 202(a)(11)(G)-1(d)(4)(xi). Under rule 202(a)(11)(G)-
1(d)(2), control is defined as the power to exercise a controlling
influence over the management or policies of an entity, unless such
power is solely the result of being an officer of such entity. If
any of these companies are pooled investment vehicles, they must be
exempt from registration as an investment company under the
Investment Company Act of 1940 because the Advisers Act requires
that an adviser to a registered investment company must register.
See 15 U.S.C. 80b-3a(a)(1)(B).
    \75\ See, e.g., Blum Letter; Kramer Levin Letter (suggesting
that the requirement be modified to require only that the entity be
controlled and 80% owned by family clients to qualify as a family
client).
    \76\ See, e.g., Coalition Letter; Kramer Levin Letter. See also
Levin Schreder Letter (suggesting that the entity be controlled and
substantially owned (80%) by family clients); Miller Letter
(suggesting that the entity be wholly owned or controlled by and
operated for the primary benefit of family clients).
    \77\ Morgan Lewis Letter.
    \78\ See, e.g., Kramer Levin Letter; Miller Letter.
---------------------------------------------------------------------------

    We believe that the elements of ownership and benefit are important
to ensuring that the policy objectives underlying the family office
exclusion are preserved. If non-family clients own a portion of such an
entity, they have a vested interest in how the assets of that entity
are managed--it is the source of their ownership stake's value. This is
also true of a non-family client who is a beneficiary of that entity.
As long as the entity is wholly owned by and for the sole benefit of
family clients, however, we agree that, as with family trusts and
family charitable organizations, the entity having non-family client
control does not change that family clients are the ultimate
beneficiaries of the investment advice, and thus we have eliminated the
requirement for control by family clients in the final rule.
f. Key Employees
    The final rule treats certain key employees of the family office,
their estates, and certain entities through which key employees may
invest as family clients so that they may receive investment advice
from, and participate in investment opportunities provided by, the
family office. More specifically, the final rule permits the family
office to provide investment advice to any natural person (including
any key employee's spouse or spousal equivalent who holds a joint,
community property or other similar shared ownership interest with that
key employee) who is (i) an executive officer, director, trustee,
general partner,

or person serving in a similar capacity at the family office or its
affiliated family office or (ii) any other employee of the family
office or its affiliated family office (other than an employee
performing solely clerical, secretarial, or administrative functions)
who, in connection with his or her regular functions or duties,
participates in the investment activities of the family office or
affiliated family office, provided that such employee has been
performing such functions or duties for or on behalf of the family
office or affiliated family office, or substantially similar functions
or duties for or on behalf of another company, for at least twelve
months.\79\ The final rule also permits the family office to advise
certain trusts of key employees, as further described below. Finally,
in addition to receiving direct advice from the family office, key
employees (because they are ``family clients'') may indirectly receive
investment advice through the family office by their investment in
family office-advised private funds, charitable organizations, and
other family entities, as described in previous sections of this
Release.
---------------------------------------------------------------------------

    \79\ Rule 202(a)(11)(G)-1(d)(8).
---------------------------------------------------------------------------

    Many commenters supported the inclusion of key employees as family
clients.\80\ They agreed that permitting investment participation by
key employees of family offices would align their interests with those
of family members and enable family offices to attract highly skilled
investment professionals who may not otherwise be attracted to work at
a family office.\81\
---------------------------------------------------------------------------

    \80\ See, e.g., ABA Letter; Coalition Letter.
    \81\ Id.
---------------------------------------------------------------------------

    Some commenters, however, urged us to include key employees of
family entities other than the family office as family clients.\82\
Some reasoned that since the definition of key employee is based on the
knowledgeable employee standard used in Investment Company Act rule 3c-
5,\83\ it should be expanded to cover key employees of any entity
related to the family office because rule 3c-5 allows knowledgeable
employees to be employees of certain affiliated entities.\84\ Such an
approach would extend Investment Company Act rule 3c-5 beyond its
intended scope. That rule permits knowledgeable employees of affiliated
entities to count as knowledgeable employees of the covered private
fund only if the affiliated entity is participating in the investment
activities of the covered private fund.\85\ Because of this role, these
individuals could be presumed to have sufficient financial
sophistication, experience, and knowledge to evaluate investment risks
and to take steps to protect themselves, even without the protection of
the Investment Company Act.\86\
---------------------------------------------------------------------------

    \82\ See, e.g., Fried Frank Letter; NY Bar Letter; Skadden
Letter.
    \83\ See Proposing Release, supra note 2, at n.46 and
accompanying text.
    \84\ See, e.g., NY Bar Letter; Skadden Letter.
    \85\ See Section III.B of Privately Offered Investment
Companies, Investment Company Act Release 22597 (April 3, 1997) [62
FR 17512 (April 7, 1997)] (``3(c)(7) Release'').
    \86\ See 3(c)(7) Release, supra note 85, at Section III.A.2.B.
---------------------------------------------------------------------------

    Many family entities advised by the family office, however, are not
involved in providing investment advisory services to the family office
or its clients and rather have principal business activities in a
variety of industries unrelated to investment management. There is no
reason to expect that their key employees have a level of knowledge and
experience in financial matters sufficient to protect themselves
without the protections afforded by the Advisers Act.\87\ We agree,
however, that if a person qualifies as a knowledgeable employee of an
affiliated family office, that those employees should be in a position
to protect themselves in receiving investment advice from a family
office excluded from regulation under the Advisers Act.\88\ We have
modified the rule to include knowledgeable employees of an affiliated
family office in the definition of key employee.\89\
---------------------------------------------------------------------------

    \87\ As we explained when we adopted rule 3c-5, employees who
simply ``obtain information'' but do not ``participate in'' the
investment activities of the fund are not included in the definition
of knowledgeable employee because they may not have investment
experience. See 3(c)(7) Release, supra note 85, at Section III.B.
    \88\ Some commenters pointed out that a family may establish
more than one family office for tax or other structuring reasons and
recommended that the definition of key employee include employees of
multiple family offices that serve the same family. See, e.g., Davis
Polk Letter; Fried Frank Letter.
    \89\ Rule 202(a)(11)(G)-1(d)(8). ``Affiliated family office'' is
defined as ``a family office wholly owned by family clients of
another family office and that is controlled (directly or
indirectly) by one or more family members of such other family
office and/or family entities affiliated with such other family
office and has no clients other than family clients of such other
family office.'' Rule 202(a)(11)(G)-1(d)(1).
---------------------------------------------------------------------------

    A few commenters suggested that we include as family clients long-
term employees of the family, even if they do not meet the
knowledgeable employee standard.\90\ Expanding the family client
definition in this way would exclude from the Advisers Act's
protections individuals for whom we have no basis on which to conclude
that they can protect themselves.\91\ We therefore decline to make the
change suggested by commenters.
---------------------------------------------------------------------------

    \90\ See, e.g., NY Bar Letter; Skadden Letter. Similarly, a few
commenters suggested that we define key employees using the
accredited investor standard from Regulation D under the Securities
Act of 1933. See, e.g., Comment Letter of Schulte Roth & Zabel LLP
(Dec. 8, 2010); Lee & Stone Letter. We believe the knowledgeable
employee standard more accurately encompasses employees that are
likely to be financially sophisticated and to not need the
protections of the Advisers Act.
    \91\ Exemptive orders issued in the past 10 years generally did
not permit family offices to provide investment advice to non-key
employees. The two exemptive orders issued to family offices
permitting such advice contained grandfathering provisions that
restricted these employees' investments to the existing ones and
prohibited the advisers from establishing new advisory relationships
with a non-family member. Adler Management, L.L.C., Investment
Advisers Act Release Nos. 2500 (Mar. 21, 2006) [71 FR 15498 (Mar.
28, 2006)] (notice) and 2508 (Apr. 14, 2006) (order); Longview
Management Group LLC, Investment Advisers Act Release Nos. 2008
(Jan. 3, 2002) [67 FR 1251 (Jan. 9, 2002)] (notice) and 2013 (Feb.
7, 2002) (order).
---------------------------------------------------------------------------

    We have made two other changes to definitions relating to key
employees in response to recommendations from commenters. First, in
response to commenters and to reduce uncertainty identified by
commenters we have included a definition of ``executive officer,''
which is virtually identical to the definition of the same term used in
Advisers Act rule 205-3 and Investment Company Act rule 3c-5.\92\
Similar to those rules, this definition delineates executive officers
that should have enough financial experience and sophistication to
invest without the protection of the Advisers Act. Second, the final
rule clarifies that family clients include trusts of which the key
employee generally is the sole contributor to the trust and the sole
person authorized to make decisions with respect to the trust.\93\
---------------------------------------------------------------------------

    \92\ Commenters recommending this change include the Fried Frank
Letter and the Skadden Letter. Paragraph (d)(3) of the rule,
however, differs from rule 205-3 and section 3c-5 in that it does
not include executives in charge of sales because such a function is
not applicable to a family office.
    \93\ Rule 202(a)(11)(G)-1(d)(4)(x). The grantor of the trust
could also be a current or former spouse or spousal equivalent of
the key employee if, at the time of contribution, the spouse or
spousal equivalent held a joint, community property, or other
similar shared ownership interest in the trust with the key
employee.
---------------------------------------------------------------------------

    Commenters recommended that we permit a trust established by a key
employee with his or her lineal descendants or immediate family members
as beneficiaries to be a family client, to allow typical estate
planning by key employees.\94\ We do not believe it is appropriate to
broadly permit trusts for which the key employee is not the sole person
authorized to make investment decisions to be a family client. Since a
non-family client will be

making investment decisions for this type of trust, and its
beneficiaries are not family members or key employees, this type of
trust stands to benefit from the protections of the Advisers Act.
However, we are persuaded that it is appropriate to allow the family
office to advise trusts for which the key employee is the sole person
making investment decisions.\95\ Permitting the family office to
provide advice to this type of entity tracks a parallel concept
included in the definition of ``qualified purchaser'' under the
Investment Company Act \96\ and thus creates consistency in entities
considered not to need investor protection under our rules because
investment decisions are made solely by individuals that we have
already concluded should have sufficient financial experience and
sophistication to act without the protection provided by our
regulations.
---------------------------------------------------------------------------

    \94\ See, e.g., Withers Bergman Letter (suggesting lineal
descendants); Kleinberg Letter (suggesting immediate family
members).
    \95\ Rule 202(a)(11)(G)-1(d)(4)(x).
    \96\ Section 2(a)(51)(A)(iii) of the Investment Company Act.
---------------------------------------------------------------------------

    Some commenters urged us to even further expand the definition of
key employee to include their spouses and spousal equivalents (even if
not with respect to joint property) or all of their immediate family
members.\97\ There is no reason to believe that the key employee's
spouse or immediate family members independently have the financial
sophistication and experience to protect themselves when receiving
investment advice from the family office. Such individuals are not
considered to be knowledgeable employees under Advisers Act rule 205-3
or Investment Company Act rule 3c-5. We see no basis for following a
different approach in this context. The premise of the rule is to allow
families to manage their own wealth. Key employee receipt of family
office advice is permitted because their position and experience should
enable them to protect themselves and to allow family offices to
attract talented investment professionals as employees. This underlying
rationale does not support as a general rule including key employees'
family members unless there is a joint property interest involved.
---------------------------------------------------------------------------

    \97\ See, e.g., Kleinberg Letter; Kramer Levin Letter.
---------------------------------------------------------------------------

    Several commenters disagreed with the 12-month experience
requirement for key employees who are not executive officers,
directors, trustees, general partners, or persons serving in similar
capacities of the family office, arguing that employees a family office
would hire into these roles would presumably possess adequate knowledge
and sophistication in financial matters regardless of whether he or she
met the 12-month experience requirement.\98\ We believe that the 12-
month experience requirement is an important part of limiting employees
who receive investment advice without the protections of the Advisers
Act (or family membership) to those employees that are likely to be in
a position or have a level of knowledge and experience in financial
matters sufficient to be able to evaluate the risks and take steps to
protect themselves. In addition, commenters' argument is equally
applicable in a private fund or performance fee context, and we see no
basis for distinguishing treatment of key employees of family offices
from key employees of private funds or qualified client advisers under
Investment Company Act rule 3c-5 and Advisers Act rule 205-3,
respectively.\99\ We therefore adopt this requirement as proposed.
---------------------------------------------------------------------------

    \98\ See, e.g., ABA Letter; Comment Letter of Cadwalader,
Wickersham & Taft LLP (Nov. 18, 2010) (``Cadwalader Letter'').
    \99\ This analysis is consistent with our analysis in the
3(c)(7) Release where we stated that the 12-month experience
requirement was designed to limit investments to employees that have
the requisite experience to appreciate the risks of investing in the
fund. 3(c)(7) Release, supra note 85, at Section III.B. As is the
case under rule 3c-5, an employee need not work for a particular
family office for the entire 12-month period. The time performing
substantially similar functions or duties by that employee for or on
behalf of another company may be counted toward the 12 month
requirement. See 3(c)(7) Release, supra note 85.
---------------------------------------------------------------------------

    Finally, as proposed, the final rule prohibits key employees
(including their trusts and controlled entities) from making additional
investments through the family office upon the end of the key
employees' employment by the family office, but will not require former
key employees to liquidate or transfer investments held through the
family office to avoid imposing possible adverse tax or investment
consequences that might otherwise result.\100\ While some commenters
supported this limitation,\101\ one commenter expressed objections to
it, asserting that former key employees of family offices often
continue to have a close relationship with the family and it should be
the family's decision whether to terminate their family office's
services to them.\102\ We are including key employees as family clients
because their particular role in the family office causes us to believe
that the employee should be in a position to protect him or herself
without the need for the protections of the Advisers Act. Once the
employee is no longer in that role, this policy rationale no longer
holds true to the same degree. Accordingly, we are adopting this aspect
of the rule as proposed.\103\
---------------------------------------------------------------------------

    \100\ Rule 202(a)(11)(G)-1(d)(4)(iv).
    \101\ See, e.g., ABA Letter; Coalition Letter.
    \102\ Schiff/Stetter Letter.
    \103\ A number of commenters requested that we clarify the
extent to which a family office could provide investment advice to
an employee benefit plan or pension plan sponsored by the family
office without registering under the Act. See, e.g., Comment Letter
of the American Benefits Council/Committee on the Investment of
Employee Benefit Assets (Nov. 18, 2010); Coalition Letter; Withers
Bergman Letter. In our view, a family office or other employer that
merely establishes an employee benefit plan or pension plan and
selects one or more investment advisers for that plan would not be
an investment adviser subject to the Advisers Act because it would
not be an ``investment adviser'' within the meaning of section
202(a)(11). A family office (as defined in rule 202(a)(11)(G)-1)
thus would not be required to register under the Act if, in addition
to providing advice to family clients, its advisory activities are
so limited. However, a family office providing additional advisory
services to an employee benefit plan all of whose participants are
not family clients may be required to register under the Act unless
another exemption is available.
---------------------------------------------------------------------------

2. Ownership and Control
    The final rule requires that, to qualify for the exclusion from
regulation under the Advisers Act, the family office must be wholly
owned by family clients and exclusively controlled, directly or
indirectly, by one or more family members or family entities.\104\ Our
final rule expands who may own the family office from ``family
members,'' as proposed, to ``family clients.'' However, the rule
continues to require that control of the family office remain, directly
or indirectly, with family members and their related entities.
---------------------------------------------------------------------------

    \104\ Rule 202(a)(11)(G)-1(b)(2). We have added the word
``exclusively'' to clarify that ``control'' cannot be shared with
individuals or companies that are not family members or family
entities. A family entity is defined as any of the trusts, companies
or other entities set forth in paragraphs (v), (vi), (vii), (viii),
(ix), or (xi) of subsection (d)(4) of rule 202(a)(11)(G)-1, but
excluding key employees and their trusts from the definition of
family client solely for purposes of this definition.
---------------------------------------------------------------------------

    Commenters urged us to expand both who could own the family office
and who could control a family office under the rule.\105\ Some stated
that many family offices are owned by family trusts, and that allowing
family members to indirectly own and control the family office did not
provide sufficient clarity that such a trust could own and control the
family office.\106\ Commenters also pointed out that many family
offices permit their employees to own equity interest in family offices
as an incentive to attract and retain talented employees, and urged us
not to prohibit such arrangements.\107\ These

commenters asked us to explicitly broaden the ownership requirement
from ``family members'' to ``family clients'' to permit these types of
arrangements. Other commenters argued more broadly that the ``wholly
owned and controlled'' aspect of the proposed definition does not
adequately reflect the variety of organizational arrangements already
in place at family offices and that the Commission should focus as a
policy matter solely on whether the family office is being operated for
the benefit of members of a single family.\108\
---------------------------------------------------------------------------

    \105\ See, e.g., Coalition Letter; Comment Letter of McDermott
Will & Emery/Richard L. Dees (Nov. 18, 2010) (``McDermott Dees
Letter'').
    \106\ See, e.g., Dorsey Letter; Comment Letter of McGuire Woods
LLP (Nov. 18, 2010).
    \107\ See, e.g., AICPA Letter; Davis Polk Letter; Dechert
Letter.
    \108\ See, e.g., Coalition Letter; Levin Schreder Letter;
McDermott Dees Letter.
---------------------------------------------------------------------------

    Commenters persuaded us to expand who may own the family office
from ``family members'' to ``family clients.'' This change is
consistent with the intent behind our proposed language (which
contemplated that the family could own the family office indirectly)
and more clearly allows family members to structure their ownership of
the family office for tax or other reasons. We also agree with
suggestions that the rule permit key employees to own a non-controlling
stake in the family office to serve as part of an incentive
compensation package for key employees. We remain convinced, however,
that for our core policy rationale to be fulfilled--that a family
office is essentially a family managing its own wealth--the family,
directly or indirectly, should control the family office. Accordingly,
the final rule provides that while family clients may own the family
office, family members and family entities (i.e., their wholly owned
companies or family trusts) must control the family office.\109\
---------------------------------------------------------------------------

    \109\ We note that, as proposed, we are not limiting the
exclusion to a family office that is not operated for the purpose of
generating a profit. We also note that some family offices may be
structured such that all or a portion of family client investment
gains are distributed as dividends from the family office (when
family clients own the family office) and that a not-for-profit
requirement would preclude this family office structure. We were
persuaded by several commenters who cautioned against limiting the
exclusion for family offices to those that operate on a not-for-
profit basis, arguing that it would be difficult to administer and
is unnecessary given the limited clientele that a family office may
advise and rely on the exclusion. See, e.g., AICPA Letter; Davis
Polk Letter; Kozusko Letter.
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3. Holding Out
    As proposed, the final rule prohibits a family office relying on
the rule from holding itself out to the public as an investment
adviser.\110\ Commenters supported this prohibition.\111\ Holding
itself out to the public as an investment adviser suggests that the
family office is seeking to enter into typical advisory relationships
with non-family clients, and thus is inconsistent with the basis on
which we have provided exemptive orders and are adopting this
rule.\112\
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    \110\ Rule 202(a)(11)(G)-1(b)(3). For purposes of this rule,
despite language under rule 203(b)(3)-1(c) regarding holding out, a
family office could not market non-public offerings to persons or
entities that are not family clients since such activity would not
be consistent with a family office that only provides investment
advice to family clients and does not hold itself out to the public
as an investment adviser.
    \111\ See, e.g., Coalition Letter; ABA letter.
    \112\ See footnote 56 of the Proposing Release, supra note 2. In
response to one commenter's request, we clarify that a family office
that is currently registered as an investment adviser and expects to
de-register in reliance on rule 202(a)(11)(G)-1, will not be
prohibited from relying on the rule solely because it held itself
out to the public as an investment adviser while it was registered
under the Advisers Act. See Dechert Letter.
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4. Multifamily Offices
    The exclusion we are adopting today does not extend to family
offices serving multiple families, as urged by several commenters.\113\
Comments we received did not persuade us that the rule could be drafted
to distinguish in any meaningful way between such offices and family-
owned commercial advisory firms that offer their services to other
families.\114\ Moreover, they did not persuade us that the protections
of the Advisers Act, including the application of the anti-fraud
provisions of the Act, would not be relevant to a family obtaining
services from an office established by another family with which it
could have conflicts of interest. Families, of course, may have
conflicts among members leading to disputes. But, as discussed in our
Proposing Release, the premise of the exclusion is that such disputes
could be worked out within the family unit or, if necessary, by state
courts under laws that facilitate resolution of family disputes. In a
multifamily office, these clients would be without the protections of
the Advisers Act or family relationships for preventing or handling any
discriminatory or fraudulent treatment of different families.
---------------------------------------------------------------------------

    \113\ See, e.g., Cadwalader Letter; Comment Letter of Lowenstein
Sandler PC (Nov. 12, 2010); Comment Letter of Stradling Yocca
Carlson & Rauth (Nov. 16, 2010).
    \114\ We note that under section 208(d) of the Advisers Act, it
is unlawful for any person indirectly to do anything that would be
unlawful for such person to do directly under the Advisers Act or
rules thereunder. Therefore, if several families that are unrelated
through a common ancestor within 10 generations have established a
separate family office for each of the families, but have staffed
these family offices with the same or substantially the same
employees such employees are managing a de facto multifamily office.
As a result, these family offices may not claim the family office
exclusion.
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B. Grandfathering Provisions, Transition Period and Effect of Rule on
Previously Issued Exemptive Orders

    The Dodd-Frank Act prohibits us from excluding from our definition
of family office persons not registered or required to be registered on
January 1, 2010 that would meet all of the required conditions under
rule 202(a)(11)(G)-1 but for their provision of investment advice to
certain clients specified in section 409(b)(3) of the Dodd-Frank
Act.\115\ We have incorporated this required grandfathering into
paragraph (c) of our rule.\116\ We received two comments on such
incorporation. One commenter suggested that we incorporate the
grandfathering provision only by reference to section 409(b)(3) of the
Dodd-Frank Act.\117\ We believe that incorporating the grandfathering
provision of Dodd-Frank Act is a more user friendly approach for those
attempting to comply with the Advisers Act compared to directing them
to look up the grandfathering provision in a separate statute. Another
commenter requested clarification of the Dodd-Frank grandfathering
provision.\118\ We believe clarification or interpretation of this
provision would involve applying the provision to specific facts, and
this release is not an appropriate means to provide such a
clarification. Therefore, we are adopting paragraph (c) of the rule as
proposed.
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    \115\ See section 409(b)(3) and (c) of the Dodd-Frank Act.
    \116\ We note that section 409(c) of the Dodd-Frank Act provides
that ``a family office that would not be a family office, but for
section 409(b)(3) of the Dodd-Frank Act, shall be deemed to be an
investment adviser for the purposes of paragraphs (1), (2) and (4)
of section 206 of the Advisers Act.'' This provision is reflected in
paragraph (3) of rule 202(a)(11)(G)-1(c).
    \117\ Coalition Letter.
    \118\ AICPA Letter.
---------------------------------------------------------------------------

    Several commenters suggested that we provide a transition period to
allow family offices time to determine whether they meet the exclusion
or to restructure or register under the Advisers Act if they do
not.\119\ We recognize that the time period between the adoption of
this rule and the repeal of the private adviser exemption from
registration contained in section 203(b)(3) of the Advisers Act,
effective July 21, 2011, may not be sufficient for every family office
to conduct such an evaluation, restructure or register. Accordingly,
the rule provides that family offices currently exempt from

registration under the Advisers Act in reliance on the private adviser
exemption and that do not meet the new family office exclusion are not
required to register with the Commission as investment advisers until
March 30, 2012.\120\ We believe that this aspect of the rule is
necessary or appropriate in the public interest and is consistent with
the protection of investors, and the purposes fairly intended by the
policy and provisions of the Advisers Act.
---------------------------------------------------------------------------

    \119\ See, e.g., Lee & Stone Letter (to provide time to
restructure certain ``club deals'' in which clients of the family
office may have engaged); Comment Letter of Paul, Hastings, Janofsky
& Walker LLP (Nov. 17, 2010) (requesting an expanded grandfather
provision to allow more time for an orderly restructuring); Ropes &
Gray Letter.
    \120\ Rule 202(a)(11)(G)-1(e)(2). See also Letter from Robert E.
Plaze, Associate Director, Division of Investment Management, U.S.
Securities and Exchange Commission, to David Massey, Deputy
Securities Administrator, North Carolina Securities Division and
President, NASAA (Apr. 8, 2011) available at http://www.sec.gov/rules/proposed/2010/ia-3110-letter-to-nasaa.pdf (stating that the
Commission would potentially consider extending the date by which
these advisers must register and come into compliance with the
obligations of a registered adviser until the first quarter of
2012). Because initial applications for registration can take up to
45 days to be approved, family offices that determine they will need
to register with the Commission should file a complete application,
both Part 1 and a brochure(s) meeting the requirements of Part 2 of
Form ADV, at least by February 14, 2012.
---------------------------------------------------------------------------

    We have determined not to rescind exemptive orders previously
issued to family offices under section 202(a)(11)(G) of the Advisers
Act. As discussed above, the Commission has issued orders under section
202(a)(11)(G) of the Advisers Act to certain family offices declaring
them and their employees acting within the scope of their employment to
not be investment advisers within the intent of the Act. In some areas
these exemptive orders may be slightly broader than the rule we are
adopting today, and in other areas they may be narrower. We proposed
not to rescind these exemptive orders and requested comment. All
commenters addressing this subject supported our proposal. Thus, family
offices currently operating under these orders may continue to rely on
them.

III. Paperwork Reduction Act

    Rule 202(a)(11)(G)-1 does not contain a ``collection of
information'' requirement within the meaning of the Paperwork Reduction
Act of 1995.\121\ Accordingly, the Paperwork Reduction Act is not
applicable.
---------------------------------------------------------------------------

    \121\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

IV. Economic Analysis

    We are adopting rule 202(a)(11)(G)-1 in anticipation of the Dodd-
Frank Act's repeal of section 203(b)(3) of the Advisers Act, which
provides an exemption from registration for certain private fund
advisers, and in light of the Dodd-Frank Act's directive that the
Commission define family offices that will be excluded from regulation
under the Advisers Act.\122\ The rule we are adopting today defines a
family office as a company that, with limited exceptions, has only
family clients, is wholly owned by family clients and controlled by
family members and/or family entities, and does not hold itself out to
the public as an investment adviser. The definition of family office
provided in the rule is designed to limit the exclusion from Advisers
Act regulation solely to those private advisory offices that we believe
the Advisers Act was not designed to regulate and to prevent
circumvention of the Adviser Act's protections by firms that are
operating as commercial investment advisory firms.
---------------------------------------------------------------------------

    \122\ See section 409 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    As a preliminary matter, and as discussed earlier, as a result of
the repeal of section 203(b)(3) of the Advisers Act a number of private
advisory offices that may consider themselves to be family offices and
that are not currently registered as investment advisers in reliance on
that provision will be required to register under the Advisers Act
after July 21, 2011 unless those advisers are eligible for a new
exemption. The benefits and costs associated with the elimination of
section 203(b)(3) are attributable to the Dodd-Frank Act. However,
while Congress also adopted a family office exclusion, it directed the
Commission to adopt rules defining the terms of that exclusion, subject
to the terms of section 409 of the Dodd-Frank Act, and thus we discuss
below the costs and benefits of our determination of which private
advisory offices are deemed family offices and therefore excluded from
regulation.
    In proposing the rule, we requested comment on all aspects of our
cost benefit analysis, including the accuracy of our estimates of costs
and benefits, identification and assessment of any costs and benefits
not discussed in our analysis, and data relevant to these costs and
benefits.\123\ While some commenters predicted that many private
advisory offices would have to restructure or apply for an exemptive
order and thus incur substantial costs if the definition of family
office were not expanded,\124\ no estimates of such costs were
provided. We discuss these comments more specifically below.
---------------------------------------------------------------------------

    \123\ Section V of the Proposing Release.
    \124\ See, e.g., Jones Day Letter; Withers Bergman Letter.
---------------------------------------------------------------------------

A. Benefits

    As discussed in the Proposing Release, we expect that rule
202(a)(11)(G)-1 will result in several important benefits. First,
family offices, as defined by this rule, will not be subject to the
mandatory costs of registering with the Commission as an investment
adviser and the associated compliance costs. Some investment advisers
currently registered with us may qualify as family offices under the
rule and have the choice to deregister. These reduced regulatory costs
should result in direct cost savings to these family offices, and thus
to their family clients.
    Second, the rule will benefit family offices, as defined by the
rule, and their clients by eliminating the costs of seeking (and
considering) individual exemptive orders. Without rule 202(a)(11)(G)-1,
the repeal of the exemption contained in section 203(b)(3) would result
in a great number of family offices having to apply for exemptive
relief and thus incurring significant costs for these family offices
and their clients. We estimate that a typical family office will incur
legal fees of $200,000 on average to engage in the exemptive order
application process, including preparation and revision of an
application and consultations with Commission staff.\125\ The rule will
benefit family offices and their family clients by eliminating the
costs of applying to the Commission for an exemptive order that the
Commission would grant and the associated uncertainty that they might
not obtain such an order. Estimates of the number of family offices in
the United States vary widely--ranging from less than 1,000 to
5,000.\126\ If all of these family offices qualify for the new
exclusion and otherwise would have applied for an exemptive order, the
rule will provide a benefit ranging from $200 million to $1 billion by
eliminating the costs of applying for those exemptive orders.\127\
---------------------------------------------------------------------------

    \125\ We included the same estimate in the Proposing Release. We
received no comments on this estimate.
    \126\ See, e.g., Pamela J. Black, The Rise of the Multi-Family
Office, Financial Planning (Apr. 27, 2010) (estimating 2,500 to
3,000 single family offices); Robert Frank, Minding the Money--
`Family Office' Chiefs Get Plied with Perks; Club Membership, Jets,
The Wall Street Journal (Sept. 7, 2007), at W2 (estimating 3,000 to
5,000 family offices in the United States); Second Annual Single-
Family Office Study, the Family Wealth Alliance (2010) (estimating
2,500 U.S.-based single family offices); Creating a Single Family
Office for Wealth Creation and Family Legacy Sustainability, Family
Office Association (2009) (estimating 1,000 single family offices
worldwide).
    \127\ $200,000 cost of applying for an exemptive order
multiplied by a range of 1,000 family offices to 5,000 family
offices.
---------------------------------------------------------------------------

    Finally, the rule also will benefit the Commission by freeing staff
resources from reviewing and processing large

numbers of family office exemptive applications resulting from the
repeal of section 203(b)(3) of the Advisers Act that the Commission
would grant and allowing the staff to target its work more efficiently,
and thus will indirectly benefit public investors.

B. Costs

    We recognize that some private advisory offices that today consider
themselves to be family offices likely will incur expenses to evaluate
whether they meet the terms of the exclusion. One commenter estimated
that such an office would incur expenses of $25,000 to $35,000 to hire
a consulting firm or law firm to determine if it meets the exclusion
provided by the rule.\128\ If all family offices estimated to exist in
the United States noted above \129\ hire a consulting firm or law firm
to determine if they meet the exclusion at such a cost, they would
incur an aggregate cost ranging from $25 million to $175 million for
this evaluation.\130\
---------------------------------------------------------------------------

    \128\ Lindquist Letter.
    \129\ See supra note 126 and accompanying text.
    \130\ ($25,000 evaluation cost) x (1,000 family offices) = $25
million. ($35,000 evaluation cost) x (5,000 family offices) = $175
million.
---------------------------------------------------------------------------

    Some of these private advisory offices may decide to restructure
their businesses to meet the conditions imposed by rule 202(a)(11)(G)-
1. Many commenters stated that the proposed definition of family office
was too narrow, and that if it was adopted without changes, absent an
exemptive order, many such advisory offices would be required to
restructure themselves in order to qualify as family offices.\131\
Restructuring or obtaining an exemptive order, some commenters
asserted, would result in substantial costs to the advisory office and
its clients.\132\ We expect that each such office will weigh the costs
of such restructuring under its particular circumstances against the
costs and burdens of registration or seeking an exemptive order.
---------------------------------------------------------------------------

    \131\ See, e.g., Lindquist Letter; Lee & Stone Letter; Withers
Bergman Letter.
    \132\ See, e.g., Coalition Letter; Lee & Stone Letter.
---------------------------------------------------------------------------

    Our final rule broadens the definition of ``family client'' and
``family office'' from that proposed, particularly concerning
permissible clients of the family office and ownership of the family
office.\133\ As a result, we expect that substantially fewer private
advisory offices will need to confront these trade-offs than would have
been the case under our proposal. Nevertheless, we recognize that some
offices may decide to restructure their businesses in order to meet
even the expanded family office definition under the final rule, rather
than register or seek an exemptive order. The costs of any such
restructuring will be highly dependent on the nature and extent of the
restructuring, which we understand may vary significantly from office
to office. No commenters provided an estimate of the costs to carry out
any necessary restructuring.
---------------------------------------------------------------------------

    \133\ See Section II of this Release for discussion of these
expansions.
---------------------------------------------------------------------------

    We do not expect that the rule will impose any significant costs on
family offices currently operating under a Commission exemptive order.
We are permitting these family offices to continue to rely on their
exemptive orders. They may choose, of course, to qualify for exclusion
under the rule. We expect that most of these family offices will
satisfy all the conditions of the rule without changing their structure
or operations. However, these family offices may incur one-time
``learning costs'' in determining the differences between their orders
and the rule. We estimate that such costs will be no more than $5,000
on average for a family office if it hires an external consulting firm
or law firm to assist in determining the differences. Because the terms
of these advisers' exemptive orders were similar to rule 202(a)(11)(G)-
1, these family offices should incur significantly lower costs to
evaluate the new rule than family offices that do not have an exemptive
order. There are 13 family offices that have obtained exemptive orders.
Accordingly, we estimate that these family offices collectively would
incur outside consulting or legal expenses of $65,000 to discern the
differences between their orders and the rule.
    Finally, if there were any family offices that previously
registered with the Commission, but now may de-register in reliance on
the new family office exclusion in the Advisers Act, the rule may have
competitive effects on investment advisers that may compete with the
family office for the provision of investment management services to
family clients since these third party investment advisers would bear
the regulatory costs associated with compliance with the Advisers Act
or state investment adviser regulatory requirements. We do not expect
that the rule will impact capital formation.

V. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory
Flexibility Analysis (``FRFA'') regarding rule 202(a)(11)(G)-1 in
accordance with section 604 of the Regulatory Flexibility Act.\134\ We
prepared an Initial Regulatory Flexibility Analysis (``IRFA'') in
conjunction with the Proposing Release in October 2010.\135\
---------------------------------------------------------------------------

    \134\ 5 U.S.C. 604(a).
    \135\ See Proposing Release, supra note 2, at Section VI.
---------------------------------------------------------------------------

A. Need for the Rule

    We are adopting rule 202(a)(11)(G)-1 defining family offices
excluded from regulation under the Advisers Act because we are required
to do so under section 409 of the Dodd-Frank Act.

B. Significant Issues Raised by Public Comment

    In the Proposing Release, we requested comment on the IRFA. None of
the comment letters we received specifically addressed the IRFA. None
of the comment letters made specific comments about the proposed rule's
impact on smaller family offices.

C. Small Entities Subject to the Rule

    Under Commission rules, for purposes of the Advisers Act and the
Regulatory Flexibility Act, an investment adviser generally is a small
entity if it: (i) Has assets under management having a total value of
less than $25 million; (ii) did not have total assets of $5 million or
more on the last day of its most recent fiscal year; and (iii) does not
control, is not controlled by, and is not under common control with
another investment adviser that has assets under management of $25
million or more, or any person (other than a natural person) that had
$5 million or more on the last day of its most recent fiscal year.\136\
---------------------------------------------------------------------------

    \136\ 17 CFR 275.0-7(a).
---------------------------------------------------------------------------

    We do not have data and are not aware of any databases that compile
information regarding how many family offices will be a small entity
under this definition, but since family offices only are established
for the very wealthy and given the statistics included in the Proposing
Release showing that they generally serve families with at least $100
million or more of investable assets and have an average net worth of
$517 million, we believe it is unlikely that any family offices would
be small entities.\137\
---------------------------------------------------------------------------

    \137\ See Proposing Release, supra note 2, at n.2 and
accompanying text. One commenter (Comment Letter of Robert Stenson
(Oct. 18, 2010)) cited a 1999 survey which estimated that 32% of
family offices had investment assets of less than $100 million.
However, this commenter did not indicate how many family offices had
assets under management of less than $25 million and thus qualified
as ``small entities'' as defined in Advisers Act rule 0-7, supra
note 136 and accompanying text.

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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

    Rule 202(a)(11)(G)-1 imposes no reporting, recordkeeping or other
compliance requirements.

E. Agency Action To Minimize Effect on Smaller Entities

    The Regulatory Flexibility Act directs the Commission to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant impact on small entities. In
connection with the rule, the Commission considered the following
alternatives: (i) The establishment of differing compliance or
reporting requirements or timetables that take into account the
resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the rule for small entities; (iii) the use of
performance rather than design standards; and (iv) an exemption from
coverage of the rule, or any part thereof, for small entities.
    Rule 202(a)(11)(G)-1 is exemptive and compliance with the rule is
voluntary. We therefore do not believe that different or simplified
compliance, timetable, or reporting requirements, or an exemption from
coverage of the rule for small entities, is appropriate. The conditions
in the rule are designed to ensure that family offices operating under
the rule provide advice only to the family itself and not the general
public and, accordingly, the protections of the Advisers Act are not
warranted. Reducing these conditions for smaller family offices would
be inconsistent with the policy underlying the exclusion and would harm
investor protection.
    Our prior exemptive orders have not made any differentiation based
on the size of the family office. In addition, as discussed above, we
expect that very few, if any, family offices are small entities. The
Commission also believes that rule 202(a)(11)(G)-1 will decrease
burdens on small entities by making it unnecessary for most of them to
seek an exemptive order from the Commission to operate without
registration under the Advisers Act. As a result, we do not anticipate
that the potential impact of the rule on small entities will be
significant.
    The rule specifies broad conditions with which a family office must
comply to rely on the exclusion; the rule leaves to each family office
how to structure its specific operations to meet these conditions. The
rule thus already incorporates performance rather than design
standards. For these reasons, alternatives to the rule appear
unnecessary and in any event are unlikely to minimize any impact that
the rule might have on small entities.

VI. Statutory Authority

    We are adopting rule 202(a)(11)(G)-1 [17 CFR 275.202(a)(11)(G)-1]
pursuant to our authority set forth in sections 202(a)(11)(G) and 206A
of the Advisers Act [15 U.S.C. 80b-2(a)(11)(G) and 80b-6A].

List of Subjects in 17 CFR Part 275

    Reporting and recordkeeping requirements, Securities.

Text of Rule

    For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
1. The authority citation for Part 275 continues to read in part as
follows:

    Authority:  15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.

* * * * *

0
2. Section 275.202(a)(11)(G)-1 is added to read as follows:

Sec.  275.202(a)(11)(G)-1  Family offices.

    (a) Exclusion. A family office, as defined in this section, shall
not be considered to be an investment adviser for purpose of the Act.
    (b) Family office. A family office is a company (including its
directors, partners, members, managers, trustees, and employees acting
within the scope of their position or employment) that:
    (1) Has no clients other than family clients; provided that if a
person that is not a family client becomes a client of the family
office as a result of the death of a family member or key employee or
other involuntary transfer from a family member or key employee, that
person shall be deemed to be a family client for purposes of this
section for one year following the completion of the transfer of legal
title to the assets resulting from the involuntary event;
    (2) Is wholly owned by family clients and is exclusively controlled
(directly or indirectly) by one or more family members and/or family
entities; and
    (3) Does not hold itself out to the public as an investment
adviser.
    (c) Grandfathering. A family office as defined in paragraph (a) of
this section shall not exclude any person, who was not registered or
required to be registered under the Act on January 1, 2010, solely
because such person provides investment advice to, and was engaged
before January 1, 2010 in providing investment advice to:
    (1) Natural persons who, at the time of their applicable
investment, are officers, directors, or employees of the family office
who have invested with the family office before January 1, 2010 and are
accredited investors, as defined in Regulation D under the Securities
Act of 1933;
    (2) Any company owned exclusively and controlled by one or more
family members; or
    (3) Any investment adviser registered under the Act that provides
investment advice to the family office and who identifies investment
opportunities to the family office, and invests in such transactions on
substantially the same terms as the family office invests, but does not
invest in other funds advised by the family office, and whose assets as
to which the family office directly or indirectly provides investment
advice represents, in the aggregate, not more than 5 percent of the
value of the total assets as to which the family office provides
investment advice; provided that a family office that would not be a
family office but for this paragraph (c) shall be deemed to be an
investment adviser for purposes of paragraphs (1), (2) and (4) of
section 206 of the Act.
    (d) Definitions. For purposes of this section:
    (1) Affiliated family office means a family office wholly owned by
family clients of another family office and that is controlled
(directly or indirectly) by one or more family members of such other
family office and/or family entities affiliated with such other family
office and has no clients other than family clients of such other
family office.
    (2) Control means the power to exercise a controlling influence
over the management or policies of a company, unless such power is
solely the result of being an officer of such company.
    (3) Executive officer means the president, any 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, for the family office.
    (4) Family client means:
    (i) Any family member;
    (ii) Any former family member;
    (iii) Any key employee;
    (iv) Any former key employee, provided that upon the end of such
individual's employment by the family office, the former key employee
shall not receive investment advice from the family office (or invest
additional assets

with a family office-advised trust, foundation or entity) other than
with respect to assets advised (directly or indirectly) by the family
office immediately prior to the end of such individual's employment,
except that a former key employee shall be permitted to receive
investment advice from the family office with respect to additional
investments that the former key employee was contractually obligated to
make, and that relate to a family-office advised investment existing,
in each case prior to the time the person became a former key employee.
    (v) Any non-profit organization, charitable foundation, charitable
trust (including charitable lead trusts and charitable remainder trusts
whose only current beneficiaries are other family clients and
charitable or non-profit organizations), or other charitable
organization, in each case for which all the funding such foundation,
trust or organization holds came exclusively from one or more other
family clients;
    (vi) Any estate of a family member, former family member, key
employee, or, subject to the condition contained in paragraph
(d)(4)(iv) of this section, former key employee;
    (vii) Any irrevocable trust in which one or more other family
clients are the only current beneficiaries;
    (viii) Any irrevocable trust funded exclusively by one or more
other family clients in which other family clients and non-profit
organizations, charitable foundations, charitable trusts, or other
charitable organizations are the only current beneficiaries;
    (ix) Any revocable trust of which one or more other family clients
are the sole grantor;
    (x) Any trust of which: Each trustee or other person authorized to
make decisions with respect to the trust is a key employee; and each
settlor or other person who has contributed assets to the trust is a
key employee or the key employee's current and/or former spouse or
spousal equivalent who, at the time of contribution, holds a joint,
community property, or other similar shared ownership interest with the
key employee; or
    (xi) Any company wholly owned (directly or indirectly) exclusively
by, and operated for the sole benefit of, one or more other family
clients; provided that if any such entity is a pooled investment
vehicle, it is excepted from the definition of ``investment company''
under the Investment Company Act of 1940.
    (5) Family entity means any of the trusts, estates, companies or
other entities set forth in paragraphs (d)(4)(v), (vi), (vii), (viii),
(ix), or (xi) of this section, but excluding key employees and their
trusts from the definition of family client solely for purposes of this
definition.
    (6) Family member means all lineal descendants (including by
adoption, stepchildren, foster children, and individuals that were a
minor when another family member became a legal guardian of that
individual) of a common ancestor (who may be living or deceased), and
such lineal descendants' spouses or spousal equivalents; provided that
the common ancestor is no more than 10 generations removed from the
youngest generation of family members.
    (7) Former family member means a spouse, spousal equivalent, or
stepchild that was a family member but is no longer a family member due
to a divorce or other similar event.
    (8) Key employee means any natural person (including any key
employee's spouse or spouse equivalent who holds a joint, community
property, or other similar shared ownership interest with that key
employee) who is an executive officer, director, trustee, general
partner, or person serving in a similar capacity of the family office
or its affiliated family office or any employee of the family office or
its affiliated family office (other than an employee performing solely
clerical, secretarial, or administrative functions with regard to the
family office) who, in connection with his or her regular functions or
duties, participates in the investment activities of the family office
or affiliated family office, provided that such employee has been
performing such functions and duties for or on behalf of the family
office or affiliated family office, or substantially similar functions
or duties for or on behalf of another company, for at least 12 months.
    (9) Spousal equivalent means a cohabitant occupying a relationship
generally equivalent to that of a spouse.
    (e) Transition. (1) Any company existing on July 21, 2011 that
would qualify as a family office under this section but for it having
as a client one or more non-profit organizations, charitable
foundations, charitable trusts, or other charitable organizations that
have received funding from one or more individuals or companies that
are not family clients shall be deemed to be a family office under this
section until December 31, 2013, provided that such non-profit or
charitable organization(s) do not accept any additional funding from
any non-family client after August 31, 2011 (other than funding
received prior to December 31, 2013 and provided in fulfillment of any
pledge made prior to August 31, 2011).
    (2) Any company engaged in the business of providing investment
advice, directly or indirectly, primarily to members of a single family
on July 21, 2011, and that is not registered under the Act in reliance
on section 203(b)(3) of this title on July 20, 2011, is exempt from
registration as an investment adviser under this title until March 30,
2012, provided that the company:
    (i) During the course of the preceding twelve months, has had fewer
than fifteen clients; and
    (ii) Neither holds itself out generally to the public as an
investment adviser nor acts as an investment adviser to any investment
company registered under the Investment Company Act of 1940 (15 U.S.C.
80a), or a company which has elected to be a business development
company pursuant to section 54 of that Act (15 U.S.C. 80a-54) and has
not withdrawn its election.

    Dated: June 22, 2011.

    By the Commission.
Elizabeth M. Murphy,
Secretary.

    Note: The following Annex will not appear in the Code of Federal
Regulations.

Annex A

    The following diagram illustrates the effect of a family office
redesignating its common ancestor. In the first chart, the shaded boxes
indicate persons in various generations that are ``family members'' of
the family office. The double-outlinedboxes indicate persons in various
generations that are outside the 10-generation limit and thus may not
be advised by the family office under the exclusion. The lower diagram
shows the impact of redesignating the common ancestor from an
individual in generation 1 to an individual in generation 5. The
single-outlined boxes indicate the new group of family clients that the
family office may advise and maintain its exclusion. The shaded boxes
indicate individuals that previously the family office could advise,
but that are no longer ``family members'' due to the redesignation. The
double-outlined boxes indicate individuals that were too remote from
the common ancestor in both cases to be considered ``family members.''

[GRAPHIC] [TIFF OMITTED] TR29JN11.000

[FR Doc. 2011-16117 Filed 6-28-11; 8:45 am]
BILLING CODE 8011-01-P