Matthew C. Dallett (617) FAMILY OFFICES and INVESTMENT ADVISER REGULATION after DODD-FRANK

Background “Family Office” – a company operated by a family that is managing its own wealth Historically, family offices have avoided investment adviser registration by:  Obtaining individual exemptive order from SEC  Meeting “Private Investment Adviser” exemption (14 clients or fewer) Or by ignoring it...

Background Dodd-Frank Act  Eliminates Private Investment Adviser exemption  Requires registered advisers with AUM less than $100M to register with state(s) instead of SEC  N/A to advisers based in NY, MN and WY  Formalizes “Family Office” exclusion from “investment adviser” status  Excluded Family Offices also outside state regulation

Family Office Exclusion 1.Only “Family Clients”  Involuntary transferee included for 1 year 2.Owned only by Family Clients 3.Controlled only by “Family Members” 4.Does not “hold itself out to the public” as an investment adviser

Family Office Exclusion Family Members  Descendants of a common ancestor no more than 10 generations back from youngest generation  The common ancestor may be changed to adapt to circumstances over time  Includes  Adoptive, step- and foster-children  Spouses and spousal equivalents

Family Office Exclusion Family Clients 1.Family Members 2.Former Family Members 3.Key Employees  Incl. spouse with joint interest in AUM 4.Former Key Employees  Limited to AUM at termination of employment 5.Estates of (1) – (4)

Family Office Exclusion Family Clients (cont.) 6.Irrevocable trusts:  Family Clients are sole current beneficiaries or  Funded solely by Family Client(s) and Family Clients and Non-Profit/Charities are sole current beneficiaries 7.Revocable trust  Family Client(s) is sole grantor 8.Certain trusts established by Key Employees

Family Office Exclusion Family Clients (cont.) 9.Non-profit, charitable foundation, charitable trust or other charitable organization if:  All funding came exclusively from Family Client(s)  For charitable lead and charitable remainder trusts, current beneficiaries must be other Family Clients or charitable/nonprofit organizations 10.Any company (other than an “investment company”) that is wholly-owned by, and operated only for the benefit of, Family Clients.

Family Office Exclusion Wholly owned by Family Clients  Permits Key Employees to hold equity as an incentive Exclusively controlled by Family Members  Officer’s authority ≠ “control” No “holding out to public as an investment adviser”  Includes identifying the company as an investment adviser in public communications

Family Office Exclusion A company is grandfathered under the exclusion if it meets the definition except that it provides investment advice to:  An “accredited investor” who invested with the Family Office before 1/1/10 when he or she was a director, officer or employee  Any company owned exclusively and controlled by a Family Member that has received advice from the Family Office since before 1/1/10  Certain investment advisers that have provided advice to and invested alongside the Family Office since before 1/1/10

Transition  New exclusion is now in effect  Family Offices that have been relying on former Private Investment Adviser exemption have grace period until 3/30/12 to:  Restructure (if necessary) to comply with the exclusion  Register with the SEC or state(s), as applicable (file by 2/14/12) Registration requires substantial advance planning:  Compliance procedures  SEC/client disclosures  Exam requirements for personnel