The US Securities and Exchange Commission has proposed how to classify family offices.

The US Securities and Exchange Commission has proposed how to classify family offices so that managers of such institutions can know if they are covered by recent sweeping new legislation.

The SEC yesterday proposed a rule stating that a “family office” is any firm that:

Provides investment advice only to family members, as defined by the rule; certain key employees; charities and trusts established by family members; and entities wholly owned and controlled by family members;

Is wholly owned and controlled by family members;

Does not hold itself out to the public as an investment advisor.

The SEC is acting after the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed earlier this year. At the time, the law appeared to be unclear what regulators deemed to be a family office, raising uncertainty on whether these important financial institutions would be covered by the Investment Advisers Act of 1940.

Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisors with fewer than 15 clients. The Dodd-Frank Act removes that exemption to enable the SEC to regulate hedge fund and other private fund advisors, but includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

The SEC is inviting comments on its consultation between now and 18 November.