• Full Senate Passes The Restoring American Financial Stability Act - Including Exemption for Family Offices
  • June 8, 2010 | Authors: David S. Guin; Christopher R. Uzpen
  • Law Firms: Withers Bergman LLP/Withers LLP - New York Office ; Withers Bergman LLP/Withers LLP - Greenwich Office
  • On May 20, 2010, the full U.S. Senate passed The Restoring American Financial Stability Act, which includes the provisions of the Private Fund Investment Advisers Registration Act.  Section 409 of the Private Fund Investment Advisers Registration Act, as passed by the Senate, exempts "family offices" from the definition of investment adviser under the U.S. Investment Advisers Act (the "Advisers Act").

    The Senate version of the Private Fund Investment Advisers Registration Act is at odds with a version of the same Act passed by the full U.S. House of Representatives on December 11, 2009.  As discussed in our December 21, 2009 update "Full U.S. House of Representatives Passes the Private Fund Investment Advisers Registration Act of 2009"  the House version of the Act could subject both domestic and international family offices to regulation under the Advisers Act.

    While the Senate's exemption of family offices from the definition of an investment adviser was an important victory, one legislative hurdle remains.  Both Acts have been referred to a House/Senate Conference Committee that will reconcile the differences between the two proposals.  Leaders in both the House and the Senate have expressed the intention of having a reconciled version of the legislation passed by both houses of Congress and ready for President Obama's signature before the 4th of July Congressional recess.

    If the Committee rejects the Senate's exemption of family offices from the definition of investment adviser, family offices are likely to become subject to registration with and regulation by the U.S. Securities and Exchange Commission (the "SEC").  If, however, the Committee retains the exemption, it appears that most single-family offices will avoid registration with and regulation by the SEC.

    Unfortunately, even if the Senate exemption of family offices prevails in the Committee, some level of uncertainty will remain.  Specifically, the legislation approved by the Senate does not define the term "family office."  Rather, the Senate proposal specifically leaves the definition of family office to a subsequent SEC rulemaking proceeding - only directing the SEC to provide an exemption that is consistent with the SEC's previous exemptive policy with respect to family offices and recognizes the range of organizational, management and employment structures and arrangements employed by family offices.

    Generally speaking, the SEC has previously issued exemptive orders to family offices serving the lineal descendants of a single individual, their spouses and entities, including private foundations and charities, exclusively owned by, for the benefit of or created by such individuals.  Because the SEC has previously limited exemptions to offices serving the lineal descendents of a single individual, it is anticipated that even small multi-family offices will be subject to regulation.  The SEC has also typically required family offices that qualified for an exemption to be controlled by a Board of Directors or other governing body a majority of which consisted of family members and provided that exempt family offices should not be operated for a profit.  On a few occasions, the SEC has permitted exempt family offices to allow key executives and employees involved in investment decisions to participate in the family's collective investment vehicles on a limited basis.

    However, it should be stressed that all exemptive orders previously issued by the SEC applied only to the specific family office requesting the exemption.  In these exemptive orders, the SEC could make determinations of limited application after analysis of all facts it considered relevant.  There can be no assurance that the SEC will endorse all of the fact patterns it has approved in its prior exemptive orders when adopting a definition that will have general applicability to all family offices.