FAMILY OFFICES and INVESTMENT ADVISER REGULATION after DODD-FRANK

1. FAMILY OFFICESandINVESTMENT ADVISER REGULATIONafterDODD-FRANK Matthew C. Dallett mdallett@eapdlaw.com (617) 239-0303

2. 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 . . .

3. 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

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

5. 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

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

7. Family Office Exclusion Family Clients (cont.) • 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 • Revocable trust • Family Client(s) is sole grantor • Certain trusts established by Key Employees

8. Family Office Exclusion Family Clients (cont.) • 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 • Any company (other than an “investment company”) that is wholly-owned by, and operated only for the benefit of, Family Clients.

9. 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

10. 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

11. 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