Family Office Key Employees’ Utilization of Worker Investment Trusts

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Family Office Key Employees’ Utilization of Worker Investment Trusts

Recent Development

Family office key employees have new versatility under recent SEC guidance concerning the nature and selection of persons who are able to correctly engage in the administration of the trusts.


Family offices, that have existed for more than a hundred years, happen to be created to apply essential and sophisticated objectives, including investment management, corporate succession, estate, gift, and tax planning, and charitable giving. Each one of these issues change up the day-to-day control over the now recognized family office industry. Because the enactment from the Dodd-Frank Wall Street Reform and Consumer Protection Act,[1] a household office that’s an “investment adviser”-an individual who, for compensation, is engaged in the industry of giving investment recommendations to other people-has had the ability to depend on Rule 202(a)(11)(G)-1 (“Family Office Rule”) underneath the Investment Advisors Act of 1940 (“Advisers Act”)[2] for exemption coming from all the provisions from the Advisors Act. The Household Office Rule provides that the “family office” should be a business that:[3]

  1. has no clients other than family clients;
  2. is wholly owned by family clients and 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.

Additionally to people from the family, family offices might want to allow key employees from the family office to co-invest with your family office. The word “key employee” is determined in paragraph (d)(8) from the Family Office Rule to mean an all natural person (i) who’s a professional officer,[4] director, trustee, general partner, or person serving inside a similar capacity from the family office, and (ii) who, regarding the their regular functions or responsibilities, participates within the investment activities from the family office. This easy definition is susceptible to several conditions. First, the idea of key worker includes the important thing employee’s spouse or spousal equivalent who holds some pot, community property, or any other similar possession interest with this key worker. Observe that this expanded idea of key worker doesn’t range from the key employee’s former spouse(s) or even the key employer’s children. Second, the idea of key worker doesn’t have an worker performing exclusively clerical, secretarial or administrative functions regarding the household office. Third, the important thing worker should have been performing such functions and responsibilities for your loved ones office or another company not less than 12 several weeks. 4th, within this paragraph the word “family office” is definitely used along with the term “affiliated family office,” that is itself defined in paragraph (d)(1) from the Family Office Rule being an alter ego from the family office.[5] The 2nd and third conditions described above are modeled carefully after similar conditions in the phrase “knowledgeable employees” in Rule 3c-5 underneath the Investment Company Act.[6]

The Adopting Release discusses in more detail the provisions affecting key employees. The SEC distinguishes dramatically between your key worker and the spouse and also the people of his family. Particularly, subparagraph (d)(4)(x) from the Family Office Rule permits the important thing worker to take a position via a trust susceptible to conditions meant to insure that just the important thing worker has the capacity to make investment decisions. As mentioned within the Adopting Release, “[t]here’s pointless to think the key employee’s spouse or immediate family people individually possess the financial sophistication and experience to safeguard themselves when receiving investment recommendations in the family office.”

New SEC Staff Guidance

In December 2014, the SEC staff issued additional guidance regarding key worker trusts.[7] The SEC staff reiterated the necessity the key worker function as the financial commitment-maker with respect to the trust but expanded the plethora of tasks that the non-key worker (presumably, another member of the family or perhaps a non-member of the family accountant, lawyer, or bank trust officer) could perform to have an otherwise qualifying key worker trust, including:

  • preparing and filing taxes for that trust[8]
  • keeping records for that trust or
  • disbursing periodic statements or disclosures to believe beneficiaries.

The SEC staff noted, “While these along with other administrative responsibilities may lead to a non-key worker making sure decisions with respect to the trust, the [SEC] staff would certainly not consider such decisions to become investment decisions.”


The SEC staff hasn’t deviated in the position in the household Office Rule the key worker must result in the investment decisions for any key employee’s trust, however the new guidance provides significant versatility to key employees concerning the nature and selection of persons who are able to correctly engage in the administration of the trusts. This can be a welcome development.

[1] Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[2] 17 C.F.R. § 275.202(a)(11)(G)-1(c). See Family Offices, Investment Advisors Act Release No. 3220 (June 22, 2011) [76 Given. Reg. 37,983, at 37,990 (June 29, 2011)] (“Adopting Release”). More specifically, a household office “shall ‘t be regarded as a good investment advisor for purpose of the [Advisors] Act.” 17 C.F.R. § 275.202(a)(11)(G)-1(a). One immediate results of the way a household office is excluded from the phrase “investment adviser” is the fact that Section 203A(b)(1)(B) from the Advisors Act will affect prevent a household office from being susceptible to condition laws and regulations requiring registration, licensing, or qualification being an investment advisor.

[3] 17 C.F.R. § 275.202(a)(11)(G)-1 (b).

[4] The word “executive officer” is determined in paragraph (d)(3) from the Family Office rule to mean obama, any v . p . responsible for a principal business unit, division, or function (for example administration or finance), or other individual who performs similar policy-making functions, for your loved ones office. 17 C.F.R. § 275.202(a)(11)(G)-1(d)(3).

[5] The word “affiliated family office” is determined in paragraph (d)(1) from the Family Office Rule to mean a household office that’s wholly of family clients of some other family office, that’s controlled (directly or not directly) by a number of family people of these other family office and/or family entities associated with such other family office which doesn’t have clients apart from family clients of these other family office. This term was added once the Family Office Rule was utilized and presumably is reply to the representations in comment letters with regards to the Proposing Release that it hadn’t been unusual for any family office to possess affiliated entities that performed a few of the services provided towards the people from the family through the family office, including becoming the paymaster to all the employees from the family office. The SEC explains that knowledgeable key employees of the affiliated family office are qualified only when the affiliated family office is taking part in an investment activities from the family clients. Adopting Release, supra note 2, at 24-25.

[6] 17 C.F.R. § 270.3c-5. Paragraph (a)(3) of Rule 3c-5 defines the word “Executive Officer” to mean “the president, any v . p . responsible for a principal business unit, division, or function (for example sales, administration or finance), every other officer who performs an insurance policy-making function, or other individual who performs similar policy-making functions” for any private investment company. 17 C.F.R. § 270.3c-5(a)(3). On its face, this definition doesn’t need the Executive Officer have active participation within the investment activities of her employer, the non-public investment company. Notwithstanding the literal wording in sentences (i) and (ii) of Rule 3c-5(a)(3), the SEC staff has routinely imported the “participates within the investment activities” condition of paragraph (ii) into paragraph (i), effectively rewriting paragraph (i) to want the specific Executive Officer being referenced be positively active in the investment process regardless of the broader references in paragraph (i) to sales and administration. Adopting Release, supra note 2, at 24-26.

[7] Div. of Inv. Mgmt., Sec. & Exch. Comm’n, IM Guidance Update No. 2014-13 (12 ,. 2014).

[8] The SEC staff inside a footnote for this specific power made the next statement: “We note, however, that particular other tax-related activities, for example supplying suggestions about structuring a tax-favorable investment strategy, wouldn’t [correctly] be [characterised as] purely administrative [anyway].”

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