Monday, December 29, 2014

Staff Issues Guidance on Key Employee Trusts Under the Family Office Rule

[This story previously appeared in Securities Regulation Daily.]

By Jacquelyn Lumb

The Division of Investment Management has issued guidance in response to questions about whether certain key employee trusts would qualify as family clients under the family office rule. The family office rule provides an exception from the Investment Advisers Act definition of investment adviser for families that manage their own wealth.

The rule permits family offices to include as family clients certain non-family members, including certain trusts. The guidance addresses whether certain trust decision-making powers can be bifurcated between a key employee and a non-key employee and whether a key employee who contributed assets to a trust must also be the one authorized to make decisions with respect to the trust (IM Guidance Update No. 2014-13, December 2014).

The staff advised that a non-key employee may make administrative decisions for a trust as long as the investment decisions are made by a key employee. The Act does not provide a definition of investment decision, but the staff said that purely administrative duties do not involve investment decisions, such as preparing and filing taxes for a trust, keeping records for the trust, or distributing periodic statements or disclosures to trust beneficiaries.

The staff also believes it is appropriate for one key employee to make investment decisions on behalf of another key employee’s trust.

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