
[Federal Register: October 18, 2010 (Volume 75, Number 200)]
[Proposed Rules]               
[Page 63753-63763]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc10-23]                         

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-3098; File No. S7-25-10]
RIN 3235-AK66

 
Family Offices

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is 
proposing a rule to define ``family offices'' that would be excluded 
from the definition of an investment adviser under the Investment 
Advisers Act of 1940 (``Advisers Act'') and thus would not be subject 
to regulation under the Advisers Act.

DATES: Comments must be received on or before November 18, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form, http://
www.sec.gov/rules/proposed.shtml; or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-25-10 on the subject line; or
     Use the Federal eRulemaking Portal, http://
www.regulations.gov. Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-25-10. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's Web 
site, http://www.sec.gov/rules/proposed.shtml. Comments are also 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549 on official 
business days between the hours of 10 a.m. and 3 p.m. All comments 
received will be posted without change; we do not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Sarah ten Siethoff, Senior Special 
Counsel, or Vivien Liu, Senior Counsel, at (202) 551-6787 or 
IArules@sec.gov, Office of Investment Adviser Regulation, Division of 
Investment Management, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is 
requesting public comment on proposed rule 202(a)(11)(G)-1 [17 CFR 
275.202(a)(11)(G)-1] under the Investment Advisers Act of 1940 [15 
U.S.C. 80b] (the ``Advisers Act'' or ``Act'').\1\
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    \1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the 
Advisers Act, or any paragraph of the Advisers Act, we are referring 
to 15 U.S.C. 80b of the United States Code, at which the Advisers 
Act is codified.
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Table of Contents

I. Background

[[Page 63754]]

II. Discussion
III. General Request for Comment
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Initial Regulatory Flexibility Analysis
VII. Statutory Authority
Text of Proposed Rule

I. Background

    ``Family offices'' are entities established by wealthy families to 
manage their wealth, plan for their families' financial future, and 
provide other services to family members. Single family offices 
generally serve families with at least $100 million or more of 
investable assets.\2\ Industry observers have estimated that there are 
2,500 to 3,000 single family offices managing more than $1.2 trillion 
in assets.\3\
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    \2\ See John J. Bowen, Jr., In the Family Way, Financial 
Planning (Aug. 1, 2004); Robert Frank, Minding the Money--`Family 
Office' Chiefs Get Plied with Perks; Club Membership, Jets, The Wall 
Street Journal (Sept. 7, 2007), at W2. A recent study found the 
average net worth of a single family office was $517 million. See 
Russ Alan Prince et al., The Family Office: Advising the Financial 
Elite (2010) (``The Family Office'').
    \3\ See Pamela J. Black, The Rise of the Multi-Family Office, 
Financial Planning (Apr. 27, 2010). A single family office generally 
provides services only to members of a single family.
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    Family office services typically include managing securities 
portfolios, providing personalized financial, tax, and estate planning 
advice, providing accounting services, and directing charitable giving, 
in each case to members of a family. Some family offices even provide 
services such as travel planning or managing a family's art collection 
or household staff.\4\ Family offices generally meet the definition of 
``investment adviser'' under the Advisers Act, as we and our staff have 
interpreted the term, because, among the variety of services provided, 
family offices are in the business of providing advice about securities 
for compensation.\5\
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    \4\ See Raphael Amit, et al., Single Family Offices: Private 
Wealth Management in the Family Context, Wharton Global Family 
Alliance (Apr. 1, 2008), available at http://
knowledge.wharton.upenn.edu/papers/1354.pdf (``Wharton Study''); The 
Family Office, supra note 2; Angelo J. Robles, Creating a Single 
Family Office for Wealth Creation and Family Legacy Sustainability, 
Family Office Association, available at http://
familyofficeassociation.org/dwnld/FOA_White_Paper.pdf.
    \5\ 15 U.S.C. 80b-2(a)(11). See Applicability of the Investment 
Advisers Act to Financial Planners, Pension Consultants, and Other 
Persons Who Provide Investment Advisory Services as a Component of 
Other Financial Services, Investment Advisers Act Release No. 1092 
(Oct. 8, 1987) [52 FR 38400 (Oct. 16, 1987)]. There are certain 
exceptions to this definition, but the typical single family office 
does not meet any of these exceptions.
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    We understand that many family offices have been structured to take 
advantage of the exemption from registration under section 203(b)(3) of 
the Advisers Act for any adviser that during the course of the 
preceding 12 months had fewer than 15 clients and neither held itself 
out to the public as an investment adviser nor advised any registered 
investment company or business development company.\6\ Other family 
offices have sought and obtained from us orders under the Advisers Act 
declaring those offices not to be investment advisers within the intent 
of section 202(a)(11) of the Advisers Act.\7\ We have issued more than 
a dozen of these orders since the 1940s.
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    \6\ 15 U.S.C. 80b-2(b)(3).
    \7\ See, e.g., In the Matter of Donner Estates, Inc., Investment 
Advisers Act Release No. 21 (Nov. 3, 1941); In the Matter of the 
Pitcairn Company, Investment Advisers Act Release No. 52 (Mar. 2, 
1949) (``Pitcairn''); In the Matter of Roosevelt & Son, Investment 
Advisers Act Release No. 54 (Aug. 31, 1949); Bear Creek Inc., 
Investment Advisers Act Release Nos. 1931 (Mar. 9, 2001) (notice) 
[66 FR 15150 (Mar. 15, 2001)] and 1935 (Apr. 4, 2001) (order); 
Riverton Management, Inc., Investment Advisers Act Release Nos. 2459 
(Dec. 9, 2005) [70 FR 74381 (Dec. 15, 2005)] and 2471 (Jan. 6, 2006) 
(order).
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    The Commission issued those exemptive orders pursuant to a 
provision of the Advisers Act that authorizes us to exclude any person 
that falls within the Advisers Act's definition of investment adviser, 
but that we conclude is ``not within the intent'' of that 
definition.\8\ We viewed the typical single family office as not the 
sort of arrangement that Congress designed the Advisers Act to 
regulate. We also were concerned that application of the Advisers Act 
would intrude on the privacy of family members. Thus, each of our 
orders exempted the particular family office from all of the provisions 
of the Advisers Act (and not merely the registration provisions). As a 
consequence, disputes among family members concerning the operation of 
the family office could be resolved within the family unit or, if 
necessary, through state courts under laws specifically designed to 
govern family disputes, but without the involvement of the Commission.
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    \8\ 15 U.S.C. 80b-2(a)(11)(G), which will be re-designated as 15 
U.S.C. 80b-2(a)(11)(H) on July 21, 2010. If a person is excluded 
from the definition of an investment adviser, no state can require 
that person to register as an investment adviser. See 15 U.S.C. 80b-
3A(b)(1).
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    Our exemptive orders have included conditions designed to 
distinguish between a ``family office,'' as described above, and a 
``family-run office'' that, although owned and controlled by a single 
family, provides advice to a broader group of clients and much more 
resembles the business model common among many smaller investment 
adviser firms that are registered with the Commission or state 
regulatory authorities.\9\ Accordingly, and as described in more detail 
below, our exemptive orders have limited relief to those family offices 
that provide advisory services only to members of a single family and 
their lineal descendants, with very limited exceptions.
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    \9\ There also are commercial family offices, which are for-
profit organizations that serve a much larger number of families and 
typically are registered as an investment adviser with the 
Commission or one or more states. See The Family Office, supra note 
2. For example, GenSpring Family Offices, LLC reports on Part 1 of 
its Form ADV that it provides investment advisory services to 5000 
clients.
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    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank 
Act'').\10\ The Dodd-Frank Act, among other matters, will repeal the 
15-client exemption contained in section 203(b)(3) of the Advisers Act, 
effective July 21, 2011.\11\ The primary purpose of repealing this 
exemption was to require advisers to private funds, such as hedge 
funds, to register under the Advisers Act.\12\ But another potential 
consequence, which Congress recognized, was that many family offices 
that have relied on that exemption would be required to register under 
the Advisers Act or seek an exemptive order before that section of the 
Dodd-Frank Act becomes effective.
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    \10\ Pub. L. 111-203, 124 Stat. 1376 (2010).
    \11\ See section 403 of the Dodd-Frank Act.
    \12\ See S. Conf. Rep. No. 111-176, at 38-39 (2010) (``Senate 
Committee Report'').
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    To prevent that consequence, section 409 of the Dodd-Frank Act 
creates a new exclusion from the Advisers Act in section 202(a)(11)(G), 
under which family offices, as defined by the Commission, are not 
investment advisers subject to the Advisers Act.\13\ Section 409 
instructs that any definition the Commission adopts should be 
``consistent with the previous exemptive policy'' of the Commission and 
recognize ``the range of organizational, management, and employment 
structures and arrangements employed by family offices.'' \14\ We have 
taken this legislative instruction into account in

[[Page 63755]]

formulating our proposed rule, as further detailed below.
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    \13\ The Senate Report states that ``family offices are not 
investment advisers intended to be subject to registration under the 
Advisers Act'' and that ``the Advisers Act is not designed to 
regulate the interactions of family members, and registration would 
unnecessarily intrude on the privacy of the family involved.'' 
Senate Committee Report, supra note 12, at 75.
    \14\ Section 409(b) of the Dodd-Frank Act. Section 409 also 
includes a ``grandfathering clause'' that precludes us from 
excluding certain family offices from the definition solely because 
they provide investment advice to certain clients and had provided 
investment advice to those clients before January 1, 2010. See 
section 409(b)(3) of the Dodd-Frank Act.
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II. Discussion

    We propose to adopt new rule 202(a)(11)(G)-1 under the Advisers Act 
to define family offices that would be excluded from the definition of 
``investment adviser'' under the Advisers Act. As a consequence, these 
family offices would not be subject to any of the provisions of the 
Advisers Act.
    Proposed rule 202(a)(11)(G)-1 largely would codify the exemptive 
orders that we have issued to family offices. Each of these exemptive 
orders reflected the specific factual situation presented by the family 
office applicant. Drafting a rule defining family offices, however, 
requires us to turn these fact-specific exemptive orders into a rule of 
general applicability. Thus, the proposed rule would not (and could 
not) match the exact representations, conditions or terms contained in 
every exemptive order as they varied to accommodate the particular 
circumstances of each family office. For example, some of these orders 
have permitted specific individuals to be treated as a member of a 
family for purposes of the exemption.\15\ Moreover, the Commission's 
views have changed over time as we have gained experience with family 
offices, and as we have been presented with new issues. Finally, some 
questions raised by this rulemaking have never been presented to us in 
the context of an exemptive request, but seem appropriate to address in 
a rule of general applicability.
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    \15\ See, e.g., Adler Management, L.L.C., Investment Advisers 
Act Release Nos. 2500 (Mar. 21, 2006) [71 FR 15498 (Mar. 28, 2006)] 
(notice) and 2508 (Apr. 14, 2006) (order) (``Adler'') (permitting 
one particular ``long-standing loyal family employee'' to hold a 
beneficial interest in a family entity advised by the family 
office).
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    The proposal, which we discuss in more detail below, reflects the 
Commission's current exemptive policy regarding family offices, and 
thus the policy judgments that we have made in granting the more recent 
orders, which Congress understood. Where terms and conditions in 
exemptive applications have varied over the years, we have sought to 
distill the policy rationale for the term or condition, and designed 
our proposed rule to align with the general policy.
    The core policy judgment that formed the basis of our exemptive 
orders (and which prompted Congressional action) is the lack of need 
for application of the Advisers Act to the typical single family 
office.\16\ The Act was not designed to regulate the interactions of 
family members in the management of their own wealth. Accordingly, most 
of the conditions of the proposed rule (like our exemptive orders) 
operate to restrict the structure and operation of a family office 
relying on the rule to activities unlikely to involve commercial 
advisory activities, while permitting traditional family office 
activities involving charities, tax planning, and pooled investing.
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    \16\ We note that the proposed rule would exclude directors, 
partners, trustees, and employees of family offices from regulation 
under the Advisers Act only when they are acting within the scope of 
their position or employment.
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    Finally, we note that the failure of a family office to be able to 
meet the conditions of this rule would not preclude the office from 
providing advisory services to family members either collectively or 
individually. In such a situation, a family office could seek an 
exemptive order from the Commission or, in the absence of such an 
order, the family office would be subject to the Advisers Act and would 
have to register unless another exemption is available. A number of 
family offices currently are registered under the Advisers Act.
    We request comment generally on our approach to the proposed rule 
and its implementation of section 409 of the Dodd-Frank Act. Are other 
approaches available that we should consider?

A. Family Office Structure and Scope of Activities

    As discussed below, the proposed rule contains three general 
conditions. First, it would limit the availability of the rule to 
family offices that provide advice about securities only to certain 
family members and key employees. Second, it would require that family 
members wholly own and control the family office. Third, it would 
preclude a family office from holding itself out to the public as an 
investment adviser. In addition to these conditions, we have 
incorporated into the rule the ``grandfathering'' provision required by 
section 409 of the Dodd-Frank Act.\17\
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    \17\ See supra note 14 and section II.A.4 of this release.
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1. Family Clients
    We propose that excluded family offices not be permitted to have 
any investment advisory clients other than ``family clients.''\18\ As 
discussed in more detail below, family clients would include family 
members, certain employees of the family office, charities established 
and funded exclusively by family members or former family members, 
trusts or estates existing for the sole benefit of family clients, and 
entities wholly owned and controlled exclusively by, and operated for 
the sole benefit of, family clients (with certain exceptions), and, 
under certain circumstances, former family members and former 
employees.
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    \18\ Proposed rule 202(a)(11)(G)-1(b)(1).
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a. Family Member
    We propose to define the term ``family member'' to include the 
individual and his or her spouse or spousal equivalent for whose 
benefit the family office was established and any of their subsequent 
spouses or spousal equivalents, their parents, their lineal descendants 
(including by adoption and stepchildren), and such lineal descendants' 
spouses or spousal equivalents.\19\ Except as discussed below, this 
definition generally corresponds to the types of clients that family 
offices have advised under our exemptive orders.
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    \19\ Proposed rule 202(a)(11)(G)-1(d)(3).
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    Our exemptive orders issued to family offices typically have 
included adopted children as family members because adopted children 
generally are not treated differently as a legal matter than children 
by birth.\20\ However, our exemptive orders have not always included 
stepchildren as ``family members.'' \21\ Proposed rule 202(a)(11)(G)-1 
would include stepchildren as family members. We recognize that 
stepchildren are not treated as consistently as adopted children under 
relevant tax, family, and

[[Page 63756]]

estate law.\22\ However, we are proposing including stepchildren in our 
definition of a family client based on our understanding of their close 
ties to the family members who would be included in the definition, and 
on the fact that permitting stepchildren to be included as clients of 
the family office leaves to the family members whether they wish to 
include stepchildren as part of the family office clientele. Indeed, 
nothing in our proposed rule would mandate that the family office 
provide advice to any particular family member; it simply permits such 
advice.\23\ We request comment on our proposed inclusion of 
stepchildren within the meaning of the term ``family members'' for 
purposes of the ``family office'' definition. Should we include 
stepchildren? Are there any additional conditions that we should impose 
if stepchildren are included?
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    \20\ See, e.g., WLD Enterprises, Inc., Investment Advisers Act 
Release Nos. 2804 (Oct. 17, 2008) [73 FR 63218 (Oct. 23, 2008)] 
(notice) and 2807 (Nov. 14, 2008) (order) (``WLD''); Woodcock 
Financial Management Company, LLC, Investment Advisers Act Release 
Nos. 2772 (Aug. 26, 2008) [73 FR 51322 (Sept. 2, 2008)] (notice) and 
2787 (Sept. 24, 2008) (order); Adler, supra note 15. For an example 
of the legal treatment of adopted children, see, e.g., National 
Conference of Commissioner on Uniform State Laws, Uniform Adoption 
Act, (1994), at Sec.  1-104 (each adoptive parent and the adoptee 
have the legal relationship of parent and child and have all the 
rights and duties of that relationship). This treatment is also 
reflected in Federal laws. For example, section 2(a)(51)(ii) of the 
Investment Company Act of 1940 recognizes adopted children as 
``lineal descendants'' for purposes of determining whether a person 
is a ``qualified purchaser.''
    \21\ Our exemptive orders issued to family offices in two 
instances have included family offices advising stepchildren. See 
WLD, supra note 20 (included two stepchildren of the patriarch's son 
and their spouses and children, but required that those individuals 
be provided with written disclosure describing the material terms 
and effects of the exemptive order and that the office obtain 
written consent from these individuals); Woodcock Financial 
Management Company, LLC, Investment Advisers Act Release Nos. 2772 
(Aug. 26, 2008) [73 FR 51322 (Sept. 2, 2008)] (notice) and 2787 
(Sept. 24, 2008) (order) (``Woodcock'') (including matriarch's 
children from a former marriage and their lineal descendants, and 
the spouses of such children and descendents).
    \22\ For example, under state inheritance law, stepchildren 
typically are not granted the inheritance rights of genetic children 
unless they are adopted. See, e.g., Mass. Gen. Laws Ann. Ch. 190B, 
Sec.  1-201(5) (West 2010); Alaska Stat. Sec.  13.06.050(5) (2010); 
Fla. Stat. Ann. Sec.  731.201(3) (West 2010); Haw. Rev. Stat. Sec.  
560:1-201(5) (2009), (32). See also Susan N. Gary, We Are Family: 
The Definition of Parent and Child for Succession Purposes, 34 ACTEC 
J. 171, 172 (Winter 2008). Other states provide limited inheritance 
rights to stepchildren. See, e.g., Cal. Prob. Code Sec.  6454 (West 
2010) (stating that a stepchild may inherit through intestate 
succession if (1) the relationship began during the child's minority 
and continued throughout the joint lifetimes of the child and the 
child's stepparent and (2) it is established by clear and convincing 
evidence that the stepparent would have adopted the stepchild but 
for a legal barrier); Conn. Gen. Stat. Ann. Sec.  45a-439(a)(1) 
(West 2010) (stating that if a person dies intestate without any 
surviving children, spouse, parents, siblings, or other next of kin, 
then the estate is distributed to stepchildren rather than escheat 
to the state); Md. Code Ann., Est. & Trusts Sec.  3-104(e) (2010) 
(same). Other legal contexts have been more generous in ascribing 
legal rights to stepchildren. For example, some states have 
inheritance tax statutes that treat stepchildren the same as natural 
or adopted children. See Wendy C. Gerzog, Families for Tax Purposes: 
What About the Steps?, 42 U. Mich. J.L. Reform 805, at n.37 and 
accompanying text (Summer 2009). The laws of inheritance are 
beginning to ascribe more rights to stepchildren. In 2008, the 
Uniform Probate Code was amended to recognize as a ``child'' for 
purposes of intestate succession any child for whom a parent-child 
relationship exists, regardless of whether the child's genetic 
parents are married and regardless of whether the child is a genetic 
child of each parent. See Uniform Probate Code Sec. Sec.  2-115 to 
2-122. Some states have begun to amend their intestacy laws to 
reflect these amendments. See, e.g., H.B. 09-1287, 67th Gen. Assem., 
1st Reg. Sess. (Colo. 2009); H.B. 1072, 61st Leg. Assem., Reg. Sess. 
(N.D. 2009).
    \23\ Thus, for example, this context differs from the intestacy 
context where family is often defined narrowly because the decedent 
is not alive to state whether or not he or she wishes his or her 
stepchildren to inherit his or her estate.
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    We also propose including ``spousal equivalents,'' using the 
definition of that term currently used under our auditor independence 
rules.\24\ We are not aware of any applicant that requested that 
spousal equivalents be included as a permitted client of any family 
office covered by our exemptive orders, and thus have never provided 
such relief. However, we believe that permitting spousal equivalents to 
be a family office client seems appropriate in a rule of general 
applicability. We request comment on our proposed definition of spousal 
equivalent.
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    \24\ See 17 CFR 210.2-01(f)(9) and (13); Revision of the 
Commission's Auditor Independence Requirements, Securities Act 
Release No. 7919 (Nov. 21, 2000) [65 FR 76008 (Dec. 5, 2000)], at 
section IV.H.8. Spousal equivalent is defined as a cohabitant 
occupying a relationship generally equivalent to that of a spouse. 
See proposed rule 202(a)(11)(G)-1(d)(7).
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    The proposed rule also would permit a family office relying on the 
exclusion to provide investment advice to parents of the family 
office's founders.\25\ While the family offices that have obtained an 
exemptive order from the Commission typically were managing wealth 
built by an older generation--and thus the ``parents'' are typically 
the ``founders,'' we understand that this may not always be the case. 
For example, some entrepreneurs (such as in the technology and private 
fund management sectors) have built sizeable fortunes at an early age 
and may form a family office.\26\ These younger founders may wish to 
include one or more of their parents as a client of the family office. 
We request comment on including parents of the founders as a ``family 
member'' under the proposed rule.
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    \25\ Proposed rule 202(a)(11)(G)-1(d)(3).
    \26\ See, e.g., Google Executives Eye Family Office, Private 
Asset Management (Dec. 5, 2005), at 1; Jim Grote, Old Money vs. New 
Money, Financial Advisor Magazine (May 2003).
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    Our proposed definition of ``family member'' also would include 
siblings of the founders of the family office, their spouses or spousal 
equivalents, their lineal descendants (including by adoption and 
stepchildren), and such lineal descendants' spouses or spousal 
equivalents.\27\ We have issued an exemptive order to a family office 
that advised siblings of one of the founders and certain of those 
siblings' descendants.\28\ These individuals have close family ties to 
the founders and allowing family members to choose to include these 
individuals as family office clients does not appear to us to expand 
the family office's clientele to such an extent that it starts to 
resemble a typical commercial investment adviser. We request comment on 
including siblings and their spouses and descendants in the definition 
of family client.
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    \27\ Proposed rule 202(a)(11)(G)-1(d)(3).
    \28\ The order was to a family office that advised siblings of 
one of the founders, those siblings' spouses, their children and 
their spouses, and their grandchildren and spouses (the applicant 
was required to give these individuals a disclosure statement 
describing the material legal effects associated with a Commission 
order exempting the family office from regulation under the Advisers 
Act). See WLD, supra note 20.
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    More generally, we request comment on our definition of family 
member. Are we drawing the line too broadly or too narrowly regarding 
when the clientele of a family office starts to resemble that of a 
typical commercial investment adviser and not a single family? For 
example, certain legally created relationships such as certain types of 
guardianships may resemble the type of relationship that is included in 
the definition of family member depending on the facts and 
circumstances. Are there other types of family members that should be 
included? Why or why not? We note that family offices would still be 
able to seek a Commission exemptive order if they wanted to continue to 
advise family that did not meet our proposed definition of family 
member.
    We are aware that some families have added other families to their 
family office's clientele to achieve economies of scale and thus save 
on costs.\29\ The rule would not extend to family offices serving 
multiple families. We have never granted an exemptive order to a 
multifamily office declaring them not to be an investment adviser and 
thus including them would seem to be inconsistent with our prior 
exemptive policy. Many multifamily offices more resemble a typical 
commercial investment adviser appropriately subject to the Advisers 
Act. Should we permit multifamily offices to operate under this 
exclusion from the Advisers Act? If so, how would we distinguish 
between a multi-family commercial office and an office more closely 
resembling those operating under our exemptive orders (except providing 
advice to multiple families)?
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    \29\ See Hannah Shaw Grove & Russ Alan Prince, E Pluribus Unum, 
Registered Rep (May 1, 2004). These multi-family offices generally 
serve families with a lesser average net worth. See The Family 
Office, supra note 2 (finding that the average net worth for a 
multi-family office client to be $116 million).
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b. Involuntary Transfers
    We recognize that family offices may encounter situations in which 
assets under management are transferred involuntarily. We note that one 
implication of the proposed rule would be that a family office could 
continue to provide advice without becoming an investment adviser under 
the Advisers Act to a person that receives assets in an involuntary 
transfer only if the involuntary transaction is to a person that is a 
family client. For example, if

[[Page 63757]]

a family member in his will left assets in a family office-advised 
private fund to a charity that did not qualify as a family client, 
generally after that family member died the family office could not 
continue to provide investment advice with respect to those assets and 
still rely on rule 202(a)(11)(G)-1 to be excluded from the definition 
of an investment adviser. The proposed rule would permit the family 
office to continue to advise such a client without violating the terms 
of the exclusion for four months following the transfer of assets 
resulting from the involuntary event, which should allow that family 
office to orderly transition that client's assets to another investment 
adviser, seek exemptive relief, or otherwise restructure its activities 
to comply with the Advisers Act.\30\
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    \30\ Proposed rule 202(a)(11)(G)-1(b)(1).
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    We believe that this treatment of involuntary transfers is 
appropriate because after such a bequest, the office would no longer be 
providing advice solely to members of a single family, and after 
several such bequests the office would cease to operate as a family 
office. Indeed, we have never issued an exemptive order to a family 
office permitting involuntary transfers to non-family members. However, 
we recognize that the Commission in some contexts has treated 
involuntary transfers in this manner and in other contexts permitted 
involuntary transfers outside the family.\31\ We request comment on our 
proposed approach regarding involuntary transfers. Should we permit 
family clients to transfer assets advised by the family office to non-
family clients if there is a death or other involuntary event without 
jeopardizing the ability of the family office to rely on the exclusion 
under proposed rule 202(a)(11)(G)-1? If so, under what conditions and 
to what types of transferees? How would we distinguish between a 
typical commercial adviser serving both related and unrelated clients 
from a family office resembling those operating under our prior 
exemptive orders? Should we allow a different period of time or 
transition mechanism to transfer assets that a non-family client 
receives in an involuntary transfer to another investment adviser?
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    \31\ For example, under our rules addressing the exclusion of 
private funds from the definition of an investment company, the 
Commission has treated an involuntary transfer of securities as if 
the transfer had not occurred, consistent with the direction from 
Congress in the Investment Company Act. See 15 U.S.C. 80a-3(c)(1)(B) 
15 U.S.C. 80a-3(c)(7)(A); 17 CFR 270.3c-6. However, under our rules 
relating to the registration of securities pursuant to certain 
compensatory benefit plans, we have only permitted involuntary 
transfers to family members without jeopardizing the ability of the 
person to continue to rely on the exemptive provision. See 17 CFR 
230.701 (exempting offers and sales of securities under a written 
compensatory benefit plan or written compensation contract for the 
participation of employees, directors, general partners, trustees, 
officers, or consultants and advisors, and their family members who 
acquire such securities from such persons through gifts or domestic 
relations orders). See also General Instruction A.1(a)(5) to Form S-
8 (The form also is available for the exercise of employee benefit 
plan options and the subsequent resale of the underlying securities 
by an employee's family member who has acquired the options from the 
employee through a gift or a domestic relations order.); 
Registration of Securities on Form S-8, Securities Act Release No. 
7646 (Feb. 26, 1999) [64 FR 11103 (Mar. 8, 1999)], at section 
III.A.2 (explicitly rejecting expanding the availability of the 
abbreviated disclosure in Form S-8 for the exercise of employee 
benefit plan options transferred by gift to charities or to other 
``unrelated persons who are the object of the employee's 
generosity'' and stating that ``[w]hile we seek to facilitate 
employees' estate planning through the amendments we adopt today, we 
must keep in mind that investor protection is our primary 
objective'' and to ``permit entities that are not controlled by, or 
for the primary benefit of, an employee's family members to exercise 
options on Form S-8 would suggest that the abbreviated Form S-8 
disclosure is adequate for the offer and sale of securities to non-
employees generally. As discussed above, we remain firmly persuaded 
of the contrary view.'').
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c. Former Family Members
    None of our exemptive orders have permitted former family members 
to receive investment advice from an exempt family office.\32\ However, 
we recognize that divorces and other events may occur in some families 
covered by the rule and that addressing in our proposed rule the effect 
of these circumstances on the family office would provide clarity to 
family offices affected by such a legal separation from the family.
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    \32\ By including in the definition of ``founders'' any 
subsequent spouse of a founder, our proposed rule would address the 
situation in which the founders divorce and one or both of the 
founders subsequently remarries. See proposed rule 202(a)(11)(G)-
1(d)(5). Again, we are not aware of any applicant for an exemptive 
order having requested that the order cover this situation, but in 
formulating a rule of general applicability, we thought it important 
to address the impact of this situation on the family office's 
exclusion under the Advisers Act.
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    We propose permitting former family members, i.e., former spouses, 
spousal equivalents and stepchildren, to retain any investments held 
through the family office at the time they became a former family 
member.\33\ However, we propose to limit former family members from 
making any new investments through the family office.\34\ Our approach 
is designed to prevent such a separation from resulting in harmful 
investment or tax consequences, while also recognizing that such 
persons are no longer members of the family controlling the office, and 
thus would not be subject to the protections we assume accompany 
membership in a family. We request comment on this approach. Should we 
exclude former family members? Are there other approaches to treating 
such persons that we should consider?
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    \33\ Proposed rule 202(a)(11)(G)-1(d)(2)(vi), and (d)(4).
    \34\ The proposed rule would permit the family office to provide 
investment advice with respect to additional investments that the 
former spouse or spousal equivalent was contractually obligated to 
make, and that relate to a family-office advised investment 
existing, prior to the time the person became a former spouse or 
spousal equivalent (e.g., if the individual has a previously 
existing capital commitment to a private fund advised by the family 
office). See proposed rule 202(a)(11)(G)-1(d)(2)(vi).
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d. Family Trusts, Charitable Organizations, and Other Family Entities
    We also propose to treat as a ``family client'' any charitable 
foundation, charitable organization, or charitable trust established 
and funded exclusively by one or more family members \35\ and any trust 
or estate existing for the sole benefit of one or more family 
clients.\36\ Similarly, we would also treat as a family client any 
company,\37\ including a pooled investment vehicle, that is wholly 
owned and controlled, directly or indirectly, by one or more family 
clients and operated for the sole benefit of family clients.\38\ We 
generally have included these types of companies and organizations when 
owned and controlled by family members to be treated as permitted 
clients of the family office under our exemptive orders.\39\ Including 
them should allow the family office to structure its activities through 
typical investment structures. We request comment on this aspect of our 
proposal.
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    \35\ Proposed rule 202(a)(11)(G)-1(d)(2)(iii).
    \36\ Proposed rule 202(a)(11)(G)-1(d)(2)(iv).
    \37\ ``Company'' is defined in section 202(a)(5) of the Advisers 
Act to mean ``a corporation, a partnership, an association, a joint-
stock company, a trust, or any organized group of persons, whether 
incorporated or not; or any receiver, trustee in a case under title 
11, or similar official, or any liquidating agent for any of the 
foregoing, in his capacity as such.''
    \38\ Proposed rule 202(a)(11)(G)-1(d)(2)(v). Under proposed rule 
202(a)(11)(G)-1(d)(1), control would be defined as the power to 
exercise a controlling influence over the management or policies of 
an entity, unless such power is solely the result of being an 
officer of such entity. If any of these companies are pooled 
investment vehicles, they must be exempt from registration as an 
investment company under the Investment Company Act of 1940 because 
the Advisers Act requires that an adviser to a registered investment 
company must register. See 15 U.S.C. 80b-3a(a)(1)(B).
    \39\ See, e.g., Woodcock, supra note 21; Kamilche Company, 
Investment Advisers Act Release Nos. 1958 (Jul. 31, 2001) [66 FR 
41063 (Aug. 6, 2001)] (notice) and 1970 (Aug. 27, 2001) (order).

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[[Page 63758]]

e. Key Employees
    We also are proposing to treat as family members certain key 
employees of the family office so that they may receive investment 
advice from and participate in investment opportunities provided by the 
family office. Such persons have been treated like family members in 
some of our exemptive orders.\40\ Permitting participation by key 
employees allows such family offices to incentivize key employees to 
take a job with the family office and to create positive investment 
results at the family office under terms that could be available to 
them as employees of other types of money management firms. It is our 
understanding that in some cases family offices may need to provide 
such incentives to attract highly skilled investment professionals who 
may not otherwise be attracted to work at a family office.\41\
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    \40\ See, e.g., WLD, supra note 20 (family office provided 
investment advice to several executives of the family business and 
their trusts); Gates Capital Partners, LLC/Bear Creek, Inc., 
Investment Advisers Act Release Nos. 2590 (Feb. 16, 2007) [72 FR 
8405 (Feb. 26, 2007)] (notice) and 2599 (Mar. 20, 2007) (order) (two 
pooled investment vehicles advised by the family office had non-
voting interests owned by certain senior employees of the family 
office); Adler, supra note 15 (one long-standing employee held 
interest in one family office advised entity). These key employees 
typically either had their investments frozen or were permitted to 
continue their side-by-side investments through the family office 
but upon termination of employment were limited to investments at 
the time of termination along with reinvestment of accretions or 
distributions on the investment.
    \41\ See e.g., Robert Frank, Minding the Money--`Family Office' 
Chiefs Get Plied with Perks; Club Membership, Jets. The Wall Street 
Journal, at W2 (Sept. 7, 2007) (``a growing number of wealthy 
families are dangling the biggest perk of all: allowing their family 
office manager to become a ``participant,'' investing his or her own 
funds along with the family money in big deals''). But see Thomas 
Coyle, Family Offices Mostly unscathed by Overhaul, Dow Jones News 
Service (Jul. 16, 2010) (``family office recruiters don't think co-
investment plays a big role in attracting family office managers'').
---------------------------------------------------------------------------

    The Dodd-Frank Act acknowledges the Commission's exemptive policy 
in this area by requiring that in defining a ``family office'' we 
``recognize the range of organizational, management, and employment 
structures and arrangements employed by family offices'' in defining 
excluded family offices.\42\ The Senate committee report explained that 
some family offices have non-family member directors, officers, and 
employees that may co-invest with family members, enabling them to 
share in the profits of investments that they oversee and better 
aligning the interests of such persons with those of the family members 
served by the family office.\43\ The report states that it expected 
that ``such arrangements would not automatically exclude a family 
office from the definition.'' \44\
---------------------------------------------------------------------------

    \42\ Section 409(b)(2) of the Dodd-Frank Act.
    \43\ Senate Committee Report, supra note 12, at 76.
    \44\ Id.
---------------------------------------------------------------------------

    The proposed rule would permit the family office to provide 
investment advice to any natural person (including persons who hold 
joint and community property with their spouse) who is (i) an executive 
officer, director, trustee, general partner, or person serving a 
similar capacity of the family office, or (ii) any other employee of 
the family office (other than an employee performing solely clerical, 
secretarial, or administrative functions) who, in connection with his 
or her regular duties, has participated in the investment activities of 
the family office, or similar functions or duties for or on behalf of 
another company, for at least twelve months.\45\
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    \45\ Proposed rule 202(a)(11)(G)-1(d)(6). The proposed rule also 
would permit the family office to provide investment advice to 
trusts created for the sole benefit of family clients (which could 
include these key employees), and to other entities wholly owned and 
controlled by and operated for the sole benefit of family clients. 
Proposed rule 202(a)(11)(G)-1(d)(2)(iv)-(v).
---------------------------------------------------------------------------

    We believe that this standard would limit employees who participate 
without the protections of the Advisers Act (or family membership) to 
those employees that are likely to be in a position or have a level of 
knowledge and experience in financial matters sufficient to be able to 
evaluate the risks and take steps to protect themselves. This 
definition of key employee is based on the ``knowledgeable employee 
standard'' currently contained in Advisers Act rule 205-3(d)(iii), 
which specifies the types of clients to whom the adviser may charge 
performance fees.\46\ We adopted the knowledgeable employee exception 
in the performance fee rule based on a similar policy conclusion that 
these types of employees are likely to be sophisticated financially and 
not need the protections of the Advisers Act's restrictions on 
performance fees.\47\
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    \46\ The knowledgeable employee standard in Advisers Act rule 
205-3 was itself based on the similar standard under the Investment 
Company Act of 1940 for knowledgeable employees of private funds 
that are exempt from registration under the Investment Company Act 
through section 3(c)(1) or 3(c)(7) of the Investment Company Act. 
See rule 3c-5 under the Investment Company Act [17 CFR 270.3c-5]; 
Exemption To Allow Investment Advisers To Charge Fees Based upon a 
Share of Capital Gains upon or Capital Appreciation of a Client's 
Account, Investment Advisers Act Release No. IA-1731 (Jul. 15, 1998) 
[63 FR 39022 (Jul. 21, 1998)], at nn.24-28 and accompanying text.
    \47\ See Exemption To Allow Investment Advisers To Charge Fees 
Based upon a Share of Capital Gains upon or Capital Appreciation of 
a Client's Account, Investment Advisers Act Release No. IA-1731 
(Jul. 15, 1998) [63 FR 39022 (Jul. 21, 1998)], at nn.24-28 and 
accompanying text.
---------------------------------------------------------------------------

    Similar to our treatment of family members under the proposed rule, 
key employees would be able to structure their investments through 
trusts and other entities, subject to the conditions relating to 
control and ownership described earlier in this Release.\48\ Upon the 
end of key employees' employment by the family office, key employees 
(including their trusts and controlled entities) would not be permitted 
to make additional investments through the family office.\49\ Similar 
to our treatment of former spouses, spousal equivalents, and 
stepchildren, our proposed rule would not require former key employees 
to liquidate or transfer investments held through the family office at 
the time of the end of their employment, however, to avoid imposing 
possible adverse tax or investment consequences that might otherwise 
result.
---------------------------------------------------------------------------

    \48\ See section II.A.1.d of this Release. See also WLD, supra 
note 20 (permitting the family office to advise key employee 
trusts).
    \49\ Proposed rule 202(a)(11)(G)-1(d)(2)(vii).
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    We request comment on our proposed treatment of investments by 
employees of the family office. Should we permit key employees to 
receive investment advice through the family office? Do family offices 
rely on allowing co-investment to attract talented investment 
professionals to work at the family office? Should the definition of 
key employee be based on the knowledgeable employee standard in rule 
205-3 under the Advisers Act? Are there restrictions that we should 
consider imposing as a condition to such investment to help protect 
non-family members investing through the family office? Should we allow 
former key employees to retain their investments through the family 
office at the time of termination? Are any of our conditions too 
restrictive? For example, should we modify or eliminate the 12-month 
experience requirement for key employees? If so, how and why? Are there 
other types of individuals or entities that should be permitted to 
invest through the family office without jeopardizing that family 
office's exclusion under the Advisers Act?
    More broadly, we request comment on our definition of who is 
considered a ``family client.'' We have not included every type of 
individual or entity that has been included in a prior exemptive order 
based on specific facts and circumstances. We do not believe we could 
have taken such an approach in a rule of general applicability and we 
note that family offices would remain free to seek a Commission 
exemptive order to advise an individual or entity

[[Page 63759]]

that does not meet our proposed family client definition. However, we 
request comment on our approach. Are there other individuals or 
entities that should be included? Under our proposed rule, the family 
office could not provide investment advice to a person that may have a 
long employment relationship with the family but does not qualify as a 
``key employee.'' Are there other types of individuals that commonly 
have close ties to a family that should be included as a family client? 
We note that as a family office extends its provision of investment 
advice beyond family members, it increasingly resembles a more typical 
commercial investment advisory business, and not a family managing its 
own wealth.
2. Ownership and Control
    We propose that to operate under the proposed exclusion from the 
Advisers Act the family office be wholly owned and controlled, either 
directly or indirectly, by family members.\50\ This condition generally 
is consistent with our exemptive orders \51\ and assures that the 
family is in a position to protect its own interests and thus is less 
likely to need the protection of the Federal securities laws.
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    \50\ Proposed rule 202(a)(11)(G)-1(b)(2).
    \51\ See, e.g., WLD, supra note 20 (requiring that a majority of 
the board of directors of the family office be comprised of family 
members and that the family office be wholly owned by family 
members); Slick Enterprises, Inc., Investment Advisers Act Release 
Nos. 2736 (May 22, 2008) [73 FR 30984 (May 29, 2008)] (notice) and 
2745 (June 20, 2008) (order) (same) (``Slick'').
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    This condition also helps distinguish family offices from family-
run offices that may provide advice to other people, as well as other 
families, and operates as a more typical commercial investment adviser. 
Most family offices that have obtained an exemptive order from the 
Commission under the Advisers Act have represented that they did not 
operate for the purpose of generating a profit and charged fees 
designed to just cover their costs.\52\ This feature helped distinguish 
these family offices from the family-run investment advisory businesses 
that the Advisers Act appropriately regulates. Requiring that the 
family office be wholly owned by family members alleviates any concern 
that we may otherwise have about the profit structure of the family 
office, because any profits generated by the family office from 
managing family clients' assets only accrue to family members. 
Accordingly, we are not proposing a specific condition regarding 
whether the family office generates a profit.
---------------------------------------------------------------------------

    \52\ See, e.g., WLD, supra note 20; Adler, supra note 15; 
Parkland Management Company, L.L.C., Investment Advisers Act Release 
Nos. 2362 (Feb. 24, 2005) [70 FR 10155 (Mar. 2, 2005)] (notice) and 
2369 (Mar. 22, 2005) (order); Longview Management Group LLC, 
Investment Advisers Act Release Nos. 2008 (Jan. 3, 2002) [67 FR 1251 
(Jan. 9, 2002)] (notice) and 2013 (Feb. 7, 2002) (order).
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    We request comment on the condition that the family office be 
wholly owned and controlled by family members. Are there reasons that 
we should not require that the family office be wholly owned and 
controlled by family members? Should some minor ownership stake of non-
family members be permitted? \53\ If we permitted non-family members to 
own a minor ownership stake in the family office, what other 
protections should we impose to ensure that the family office did not 
operate as a more typical commercial investment adviser? Are there 
other restrictions on ownership and control of the family office that 
we should impose consistent with our policy goals? Should we also 
require that the family office be operated without the intent of 
generating a profit or only charge fees designed to cover its costs and 
the compensation of its employees?
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    \53\ In one case we granted an exemptive order to a family 
office in which four churches owned a small interest in the family 
office. See Pitcairn, supra note 7. In one other case we granted an 
exemptive order to a family office owned by a trust in which half of 
the trustees were independent and half of the trustees were family 
members. See Moreland Management Company, Investment Advisers Act 
Release Nos. 1700 (Feb. 12, 1998) [63 FR 8710 (Feb. 20, 1998)] 
(notice) and 1706 (Mar. 10, 1998) (order).
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3. Holding Out
    Consistent with our exemptive orders,\54\ we propose to prohibit a 
family office relying on the rule from holding itself out to the public 
as an investment adviser.\55\ Holding itself out to the public as an 
investment adviser suggests that the family office is seeking to enter 
into typical advisory relationships with non-family clients, and thus 
is inconsistent with the basis on which we have provided exemptive 
orders and this proposed rule.\56\ We request comment on this proposed 
condition. Are there circumstances where a family office holding itself 
out to the general public as an investment adviser should nevertheless 
be excluded from the protections afforded to the investing public under 
the Advisers Act?
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    \54\ See, e.g., WLD, supra note 20; Woodcock, supra note 21; 
Slick, supra note 51.
    \55\ Proposed rule 202(a)(11)(G)-1(b)(3).
    \56\ We note that the exemption from registration under section 
202(b)(3) of the Advisers Act is not available to a person that 
holds himself out as an investment adviser. In addition, our staff 
has stated that a person that holds himself out as an investment 
adviser or as one who provides investment advice satisfies the ``in 
the business'' element of being an investment adviser under the 
Advisers Act. See Applicability of the Investment Advisers Act to 
Financial Planners, Pension Consultants, and Other Persons Who 
Provide Investment Advisory Services as a Component of Other 
Financial Services, Investment Advisers Act Release No. 1092 (Oct. 
8, 1987) [52 FR 38400 (Oct. 16, 1987)].
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4. Grandfathering Provisions
    The Dodd-Frank Act prohibits us from excluding from our definition 
of family office persons not registered or required to be registered on 
January 1, 2010 that would meet all of the required conditions under 
rule 202(a)(11)(G)-1 but for their provision of investment advice to 
certain clients specified in section 409(b)(3) of the Dodd-Frank 
Act.\57\ We have incorporated this required grandfathering into 
paragraph (c) of our proposed rule.\58\
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    \57\ See section 409(b)(3) and (c) of the Dodd-Frank Act. The 
family office must have been providing investment advice to such 
clients before January 1, 2010. The grandfathered clients are 
natural persons who, at the time of their investment, are officers, 
directors, or employees of the family office, and had invested with 
the family office before January 1, 2010. These clients must be 
accredited investors under Regulation D of the Securities Act of 
1933. The other grandfathered clients are investment advisers 
registered under the Advisers Act that in turn provide investment 
advice and identify investment opportunities to the family office 
and invest in such transactions on substantially the same terms as 
the family office invests, but does not invest in other funds 
advised by the family office and whose assets as to which the family 
office directly or indirectly provides investment advice represent, 
in the aggregate, not more than 5% of the value of the total assets 
as to which the family office provides investment advice. See 
proposed rule 202(a)(11)(G)-1(c).
    \58\ A family office that will only qualify for the exclusion 
under section 202(a)(11)(G) of the Advisers Act, as amended by the 
Dodd-Frank Act, because of section 409(b)(3) of the Dodd-Frank Act 
will still be subject to paragraphs (1), (2) and (4) of section 206 
of the Advisers Act. See section 409(c) of the Dodd-Frank Act.
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B. Effect of Rule on Previously Issued Exemptive Orders

    As discussed above, the Commission has issued orders under section 
202(a)(11)(G) of the Advisers Act to certain family offices declaring 
them and their employees acting within the scope of their employment to 
not be investment advisers within the intent of the Act. In some areas 
these exemptive orders may be slightly broader than the rule we are 
proposing today, and in other areas they may be narrower.
    We are not proposing to rescind the orders we have issued to family 
offices because we do not believe that the policy behind the previously 
issued orders differs substantially from that of our proposal. Further, 
single family offices do not compete with one another and thus there is 
no need to rescind exemptive orders to create a ``level playing 
field.'' Family offices currently

[[Page 63760]]

operating under these orders could continue to rely on those orders or, 
if they meet the conditions of proposed rule 202(a)(11)(G)-1, they 
could rely on the rule. We request comment on whether we should rescind 
previous orders granted to family offices under section 202(a)(11)(G) 
of the Advisers Act. Should we rescind the very early orders that did 
not impose all of the same conditions as more recent orders?

III. General Request for Comment

    The Commission requests comment on the rule proposed in this 
Release, suggestions for additional changes to the existing rules and 
comment on other matters that might have an effect on the proposals 
contained in this Release. Commenters should provide empirical data to 
support their views.

IV. Paperwork Reduction Act

    Proposed rule 202(a)(11)(G)-1 does not contain a ``collection of 
information'' requirement within the meaning of the Paperwork Reduction 
Act of 1995.\59\ Accordingly, the Paperwork Reduction Act is not 
applicable.
---------------------------------------------------------------------------

    \59\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

V. Cost-Benefit Analysis

    We have identified certain costs and benefits of the proposed new 
rule, and we request comment on all aspects of this cost benefit 
analysis, including identification and assessment of any costs and 
benefits not discussed in this analysis. We seek comment and data on 
the value of the benefits identified. We also welcome comments on the 
accuracy of the cost estimates in this analysis, and request that 
commenters provide data that may be relevant to these cost estimates. 
In addition, we seek estimates and views regarding these costs and 
benefits for particular family offices as well as any other costs or 
benefits that may result from the adoption of the proposed new rule.
    In proposing this rule, we are responding to the Dodd-Frank Act's 
repeal of section 203(b)(3) of the Advisers Act and proposing a new 
exclusion for a ``family office,'' which Congress anticipated we would 
define.\60\ Proposed rule 202(a)(11)(G)-1 would exclude from regulation 
under the Advisers Act family offices that meet the qualifications and 
conditions contained in the proposed rule. Among other matters, to 
qualify as an excluded family office, the family office generally must 
have no non-family clients, must be wholly owned and controlled by 
family members, and must not hold itself out to the public as an 
investment adviser.
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    \60\ See section 409 of the Dodd-Frank Act.
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A. Benefits

    As discussed earlier in this Release, we expect that proposed rule 
202(a)(11)(G)-1 would yield several important benefits. First, the 
proposed rule would result in several benefits for excluded family 
offices that do not already have an exemptive order. They would not be 
subject to the costs of registering with the Commission as an 
investment adviser and its associated compliance costs (or if they were 
previously registered, they would benefit from the reduced regulatory 
costs after de-registering in reliance on the exclusion). These reduced 
regulatory costs should result in direct cost savings to these family 
offices, and thus to their family clients. Excluded family offices 
would be able to maintain greater privacy because they would not have 
to make the public filings with the Commission that they would 
otherwise have to make as a registered investment adviser.
    The proposed rule also would benefit the Commission and family 
offices that meet the conditions of the proposed rule and their clients 
by eliminating the costs and inefficiencies of seeking (and 
considering) individual exemptive orders. As discussed above, family 
offices that did not qualify for the exemption from registration 
contained in section 203(b)(3) of the Advisers Act often applied to the 
Commission for exemptive relief from the Advisers Act. Following the 
repeal of the exemption contained in section 203(b)(3), we would expect 
a much greater number of family offices to otherwise apply for 
exemptive relief absent our rule proposal.\61\ We estimate that a 
typical family office (and thus indirectly their family clients) would 
incur legal fees of $200,000 on average to engage in the exemptive 
order application process, including preparation and revision of an 
application and consultations with Commission staff.\62\ The proposed 
rule would benefit qualifying family offices and their family clients 
by eliminating the costs of applying to the Commission for an exemptive 
order to avoid registration and the associated compliance burdens. It 
also would benefit excluded family offices and their family clients by 
eliminating the uncertainty that they might not obtain such an order.
---------------------------------------------------------------------------

    \61\ See supra note 3 and accompanying text for industry 
estimates of the number of single family offices.
    \62\ This estimate is based on our understanding of typical 
outside legal fees for past applications.
---------------------------------------------------------------------------

    The proposed rule also would benefit the Commission by freeing 
staff resources from reviewing and processing family office exemptive 
applications that would result from the repeal of section 203(b)(3) of 
the Advisers Act in many cases where the staff would likely recommend 
to the Commission that exclusion from regulation under the Advisers Act 
was appropriate and in the public interest, allowing the staff to 
target its work more efficiently, and thus would indirectly benefit 
investors.
    We seek comment on whether the elimination of these costs would 
result in additional benefits to family offices or their clients.

B. Costs

    We recognize that there are costs that could result if we adopted 
our proposed rule. We do not expect that the proposed rule would impose 
any significant costs on family offices currently operating under a 
Commission exemptive order. We are permitting these family offices to 
continue to rely on their exemptive orders and thus would expect them 
to do so if the costs to do so were lower than complying with the 
proposed rule. We expect that most of these family offices could 
satisfy all the conditions of the rule without changing their structure 
or operations. However, these family offices may incur one-time 
``learning costs'' in determining the differences between their orders 
and the rule. We expect that such costs would be no more than $5,000 on 
average for a family office if it hires an external consulting firm or 
law firm to assist in determining the differences.\63\ There are 13 
family offices that have obtained exemptive orders. Accordingly, we 
estimate that these family offices collectively would incur outside 
consulting or legal expenses of $65,000 to discern the differences 
between their orders and the rule.
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    \63\ We expect that a family office would need no more than 10 
hours of consulting or legal advice to learn the differences between 
its order and the rule. We estimate that this advice would cost the 
family office $500 per hour based on our understanding of the rates 
typically charged by outside consulting or law firms.
---------------------------------------------------------------------------

    As discussed above, there are a number of family offices that 
currently are not registered as an investment adviser in reliance on 
the exemption from registration in section 203(b)(3) of the Advisers 
Act. The proposed rule would not impose any costs on those advisers 
because they currently are exempt from registration and thus would have 
no reason to consider whether they would rather rely on the proposed 
rule to relieve them of the

[[Page 63761]]

burdens associated with being a registered investment adviser. After 
July 21, 2010, section 203(b)(3) of the Advisers Act will be repealed 
and as a result, some of these family offices would be subject to the 
costs and burdens of registration under the Advisers Act. However, 
these costs are a consequence of section 403 of the Dodd-Frank Act 
repealing the section 203(b)(3) exemption, and not this rulemaking. 
Accordingly, we do not attribute these costs to this rulemaking and 
thus are not considering them.
    We recognize that some family offices may decide to restructure 
their business to meet the conditions imposed by proposed rule 
202(a)(11)(G)-1 so that they would avoid the costs and burdens of 
registration in reliance on our proposed rule. Some family offices may 
need to reorganize the ownership or control structure of the family 
office in order to meet the family office definition under the proposed 
rule. We estimate that this type of reorganization could be 
accomplished without significant costs being imposed on the family 
office because we estimate that most family offices are wholly owned 
and those that are not only have a small number of non-family members 
with ownership interests. Other family offices may have to terminate 
providing investment advice to certain persons because they would not 
meet the definition of a ``family client,'' which may require these 
individuals to divest interests in pooled investment vehicles and other 
entities advised by the family office. The costs of any such 
restructuring would be highly dependent on the nature and extent of 
investment of these non-qualifying clients through the family office, 
which we understand may vary significantly from family office to family 
office.
    Finally, if there were any family offices that previously 
registered with the Commission, but now may de-register in reliance on 
the new family office exclusion in the Advisers Act, the proposed rule 
may have competitive effects on investment advisers that may compete 
with the family office for the provision of investment management 
services to family clients since these third party investment advisers 
would bear the regulatory costs associated with compliance with the 
Advisers Act or state investment adviser regulatory requirements. We do 
not expect that the proposed rule would impact capital formation.
    We request comment on this analysis. Would family offices that 
currently rely on an order bear lower costs if they rely on the 
proposed rule? What amount and types of costs will these family offices 
bear as a result of the proposed rule? How many family offices are 
likely to restructure and in what ways? At what cost? What competitive 
impacts may result if registered family offices de-register if the 
proposed rule is adopted?

C. Request for Comment

    The Commission requests comments on all aspects of the cost-benefit 
analysis, including the accuracy of the potential costs and benefits 
identified and assessed in this Release, as well as any other costs or 
benefits that may result from the proposals. We encourage commenters to 
identify, discuss, analyze, and supply relevant data regarding these or 
additional costs and benefits. For purposes of the Small Business 
Regulatory Enforcement Fairness Act of 1996,\64\ the Commission also 
requests information regarding the potential annual effect of the 
proposals on the U.S. economy. Commenters are requested to provide 
empirical data to support their views.
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    \64\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
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VI. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') regarding proposed rule 202(a)(11)(G)-1 
in accordance with section 3(a) of the Regulatory Flexibility Act.\65\
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    \65\ 5 U.S.C. 603(a).
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A. Reasons for Proposed Action

    We are proposing rule 202(a)(11)(G)-1 defining family offices 
excluded from regulation under the Advisers Act because we are required 
to do so under Section 409 of the Dodd-Frank Act.

B. Objectives and Legal Basis

    As described more fully in Sections I and II of this Release, the 
general objective of proposed rule 202(a)(11)(G)-1 is to define a 
family office consistent with prior Commission exemptive policy 
consistent with the Dodd-Frank Act. The Commission is proposing rule 
202(a)(11)(G)-1 pursuant to our authority set forth in section 
202(a)(11)(G) of the Advisers Act [15 U.S.C. 80b-2(a)(11)(G)].

C. Small Entities Subject to the Rule

    Under Commission rules, for the purposes of the Advisers Act and 
the Regulatory Flexibility Act, an investment adviser generally is a 
small entity if it: (i) Has assets under management having a total 
value of less than $25 million; (ii) did not have total assets of $5 
million or more on the last day of its most recent fiscal year; and 
(iii) does not control, is not controlled by, and is not under common 
control with another investment adviser that has assets under 
management of $25 million or more, or any person (other than a natural 
person) that had $5 million or more on the last day of its most recent 
fiscal year.\66\
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    \66\ 17 CFR 275.0-7(a).
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    We do not have data and are not aware of any databases that compile 
information regarding how many family offices would be a small entity 
under this definition, but since family offices only are established 
for the very wealthy and given the statistics noted earlier showing 
that they generally serve families with at least $100 million or more 
of investable assets and have an average net worth of $517 million, we 
believe it is unlikely that any family offices would be small 
entities.\67\
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    \67\ See supra note 2 and accompanying text. See also The Family 
Office, supra note 2 (finding investable assets of single family 
offices surveyed ranged from $197 million to $843 million); Family 
Wealth Alliance, Single-Family Office Study Executive Summary, 
available at http://www.fwalliance.com/store/
2ndannualsinglefamilystudy.html (finding assets under management of 
surveyed single family offices ranged from $51 million to $2.1 
billion); Wharton Study, supra note 4, at 4 (stating that surveyed 
single family offices had at least $100 million in investable 
assets).
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    Proposed rule 202(a)(11)(G)-1 would impose no reporting, 
recordkeeping or other compliance requirements.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission has not identified any Federal rules that duplicate, 
overlap, or conflict with the proposed rule.

F. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant impact on small entities. In 
connection with the proposed rules and amendments, the Commission 
considered the following alternatives: (i) The establishment of 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities; (ii) the 
clarification, consolidation, or simplification of compliance and 
reporting requirements under the rule for small entities; (iii) the use 
of performance rather than design standards; and (iv) an exemption from 
coverage of the rule, or any part thereof, for small entities.

[[Page 63762]]

    Proposed rule 202(a)(11)(G)-1 is exemptive and compliance with the 
rule would be voluntary. We therefore do not believe that different or 
simplified compliance, timetable, or reporting requirements, or an 
exemption from coverage of the proposed rule for small entities would 
be appropriate. The conditions in the proposed rule are designed to 
ensure that family offices operating under the rule would only impact 
the family itself and not the general public and, accordingly, the 
protections of the Advisers Act are not warranted. Reducing these 
conditions for smaller family offices would be inconsistent with the 
policy underlying the exclusion and would harm investor protection.
    Our prior exemptive orders have not made any differentiation based 
on the size of the family office. In addition, as discussed above, we 
expect that very few, if any, family offices are small entities. The 
Commission also believes that proposed rule 202(a)(11)(G)-1 would 
decrease burdens on small entities by making it unnecessary for them to 
seek an exemptive order from the Commission to operate without 
registration under the Advisers Act. As a result, we do not anticipate 
that the potential impact of the proposed rule on small entities would 
be significant.
    The proposed rule specifies broad conditions with which a family 
office must comply to rely on the exclusion; the proposed rule leaves 
to each family office how to structure its specific operations to meet 
these conditions. The proposed rule thus already incorporates 
performance rather than design standards. For these reasons, 
alternatives to the proposed rule appear unnecessary and in any event 
are unlikely to minimize any impact that the proposed rule might have 
on small entities.

G. Solicitation of Comments

    We encourage written comments on matters discussed in this IRFA. In 
particular, the Commission seeks comment on:
     The number of small entities that would be affected by the 
proposed rule; and
     Whether the effect of the proposed rule on small entities 
would be economically significant.
    Commenters are asked to describe the nature of any effect and 
provide empirical data supporting the extent of the effect.

VII. Statutory Authority

    We are proposing rule 202(a)(11)(G)-1 [17 CFR 275.202(a)(11)(G)-1] 
pursuant to our authority set forth in section 202(a)(11)(G) of the 
Advisers Act [15 U.S.C. 80b-2(a)(11)(G)].

List of Subjects in 17 CFR Part 275

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rule

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    1. The authority citation for Part 275 continues to read in part as 
follows:

    Authority:  15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-
4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
* * * * *
    2. Section 275.202(a)(11)(G)-1 is added to read as follows:


Sec.  275.202(a)(11)(G)-1  Family offices.

    (a) Exclusion. A family office, as defined in this section, shall 
not be considered to be an investment adviser for purpose of the Act.
    (b) Family office. A family office is a company (including its 
directors, partners, trustees, and employees acting within the scope of 
their position or employment) that:
    (1) Has no clients other than family clients; provided that if a 
person that is not a family client becomes a client of the family 
office as a result of the death of a family member or key employee or 
other involuntary transfer from a family member or key employee, that 
person shall be deemed to be a family client for purposes of this Sec.  
275.202(a)(11)(G)-1 for four months following the transfer of assets 
resulting from the involuntary event;
    (2) Is wholly owned and controlled (directly or indirectly) by 
family members; and
    (3) Does not hold itself out to the public as an investment 
adviser.
    (c) Grandfathering. A family office as defined in paragraph (a) of 
this section shall not exclude any person, who was not registered or 
required to be registered under the Act on January 1, 2010, solely 
because such person provides investment advice to, and was engaged 
before January 1, 2010 in providing investment advice to:
    (1) Natural persons who, at the time of their applicable 
investment, are officers, directors, or employees of the family office 
who have invested with the family office before January 1, 2010 and are 
accredited investors, as defined in Regulation D under the Securities 
Act of 1933;
    (2) Any company owned exclusively and controlled by one or more 
family members; or
    (3) Any investment adviser registered under the Act that provides 
investment advice to the family office and who identifies investment 
opportunities to the family office, and invests in such transactions on 
substantially the same terms as the family office invests, but does not 
invest in other funds advised by the family office, and whose assets as 
to which the family office directly or indirectly provides investment 
advice represents, in the aggregate, not more than 5 percent of the 
value of the total assets as to which the family office provides 
investment advice; provided that a family office that would not be a 
family office but for this paragraph (c) shall be deemed to be an 
investment adviser for purposes of paragraphs (1), (2) and (4) of 
section 206 of the Act.
    (d) Definitions. For purposes of this section:
    (1) Control means the power to exercise a controlling influence 
over the management or policies of a company, unless such power is 
solely the result of being an officer of such company.
    (2) Family client means:
    (i) Any family member;
    (ii) Any key employee;
    (iii) Any charitable foundation, charitable organization, or 
charitable trust, in each case established and funded exclusively by 
one or more family members or former family members;
    (iv) Any trust or estate existing for the sole benefit of one or 
more family clients;
    (v) Any limited liability company, partnership, corporation, or 
other entity wholly owned and controlled (directly or indirectly) 
exclusively by, and operated for the sole benefit of, one or more 
family clients; provided that if any such entity is a pooled investment 
vehicle, it is excepted from the definition of ``investment company'' 
under the Investment Company Act of 1940;
    (vi) Any former family member, provided that from and after 
becoming a former family member the individual shall not receive 
investment advice from the family office (or invest additional assets 
with a family office-advised trust, foundation or entity) other than 
with respect to assets advised (directly or indirectly) by the family 
office immediately prior to the time that the individual became a 
former family member, except that a former family member shall be 
permitted to receive investment advice from the family office with 
respect to additional investments that the former family member was

[[Page 63763]]

contractually obligated to make, and that relate to a family-office 
advised investment existing, in each case prior to the time the person 
became a former family member; or
    (vii) Any former key employee, provided that upon the end of such 
individual's employment by the family office, the former key employee 
shall not receive investment advice from the family office (or invest 
additional assets with a family office-advised trust, foundation or 
entity) other than with respect to assets advised (directly or 
indirectly) by the family office immediately prior to the end of such 
individual's employment, except that a former key employee shall be 
permitted to receive investment advice from the family office with 
respect to additional investments that the former key employee was 
contractually obligated to make, and that relate to a family-office 
advised investment existing, in each case prior to the time the person 
became a former key employee.
    (3) Family member means:
    (i) The founders, their lineal descendants (including by adoption 
and stepchildren), and such lineal descendants' spouses or spousal 
equivalents;
    (ii) The parents of the founders; and
    (iii) The siblings of the founders and such siblings' spouses or 
spousal equivalents and their lineal descendants (including by adoption 
and stepchildren) and such lineal descendants' spouses or spousal 
equivalents.
    (4) Former family member means a spouse, spousal equivalent, or 
stepchild that was a family member but is no longer a family member due 
to a divorce or other similar event.
    (5) Founders means the natural person and his or her spouse or 
spousal equivalent for whose benefit the family office was established 
and any subsequent spouse of such individuals.
    (6) Key employee means any natural person (including any person who 
holds a joint, community property, or other similar shared ownership 
interest with that person's spouse or spousal equivalent) who is an 
executive officer, director, trustee, general partner, or person 
serving in a similar capacity of the family office or any employee of 
the family office (other than an employee performing solely clerical, 
secretarial, or administrative functions with regard to the family 
office) who, in connection with his or her regular functions or duties, 
participates in the investment activities of the family office, 
provided that such employee has been performing such functions and 
duties for or on behalf of the family office, or substantially similar 
functions or duties for or on behalf of another company, for at least 
12 months.
    (7) Spousal equivalent means a cohabitant occupying a relationship 
generally equivalent to that of a spouse.

    Dated: October 12, 2010.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-26086 Filed 10-15-10; 8:45 am]
BILLING CODE 8011-01-P

