Family Offices
This chapter addresses the business organization and governance design needed to establish and maintain a qualifying family office that satisfies the federal exclusion from investment advisor registration.
Section 202(a)(11)(G) of the Investment Advisers Act of 1940, codified at 15 U.S.C. § 80b–2(a)(11)(G), excludes “any family office” from the definition of “investment adviser.” The Securities and Exchange Commission (SEC) adopted rule 202(a)(11)(G)–1, codified at 17 C.F.R. § 275.202(a)(11)(G)–1, to define “family office” and establish the specific requirements an entity must meet to qualify for the statutory exclusion.
Family offices have become a significant business organization structure in Texas transactional practice. The number of family offices in Texas and the United States has grown exponentially over the past few decades and continues to grow. The most common reason a family office is established is an attempt by families to centralize management of their financial, investment, and governance affairs through a dedicated private entity, predominately after major liquidity events.
Family offices serve broader purposes, including—
•providing a professional platform for multi-generational wealth management,
•creating formal governance mechanisms for family decision-making and succession planning, and
•enabling families to participate directly in private investments and mergers and acquisitions (M&A) as institutional actors rather than relying exclusively on outside fund managers.
The family office structure is formed to provide these services to the family while avoiding the costly and burdensome requirements of having to register as an investment advisor with the SEC and the state of Texas.
From a business organizations perspective, Texas practitioners may encounter family offices across multiple practice contexts: as buyers or co-investors in private M&A transactions, as entities requiring entity formation and governance documentation, as employers drafting sophisticated compensation arrangements for investment professionals, and increasingly in regulatory matters when informal family arrangements require formalization.
§ 26.2Structure and Operations
A family office can take the form of many different entity types, provided ownership and control remain within the family group and there is functional separation between personal wealth management and any commercial business operations. A family office can be a standalone LLC, limited partnership, corporation, or even a division embedded within an existing family operating business. The critical threshold issue is whether the family office provides investment advice for compensation. Doing so triggers the Investment Advisers Act of 1940 unless the entity is properly structured to qualify for the federal family office exclusion. This exclusion is codified at 15 U.S.C. § 80b–2(a)(11)(G) and implemented through the SEC rule at 17 C.F.R. § 275.202(a)(11)(G)–1.
17 C.F.R. § 275.202(a)(11)(G)–1(b) requires three conditions for the family office exclusion to apply:
1.The family office must serve only statutorily defined “family clients.”
2.The family office must be wholly owned and exclusively controlled by family members or family entities.
3.The family office must refrain from holding itself out to the public as an investment adviser.
The full list of statutorily defined “family clients” is found in 17 C.F.R. § 275.202(a)(11)(G)–1(d)(4).
Caveat: Proper entity documentation is essential because inadvertent violations (such as providing advice to a business partner or key employee who does not qualify as a “family client”) will remove the family office exclusion and require immediate SEC registration obligations that most family offices cannot and will not satisfy. The most critical documentation is the business entity’s operating agreement. To properly set up a family office in a business entity, the operating agreement must restrict membership, control, and services to compliant parameters.