Family Office as Investment Advisor under FINRA Rule 5131

October 4, 2017

The Financial Industry Regulatory Authority, Inc. (“FINRA”) recently issued an Interpretive Letter (the “Letter”) stating that a family office1 (as defined under SEC rules) is included under the definition of an “investment adviser” for purposes of FINRA Rule 5131 (“Rule 5131”).

Rule 5131 addresses certain conduct of FINRA broker-dealers and prohibits “spinning”. “Spinning” generally refers to the allocation of new issues2 by a FINRA broker-dealer to certain persons who are affiliated with a company that is a current, former or prospective investment banking client of the broker-dealer.

Rule 5131 provides a limited exception permitting FINRA broker-dealers to rely upon a written representation obtained within the prior twelve (12) months from a person authorized to represent an account that does not look through to the beneficial owners of any unaffiliated private fund invested in the account, except for beneficial owners that are control persons of the investment adviser to the private fund, if the unaffiliated private fund meets certain conditions3. Rule 5131 does not define “investment adviser” for purposes of the rule or the exception set forth above. Though family offices manage private funds, they are excluded from the definition of “investment adviser” under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).

The Letter interprets “investment adviser” to include a family office for purposes of Rule 5131, allowing family offices to take advantage of the limited exemption with respect to private funds managed by a family office, as long as the other conditions are met. FINRA noted in the Letter that the policy reasons for excluding family offices from the “investment adviser” definition under the Advisers Act is for policy reasons unrelated to Rule 5131, and therefore FINRA believes that notwithstanding the fact that a family office is not an “investment adviser” under the Advisers Act, they are for purposes of Rule 5131.

It is important to note, however, that a separate determination will need to be made whether the family office is eligible to participate in new issues under FINRA Rule 5130.

If you have any questions concerning any information contained in this Memorandum, please contact your primary attorney in Seward & Kissel’s Investment Management Group.


1 A family office is a company that: (i) has no clients other than “family clients”; (ii) is wholly-owned by family clients and exclusively controlled (directly or indirectly) by one or more “family members” or family entities; and (iii) does not hold itself out to the public as an investment advisers. Rule 202(a)(11)(G)-1 of the Advisers Act.

2 Any initial public offering of an equity security made pursuant to a registration statement or an offering circular (i.e., not a secondary offering), excluding certain various exceptions. FINRA Rule 5130(i)(9).

3 The unaffiliated private fund must: (i) be managed by an investment adviser; (ii) have assets greater than $50 million; (iii) own less than 25 percent of the account and is not a fund in which a single investor has a beneficial interest of 35 percent or more; and (iv) not be formed for the specific purpose of investing in the account.