The staff of the Division of Investment Management (IM) recently issued a flurry of interpretive guidance regarding when advisers are deemed to have custody of their clients’ funds and securities. The guidance covers transfers among a client’s custodial accounts, standing letters of instruction to a custodian, and inadvertent custody under the client’s custodial agreement. The guidance does not affect family offices exempted from the Investment Advisers Act of 1940 (Advisers Act) by Rule 202(a)(11)(G)‑1. The guidance also does not address issues commonly faced by family offices that must register under the Advisers Act.

Our previous post illustrated ethical quagmires that can result when a staff attorney of a family office tries to negotiate the potentially conflicting interests of the family’s members. This post explains how a well-crafted engagement letter can help an attorney navigate such quagmires through clarity in who is the intended client and who is not. It also considers using non-client letters to keep things sorted out.

Family offices continue to multiply and the industry professionals who provide services to them have grown. The typical single-family office has president, a chief operations officer, a chief investment officer and a chief financial officer. In many cases, the office may employ one or more lawyers on staff. Those lawyers may serve the needs of a number of persons and entities advised by the family office, including:

  • the family office as a legal organization;
  • members of the family in their personal capacity, as shareholders of an operating company from which wealth was created, or as beneficiaries of a trust;
  • members of the family acting as trustees of trusts;
  • investment entities created by the family, i.e., passive and active investment vehicles such as LLCs and partnerships and private or public foundations; and
  • members of the family acting as trustees or directors for the boards of those investment entities.

The evolving best practice is to treat each of the above five situations as a different “client” for purposes of evaluating potential conflicts of interests, maintaining confidentiality and other ethical issues. This is the first of two blog posts intended to help attorneys employed by a family manage their relationships with their family office clients.