In October 2010, Ned Johnson, the CEO of Fidelity Investments in Boston, moved his family office-Crosby Advisors-three miles across the state border to Salem, N.H. His may be one of many such moves when family offices across the country discover how the Dodd-Frank law will limit their freedom. (Crosby is Johnson's middle name.)

As most advisors know, Dodd-Frank eliminates the "15 client" exemption from the Investment Advisers Act of 1940, effective this July 21. But Dodd-Frank added to the Advisers Act a new registration exemption for family offices, leaving it to the SEC to define the "real family offices" that would be exempt.

Because the new rules force family offices into one of four alternatives-none of them particularly attractive-some states around the country are rewriting trust laws in the hope of attracting family offices from other states. The Wall Street Journal reported in April that New Hampshire has become "a kind of mini-Switzerland for wealthy Northeast families." And the Boston Herald reported that trust companies are "cropping up like tax-free liquor stores in southern New Hampshire."

Trust assets under management by banks and trust companies there have jumped 70% over the past five years to $311 billion in 2010 from $184 billion in 2005, according to the New Hampshire Banking Department, as reported in the Journal on April 7. During the same period, the number of trust companies in New Hampshire doubled from 16 to 31 (which includes either those chartered or pending), according to Scott Baker, the chairman of the New Hampshire Trust Council and a principal at Perspecta Trust LLC in New Hampshire.

Congress intended for the SEC to make a distinction among the 2,500 to 3,000 U.S. family offices managing more than $1 trillion in assets between "those that serve a 'typical family' and those that 'start to resemble a commercial advisor,'" says John P.C. Duncan of Duncan Associates in Chicago, who is referred to in the business as "Mr. Private Trust." Duncan is familiar with the Dodd-Frank law as well as the SEC's first iteration of the definition of a family office because he has helped many family offices respond to the new law. He is also familiar with New Hampshire trust laws, because he wrote them.

The SEC definition is so narrow as to include perhaps 10% of "real family offices," Duncan says. Most confining is the regulation that narrows the definition of a family member. Duncan's firm-as well as 79 others-filed complaints with the SEC during the comment period.

Duncan's firm asked the SEC to broaden the definition to that used in the recent Nevada trust company law. If it did, Duncan says it would include 90% of family offices. But he's not expecting it to go that far. He's hoping for a definition that includes 50% of family offices. The SEC extended the deadline for final rules from July 21, to the end of the year. Meanwhile, a family office has four options, Duncan says:

Be in compliance with the SEC's new definition of a family office;
Set up a private trust company, which is a firm, not simply a trust contract between the creator of a trust and a trustee for the beneficiary. A private trust company, like the one set up in New Hampshire by the Johnson family, is supervised by bank regulators;
Register as an investment advisor; or
Use an outside registered investment advisor.

A family office could also seek an order from the SEC that would provide an exemption for that family. Or it could cut some family members out of the office in order to qualify for the new rules defining "relationship."

Waiting for the deadline is not an option, Duncan says. It takes a long time to go through all the paperwork to find the state laws most favorable to trusts (New Hampshire, South Dakota and Delaware are usually on the top three list) and then set up the trust company.
Family offices that have not yet addressed the issue face problems. "We're working with several multi-billion-dollar families to get all the investment advisor activities into a private trust company or an exempt family office," Duncan says.