The Securities and Exchange Commission has proposed new rules that define when an advisory firm is a "family office" and exempt from regulation under the Investment Advisers Act of 1940.

The proposal defines a family office as an advisory firm that:

Provides investment advice only to family members, as defined by the rule; certain key employees; charities and trusts established by family members; and entities wholly owned and controlled by family members.

Is wholly owned and controlled by family members.

Does not hold itself out to the public as an investment advisor.

The proposal, according to the SEC, codifies a policy that the SEC has been using for years to exempt family offices from regulation-partly to protect the privacy of families that operate the offices to handle their financial, estate planning, philanthropic and tax matters.

The exemption had previously been granted under an exclusion of the Investment Advisers Act that applied to investment advisors with fewer than 15 clients. But that exclusion was eliminated with the adoption of the Dodd-Frank financial reform act as part of an effort to extend regulation over hedge fund managers.

With the exclusion gone, the SEC says it needed to codify a family office exemption for these private operations to retain their ability to escape SEC regulation.

The SEC says family offices generally serve families with at least $100 million in investable assets. Industry observers report there are 2,500 to 3,000 single-family offices in the nation managing more than $1.2 trillion in assets, according to the SEC.

The SEC has also issued about a dozen "exemptive orders" since 1940 that exempted family offices that were "not within the intent" of the Investment Advisors Act, according to the SEC. Family offices would still be free to seek exemptive orders under the Dodd-Frank act.