Executive Summary
Family offices often operate at an institutional scale and regularly engage both broker-dealers and registered investment advisers (“RIAs”). This dual engagement can create compliance blind spots, especially when firms assume that asset size, sophistication, or family office status alters regulatory treatment. Under Regulation Best Interest (“Reg BI”) and the Securities and Exchange Commission’s (“SEC”) Investment Adviser Marketing Rule, regulators apply a consistent principle: investor protection follows purpose, not structure. As a result, many family offices remain subject to retail-level protections under Reg BI, and heightened conditions apply when RIAs use hypothetical performance projections, regardless of sophistication or assets under management.
Retail Status Under Reg BI Is Purpose-Based – And Often Applies to Family Offices
Reg BI applies when a broker-dealer makes a recommendation to a retail customer, defined as a natural person or the legal representative of a natural person, who receives the recommendation primarily for personal, family, or household purposes. This definition intentionally omits financial thresholds and sophistication tests. The SEC’s approach reflects the view that investor protections should not be diminished merely because assets are held through legal entities or managed by professional intermediaries.
In the family office context, this purpose-based analysis is critical. When a family office serves as a centralized decision-maker for individual family members or family trusts, regulators view the entity as a legal representative of natural persons. Even when recommendations are delivered to an entity, the personal or family wealth management purpose typically triggers Reg BI obligations for broker-dealers.
Why Family Offices Are Commonly Treated as Retail Customers
Family offices often manage long-term investment strategies to preserve, grow, or allocate family wealth across generations. Although these entities may employ professional staff, investment committees, and institutional governance structures, the economic substance of the relationship remains personal or family-oriented. For regulatory purposes, sophistication does not change the beneficiary’s identity.
Accordingly, family offices are often treated as retail customers under Reg BI, even though they resemble institutional accounts under FINRA rules. Broker-dealers must therefore apply Reg BI’s care, disclosure, conflict, and compliance obligations to recommendations involving family offices, rather than rely on assumptions about asset size or perceived expertise.
The Narrow Circumstances Where Reg BI May Not Apply
There are limited situations in which a family office or family-controlled entity may fall outside Reg BI. This occurs when recommendations are made to a legal entity acting for non-personal purposes, such as a family-owned operating company, a holding company managing treasury or capital allocation functions, or an entity pursuing business or commercial investment objectives unrelated to personal wealth planning. In these cases, the analysis turns on the purpose of the recommendation and whether the entity is acting independently of the personal or household financial objectives of natural persons.
In addition, the SEC staff has issued a narrow no-action letter permitting broker-dealers, in limited circumstances, to treat certain family offices, referred to as “Institutional Family Offices,” as non-retail customers for purposes of Reg BI and Form CRS. In that letter, the staff stated that it would not recommend enforcement action against a broker-dealer that does not treat a qualifying Institutional Family Office as a retail customer, provided that specific conditions are met and the facts align with those presented to the staff.
To rely on this relief, a broker-dealer must have a reasonable basis to believe that the family office (i) employs one or more experienced securities or financial services professionals, (ii) manages at least $50 million in total assets, (iii) does not rely on the broker-dealer for recommendations and exercises independent judgment, and (iv) is subject to policies, procedures, and recordkeeping designed to support the classification. This relief is expressly limited to broker-dealer activity and is framed solely as an enforcement position, and not a change to the legal definition of a retail customer under Reg BI.
When either a non-personal purpose analysis or the Institutional Family Office no-action position is considered, firms must conduct and document a fact-specific assessment. Regulators expect broker-dealers to look beyond organizational form and confirm that recommendations are not primarily for personal, family, or household purposes and that all conditions for reliance on the staff position are met. Absent clear and documented support, the safer compliance posture remains to apply Reg BI protections.
Institutional Accounts Under FINRA Rules Still Trigger Reg BI
A common compliance misconception is that institutional account status under FINRA Rule 4512 or eligibility for institutional suitability treatment under FINRA Rule 2111(b) exempts a firm from Reg BI obligations. These frameworks operate independently. A customer may qualify as institutional for recordkeeping or suitability purposes while remaining a retail customer under Reg BI.
The SEC staff’s Institutional Family Office no-action position does not change this principle. It offers only a limited, conditional enforcement position for broker-dealers and does not create a general institutional classification for family offices or a financial-threshold exemption from Reg BI. Family offices that do not meet all conditions of the staff position, or whose facts differ from those presented to the SEC, must continue to be analyzed under the standard Reg BI retail-customer framework.
Broker-dealers must therefore apply separate, independent analyses under Reg BI and FINRA’s institutional rules, and ensure that their supervisory systems reflect these distinctions. Treating institutional suitability status as a substitute for Reg BI compliance, without meeting the narrow requirements of the Institutional Family Office no-action position, exposes firms to heightened regulatory scrutiny and enforcement risk.
Practical Compliance Takeaways for Broker-Dealers and RIAs
Compliance programs should begin with a conservative assumption: family offices are not exempt from retail-level protections merely because they are large or sophisticated. Broker-dealers should presume that Reg BI applies unless a documented analysis supports non-retail treatment. RIAs should ensure that any use of hypothetical projections complies with the Marketing Rule’s policy, disclosure, and relevance requirements.
Written supervisory procedures should explicitly address family-office relationships, account classification, and the use of projections. Training should reinforce that wealth and sophistication do not excuse regulatory obligations. This disciplined approach reduces misclassification risk and aligns firm practices with SEC and FINRA examination priorities.
Bottom Line
Family offices often blur the line between retail and institutional regulation, but both Reg BI and the Marketing Rule resolve that ambiguity in favor of investor protection. When recommendations or advisory communications serve personal or family wealth objectives, retail-level safeguards apply, and the use of hypothetical projections requires heightened care. Firms that recognize and manage these overlapping obligations are better positioned to withstand regulatory scrutiny.