The recent Archegos Capital Management meltdown is raising new questions as towhether the Securities and ExchangeCommission this year will mull putting family offices under its regulatorypurview.
The agency had already said inits “Reg Flex” agenda, released inlate March in the Federal Register,that family office registration ruleexemptions was one of four rulesit planned to review this year. TheSEC is required to file its rule reviewunder Section 610 of the RegulatoryFlexibility Act. The purpose of thereview is “to determine whether suchrules should be continued withoutchange, or should be amended orrescinded,” the RFA states.
After Dodd-Frank went into effect in2010, the SEC adopted on June 22, 2011,a rule to define “family offices” thatare excluded from the definition of aninvestment advisor under the AdvisersAct and are thus not subject to regulation under the Advisers Act.
Archegos, a family office capitalmanagement firm run by Bill Hwang,defaulted on margin calls that resultedin a stock fire sale. The firm had $10 billion under management as of 2020.
Industry officials that I spoke to inmid-April had mixed views as to whatthe SEC may or may not do regarding regulating family offices post theArchegos blow up.
“The most common reaction to the
Archegos unraveling has been varia-
tions of ‘Archegos who?’ or ‘Why are
there no SEC filings for Archegos?’”
Nick Morgan, a partner at legal
defense firm Paul Hastings and a for-
mer SEC trial attorney, told me in
The Dodd-Frank Act of 2010“excludes family offices from the fundadvisor registration requirement, andother SEC filings such as on Forms 13Dor 13F are required only for holdings ofcertain amounts of certain securities,”Morgan said.
For instance, “total return swapsaren’t on the SEC’s list of securitiesto be disclosed on 13F, and securities that are on the SEC’s list but thatfall below the $100 million aggregatethreshold don’t need to be disclosed,”Morgan said.
Archegos “traded what are calledsecurity-based swaps; that was theinstrument they used to put on thatrisk,” said a general counsel of a familyoffice who asked not to be identified.
Archegos’ derivative contracts“exposed the firm to severe losseswhen the trades went bad,” The WallStreet Journal reported. Hwang lost$8 billion in 10 days, the Journalreported, while Bloomberg Newsreported that Hwang lost $20 billionin two days.
SEC LATE TO THE GAME
“As part of Dodd-Frank, Congresscharged the SEC and CFTC to regulatesecurity-based swaps. That regulationis literally going into effect starting inAugust. It would require the dealers toreport security-based swap positionsto a central repository that the SECand public has access to,” the generalcounsel said.
“If that [regulation] had been ineffect before Archegos blew up, the SECwould have seen those trades. Congress
THE PLAYING FIELD
By Melanie Waddell
Is Family Office Regulation in SEC’s Future?
Industry officials weigh in on the Archegos meltdown along with a family
office rule review that’s already in the SEC’s crosshairs.
The Dodd-Frank Actof 2010 “excludesfamily offices fromthe fund advisorregistrationrequirement, andother SEC filingssuch as on Forms 13Dor 13F are requiredonly for holdings ofcertain amounts ofcertain securities.”—Nick Morgan ofPaul Hastings