The recent Archegos Capital Management meltdown is raising new questions as to whether the Securities and Exchange Commission this year will mull putting family offices under its regulatory purview.
The agency had already said in its "Reg Flex" agenda, released in late March in the Federal Register, that family office registration rule exemptions was one of four rules it planned to review this year.
The SEC is required to file its rule review under Section 610 of the Regulatory Flexibility Act. The purpose of the review is ''to determine whether such rules should be continued without change, or should be amended or rescinded," the RFA states.
After Dodd-Frank went into effect in 2010, the SEC adopted on June 22, 2011, a rule to define "family offices" that are excluded from the definition of an investment advisor under the Advisers Act and are thus not subject to regulation under the Advisers Act.
Archegos, a family office capital management firm run by Bill Hwang, defaulted on margin calls that resulted in a stock fire sale. The firm had $10 billion under management as of 2020.
Industry officials that I spoke to in mid-April had mixed views as to what the SEC may or may not do regarding regulating family offices post the Archegos blow up.
"The most common reaction to the Archegos unraveling has been variations of 'Archegos who?' or 'Why are there no SEC filings for Archegos?'" Nick Morgan, a partner at legal defense firm Paul Hastings and a former SEC trial attorney, told me in mid-April.
The Dodd-Frank Act of 2010 "excludes family offices from the fund advisor registration requirement, and other SEC filings such as on Forms 13D or 13F are required only for holdings of certain amounts of certain securities," Morgan said.
For instance, "total return swaps aren't on the SEC's list of securities to be disclosed on 13F, and securities that are on the SEC's list but that fall below the $100 million aggregate threshold don't need to be disclosed," Morgan said.
Archegos "traded what are called security-based swaps; that was the instrument they used to put on that risk," said a general counsel of a family office who asked not to be identified.
Archegos' derivative contracts "exposed the firm to severe losses when the trades went bad," The Wall Street Journal reported. Hwang lost $8 billion in 10 days, the Journal reported, while Bloomberg News reported that Hwang lost $20 billion in two days.
SEC Late to the Game
"As part of Dodd-Frank, Congress charged the SEC and CFTC to regulate security-based swaps. That regulation is literally going into effect starting in August. It would require the dealers to report security-based swap positions to a central repository that the SEC and public has access to," the general counsel said.
"If that [regulation] had been in effect before Archegos blew up, the SEC would have seen those trades. Congress saw this as an issue back in Dodd-Frank, implemented it, and it's taken the SEC more than 10 years to get these regulations in place."
Family offices, according to Morgan, "should expect political pressure for greater public disclosures, even though the reasons for not requiring disclosure haven't changed: sophisticated, wealthy investors dealing with sophisticated wealthy counterparties (in the case of swaps) have the knowledge and bargaining power to obtain all the information they want."
