- After Archegos, family offices are girding themselves for the possibility of tougher regulation.
- Some family offices are coordinating with one another on how they can avoid new scrutiny.
- The new administration’s regulators were already expected to reassess family-office guidelines.
- See more stories on Insider’s business page.
Family-office insiders learned of Archegos’ existence only when its implosion made international headlines, a rarity in the exclusive community where secrecy is often prized and kept.
Several told Insider they regarded Archegos Capital Management as a family office in name only — it operated more like a hedge fund, many observers said. The fallout has brought unwelcome attention to their largely unregulated industry, and most have no interest in dissecting what went wrong or how to prevent it from happening again.
“When one animal gets taken out by a lion, the rest run away. They don’t say, ‘Maybe we should have a meeting to discuss how not to get eaten by lions next time,'” said one family office executive who requested anonymity to discuss the ramifications of Archegos’ collapse. “Family offices want no part of it.”
Archegos was founded by the former hedge-fund manager Bill Hwang, whose hedge fund Tiger Asia pleaded guilty to insider trading in 2012. His firm unraveled when its large, heavily concentrated bets held through swaps went the wrong way last month and its lenders, like Credit Suisse and Morgan Stanley, were exposed to Hwang’s losses.
Archegos lost some $8 billion in just over a week, according to reports. Representatives for Archegos did not return a request for comment.
Family offices are now girding themselves for the possibility of closer regulatory scrutiny from a new administration that was already expected to take a tougher stance on their industry.
Family offices are coordinating with one another directly about how they can lobby for favorable policies to shield them from harsher regulation. Policymakers and bank executives like Morgan Stanley CEO James Gorman have suggested tougher regulation on family offices would benefit the financial system, but no proposals have arisen just yet.
Family offices’ many definitions
Executives who run or cater to these entities, which are set up to handle the financial lives of the world’s richest, are quick to say that no family office is the same.
Family offices are in large part regulated on the basis that they do not manage money or provide advice for outside clients. Entities known as single-family offices handle assets of family members or senior firm leaders, and US regulators generally require few disclosures of them as a result.
That was part of the thinking when, in 2019, the Commodity Futures Trading Commission said family offices would be exempt from having to register as commodity pool operators, and when the Securities and Exchange Commission in 2011 said family offices would not have to register as investment advisors under the Investment Advisers Act of 1940.
As the dust settles around Archegos, agencies could start imposing new ruleson the family-office space, which oversees some $6 trillion in assets globally, according to Campden Wealth. Gary Gensler, the new SEC chair who previously served as CFTC chair and was a Goldman Sachs banker before that, is known for his reputation as a tough regulator.
CFTC Commissioner Dan Berkovitz, who objected to the agency’s 2019 decision at the time, said in a statement earlier this month that Archegos and its ripple effects illustrated the havoc that large, loosely regulated family offices can wreak on financial markets when large positions — in the case of Archegos, swaps — go undetected by regulators.
“The Archegos failure highlights the importance of strengthening the CFTC’s oversight of these large funds and preventing bad actors from trading in our markets,” Berkovitz said, urging the agency to assess the current framework.
Some executives in the business of serving family offices, like Bill Woodson, took issue with Berkovitz’s remarks. Woodson, head of wealth advisory and family-office services for Boston Private, referred to the commissioner’s remarks as part of “populist rhetoric,” and said he had not engaged with regulators on these issues in recent weeks.
Family offices, some of which are part of powerful private networks that can gather and lobby for favorable policies, are concerned that they will be “swept under the broader hedge-fund framework” if regulators turn a closer eye to them and lump them all together, Woodson told Insider.
“They can act in concert very quickly,” he said.
‘We view Archegos as an aberration’
One such group, the Private Investor Coalition, is prepared to do just that. The 60-member community of ultra-wealthy families formed in 2009 to lobby Congress on the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act in the wake of the financial crisis.
The industry group lost one battle with Dodd-Frank when it came to shielding multifamily offices from SEC registration. Dodd-Frank repealed an earlier exemption under which single-family offices could generally avoid registration because they catered to fewer than 15 clients.
In connection with that repeal, the SEC adopted a rule that generally defined exempt family offices as operations that do not have clients outside the family and “key employees” like a president; are owned and controlled by the family and key employees who count as family clients in the SEC’s eyes; and do not represent themselves as investment advisory firms to the public, according to an analysis from the law firm Kirkland & Ellis.
Now they are monitoring the discussion around regulation, according to the general counsel of a New York-based family office, who requested anonymity to discuss industry regulation. He also told Insider that the Private Investor Coalition is prepared to talk to Congress and regulators.
“We view Archegos as an aberration, but we are concerned about the rhetoric that is generated,” he said. “It’s another bash-the-rich opportunity, but there’s no substance behind it. When you look at the facts and you look at what Archegos did, it’s not a family-office problem. It’s an Archegos problem, and it’s the prime-broker problem.”
Family offices pay close attention to how they can stay within guidelines that keep them from being designated as managing outside money, said Amy Lynch, the president of FrontLine Compliance, a consultant to hedge funds, private-equity firms, and other financial-services firms on compliance matters.
Family offices might try to ensure that managing money for a distantly related cousin doesn’t mean they must now register as an investment advisor and have to disclose more holdings and transactions, for example. Family offices were already part of regulators’ agenda for this year, and Archegos is now expected to pull the space into sharper focus, Lynch said.
Family offices over a certain size could be asked to register as investment advisors and disclose more information to regulators, for instance.
“They want to operate as a family business,” said Lynch, who before founding FrontLine was an SEC examiner and a special investigator with Finra.
Some insiders think it’s more likely that banks start taking a second look at family offices before extending leverage than it would be that Congress passes legislation to increase oversight.
“The most natural outcome is that, hopefully, the prime brokers will be much more careful about leverage,” said David Wells, the founder of Nashville-based wealth-advisory firm Family Capital Strategy. “There’s nothing like losing money to focus the mind. Nobody likes to lose $4 billion.”
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