Family Office Regulation in Light of the Archegos Fallout

Family Office Regulation in Light of the Archegos Fallout

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Updated August 8, 2023
Family Office Regulation in Light of the Archegos Fallout
In late March 2021, Archegos Capital Management and its
converted one of the former hedge funds into a family
investment bank financiers started liquidating huge stock
office, Archegos.
positions, causing significant turbulence in capital markets.
The stock sell-offs led to pronounced declines among a
What Are Family Offices?
number of stocks and left various investment banks with
Family offices are investment firms that solely manage the
large losses. The developments sparked an array of
wealth of family clients or the manager’s own money.
responses from financial regulators. Some scrutiny has
Surveys say that they primarily invest in stocks, fixed
turned to Archegos’s regulatory status as a family office—a
income instruments, private equity, and real estate and do
lightly regulated entity with numbers in the thousands.
not offer their services to the public. Robert Casey, a
consultant, estimates that as of 2020, there were 3,500
What Happened?
family offices with more than $2.1 trillion in assets under
Archegos, a family office managing assets for investor Bill
management in the United States. Historically, family
Hwang, reportedly had $20 billion in net worth
offices have largely focused on family wealth preservation
immediately before its collapse. Its entire investment
and management for wealthy families. That landscape has
portfolio, assembled by borrowing from multiple
shifted in recent years as the offices have grown in number
investment banks, reportedly totaled $100 billion. In March
and size. A report from investment management firm UBS
2021, Archegos defaulted on its loans after losses on a
found that around 70% of the largest family offices globally
concentrated portfolio of risky stocks. As a result,
were formed in the past two decades (Figure 1). Through
Archegos’s $20 billion in net worth disappeared, and the
the years, various hedge fund founders and traders such as
losses spread to several lenders and counterparties to the
Hwang have transitioned to founding family offices. Unlike
firm. Credit Suisse, Nomura, Morgan Stanley, and UBS
earlier generations of family offices, some of these firms
accumulated collective losses reportedly estimated to be
are said to employ aggressive investment strategies.
about $9.5 billion.
Figure 1. Founding Year of the Largest Family Offices
The event came as a surprise not only because of the size of
(Percent of UBS Surveyed Offices Founded in Each Period)
the losses but also because of how Archegos was able to
conceal its investment positions. Archegos invested heavily
in a handful of stocks using financial instruments called
equity total return swaps. These instruments allowed
Archegos to receive economic exposure to the relevant
stocks without directly owning them, thus avoiding direct-
ownership-based disclosure requirements.
With losses of this magnitude tracing back to a single
family office, policymakers have voiced concerns. Federal
Reserve Chair Jay Powell said the agency was monitoring
the event carefully. The Securities and Exchange
Commission (SEC) indicated that it would examine the

development, and Congress may hold related hearings.
Source: UBS, Global Family Office Report 2020.
How Was Archegos Formed?
Notes: UBS survey of 121 of the world’s largest single family offices
covering $142 bil ion in net worth.
The origins of Archegos began in 2001 when Bill Hwang
launched hedge funds Tiger Asia Management and Tiger
Some Proposed Policy Solutions
Asia Partners. In 2008 and 2009, the SEC alleged that
Some observers propose to subject family offices to
Hwang committed insider trading and attempted to
regulation as investment advisers under the Investment
manipulate the markets. In 2012, the SEC arranged a
Advisers Act of 1940 (Advisers Act, P.L.76-768). Others
settlement with Hwang in which he and the two hedge
argue for enhanced disclosure requirements for family
funds agreed collectively to pay $44 million. It also
offices and other market participants through Sections 13(f)
prohibited Hwang from associating with brokers, dealers,
and 13(d) of the Securities Exchange Act (Exchange Act,
municipal securities dealers, municipal advisors, transfer
P.L. 73-291) to address perceived loopholes.
agents, or credit rating agencies. This effectively banned
Hwang from managing hedge funds. Later, in April 2020,
The Investment Advisers Act
the SEC commissioners voted to vacate the ban. In 2013,
Congress passed the Advisers Act to codify a fiduciary duty
the same year the ban was imposed, Hwang reportedly
of investment advisers to their clients and to mitigate or
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Family Office Regulation in Light of the Archegos Fallout
eliminate adviser conflicts of interest that might bias their
institutional investors. The policy intention was to increase
advice. Under the act, an investment adviser is an entity that
investor confidence through transparency. Institutional
provides advice or issues reports or analyses regarding
investors’ investment activities and holdings in 13F reports
investment in securities for compensation. Central to being
could also help the SEC to assess the investors’ influence
a SEC-registered investment adviser is completing a
and impact on fair and orderly securities markets.
registration form providing information about an adviser’s
business, ownership, clients, employees, and disciplinary
An institutional investor must file a 13F report if it
record and the private funds they advise.
exercises investment discretion over an aggregate of more
than $100 million in securities specifically designated by
The central role of a family office is advising its family
the SEC as Section 13(f) securities. The SEC has broad
clients, which is also arguably the role of an investment
rulemaking authority to determine the eligibility thresholds
adviser. Before the Dodd-Frank Wall Street Reform and
for 13F reporting. Archegos reportedly never filed form
Consumer Protection Act (Dodd-Frank Act, P.L. 111-203),
13F in its eight years. Some inside the industry reported to
family offices were not statutorily defined. During this
the New York Times that it is unusual for offices the size of
time, family offices avoided regulation under the Advisers
Archegos not to file and that smaller ones routinely file.
Act under the former “private adviser” exemption—which
was available to advisers with fewer than 15 clients—or by
Form 13D. Section 13(d) of the Exchange Act specifies
obtaining a special exemptive order from the SEC.
that, when an investor acquires beneficial ownership of
more than 5% of a voting class of a company’s equity
The Dodd-Frank Act amended this regime to explicitly
securities, the investor must file a 13D report with the SEC.
provide that certain family offices, as to be defined by the
The form discloses the investor name, ownership amount,
SEC, are not “investment advisers.” The carve-out applies
and purpose of transaction, among other information.
only to single family offices, which pool the wealth of a
Depending upon the individual circumstances, the investor
single family, not multifamily offices, which pool the
may be eligible to file the more abbreviated 13G in lieu of
wealth of several families. The carve-out for single family
13D. Filings of 13D are particularly important for investors
offices is in contrast to Dodd-Frank Act’s placement of
and company issuers to detect early signs of unsolicited
hedge funds and private equity funds with at least $150
takeover from hedge funds and others. In many situations,
million in assets under management under the act.
13D filings can show when investors begin to accumulate
large blocks of equity holdings of publicly traded
A 2010 Senate Committee on Banking, Housing, and Urban
companies. The filings provide transparency for large
Affairs report that accompanied the Dodd-Frank Act argued
equity positions that trigger the 5% threshold. Archegos
that large hedge funds and private equity funds—which,
reportedly never filed a 13D despite its large economic
like family offices, were exempt from registration under the
exposure via total return swaps.
Advisers Act—should be made subject to registration under
the act to provide information about their trades and
Policy proposal—enhancing 13F and 13D requirements.
portfolios and help regulators assess systemic risks. By
Some observers argue for enhanced disclosure for family
contrast, the committee also explained that it was removing
offices and other asset managers. Among other things, they
family offices from the act’s jurisdiction because the act
advocate subjecting them to more confidential filings with
was not designed to regulate the interactions of family
the SEC to identify potential threats to market stability. For
members and would intrude on their privacy.
example, Americans for Financial Reform, a coalition
group, has called for an SEC review of 13F filings and
Policy proposal—subjecting family offices to the
whether gaps in the disclosure process exist for family
Investment Advisers Act. In the aftermath of the Archegos
offices. Specifically, the group recommended the SEC
failure, some have advocated for more family office
expand the reporting frequency and types of financial
regulatory oversight by putting them under the ambit of the
products subject to 13F reporting to include total return
Advisers Act. One observer, Tyler Gellasch, is head of the
swaps and short-selling positions. Opponents of the
market reform group Healthy Markets. A former SEC
proposed changes argue that increased disclosures may
counsel, Gellasch argues that the absence of such regulation
reveal investors’ proprietary trading strategies. They say
has helped to make some family offices a financial stability
disclosed positions may harm the market by deterring some
concern. However, pushing back on the costs of such
investors from engaging with poorly run companies or
reform, in a 2012 report, To Register or Not? SEC
expose fraud. Critics also argue that more disclosure may
Investment Adviser Guidance for Family Offices, business
not be necessary, because market participants already know
lawyers Ryan Harding and Elise McGee argue, “For most
the level of trading activities even though they may not
family offices, the information disclosure and compliance
know who was making the trades. A previous legislative
expense make registration an unattractive outcome.” The
proposal (the Brokaw Act, S. 1744 in the 115th Congress)
share of very large family offices appears to have grown
would have required the disclosure of certain derivatives—
since 2012. Institutional Real Estate reports that most
such as the ones used by Archegos—that would give
family offices currently have over $250 million in assets
investors economic exposure to stocks.
under management.
Eva Su, Specialist in Financial Economics
The Exchange Act’s 13F and 13D Disclosures
Form 13F. Section 13(f) of the Exchange Act requires
IF11825
disclosure of information regarding securities holdings by
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Family Office Regulation in Light of the Archegos Fallout

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