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Regulation and Compliance > Federal Regulation > SEC

Why Family Offices Are in SEC’s Crosshairs

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What You Need to Know

  • The SEC's “Reg Flex” agenda says it plans to review the family office registration rule exemptions this year.
  • Archegos, a family office that defaulted on margin calls in March, put the family office exemption under the spotlight.
  • Now the SEC is likely to review implications of large family offices and how they can affect markets and counterparties.

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purpose of the review is ‘‘to determine whether such rules should be continued without change, or should be amended or rescinded,” the RFA states.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.

See: 4 Rules the SEC Plans to Review This Year

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.”

He added: “Not every failed investment requires greater disclosure or regulatory oversight.”

Amy Lynch, president and founder of FrontLine Compliance, said that she does see the SEC looking into family offices and the current exemption from registration.

“Prior to Archegos, I believe [the SEC was] going to look at it from the perspective of adding new guidance on exactly which types of family offices qualify and giving further clarity on the definition of a family office,” Lynch said. However, post Archegos, the SEC “will most likely also consider the implications of large family offices and how they can affect markets and counterparties,” she continued.

“The SEC will either consider bringing family offices under the registration umbrella once they reach a certain size or they may set new reporting requirements for them if their trading volumes and transaction amounts reach a certain size or leverage,” Lynch added. “The large family offices that could pose a risk to counterparties (like Archegos did) need some level of oversight and the SEC now knows this.”

Linda Shirkey, compliance managing director at Bates Group based in Houston, and the former president and founder of The Advisor’s Resource, Inc., questioned, however, whether the SEC has the resources to examine family offices.

“The SEC has been pretty clear about the fact that the RIA world is growing very quickly and that they are working hard and may be struggling to be able to examine all the firms they need to,” Shirkey said. “If they bring in the family offices, they’re already saying they need more resources.”

AML Rule for RIAs?

The SEC exam division recently issued a risk alert detailing broker-dealers’ anti-money laundering compliance failures, specifically those related to filing suspicious activity reports.

Ben Marzouk, an attorney at Eversheds Sutherland, said that the recent chatter forewarns that likely incoming SEC Chairman Gary Gensler may revive a dormant AML policy plan for registered investment advisors.

Investment advisors “are still not technically subject to AML rules issued by FinCEN,” the Treasury Financial Crimes Enforcement Network, Marzouk said. However, a Gary Gensler-led SEC may “pick up the 2016 investment advisor AML proposals which have been sitting dormant at SEC for the last four years.”

AML offenses were the top fine-getter for the Financial Industry Regulatory Authority in 2020. FINRA reported 14 AML cases last year, resulting in $16.2 million in fines.

“There have been recent AML enforcement actions, including some with very large fines. This is a continued focus for broker-dealer regulators, such as FINRA and SEC. Given the increased regulatory attention (and fines) in this space, broker-dealers seem to be beefing up AML staffing to ensure adequate responses to red flags, sufficient SAR filings and more,” Marzouk said.

Related: Four Rules the SEC Plans to Review This Year


Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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