New House Bill Mulls More Regulations for Family Offices
August 05. 2021
The spectacular implosion of Archegos Capital Management in March left many investors in awe. For starters, Archegos isn’t the first wealth manager in the world to go under, but how it sank and the scale of losses reported is what makes it spectacular.
While the Bill Hwang-led family office boasted a $30 billion valuation at its peak, it sunk to under $10 billion in a matter of days. Moreover, an autopsy of the case indicated that Hwang was dangerously leveraged in complex derivative products.
Regulators summoned to prevent another Archegos style implosion
Undoubtedly, the aftermath of the Archegos saga promised a lot of things. For example, highly leveraged family offices would reconsider their positions. Also, commentators and policymakers would call for stricter regulations on family offices.
No one can tell whether family offices deleveraged their positions, but the regulatory landscape is unlikely be the same.
On Thursday, July 29, 2021, a US Congressional panel advanced a bill proposing stricter regulations for family offices. The Family Office Regulation Act of 2021 (HR 4620), sponsored by Rep. Alexandria Ocasio-Cortez, targets the Investment Advisers Act of 1940.
The bill proposes to amend the Investment Advisers Act of 1940 concerning the designation of family offices with assets under management above $750 million. If passed, the legislation will require the US SEC to recognize such family offices as “exempt reporting advisors.”
As per the bill, family offices will have to regularly file limited sections of Form ADV with the US premier financial markets regulator. It also introduces specific clauses that plug holes that some family offices exploit to fly under regulators’ radar. In short, the bill aims to preempt cases similar to Archegos in the future.
Are new regulations necessary?
While the bill’s sponsors laud its timeliness, some observers think new regulations for family offices are unnecessary. They argue that “family offices are organizations set up and overseen by wealthy individuals to manage their own money.”
Because they manage wealth for family members, who are all insiders, family offices protect investors by default. As such, there is no need for investment advisor registration, whose primary purpose is to protect “outside investors through disclosures, fiduciary-duty obligations, and reporting requirements.”