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A $ 6 trillion Family Office World is fighting the Archegos crackdown

(Bloomberg) – The Archegos implosion poses the greatest privacy challenge for thousands of secret family offices in a decade. You won’t give it up without a fight. Some lawmakers, regulators, and consumer advocates are pushing to uncover the inner workings of family offices that are tightly held and lightly regulated, yet still manage an estimated $ 6 trillion for the ultra-rich worldwide Changes that reform advocates seek would require themselves US family offices register as investment advisors and publicly report holdings quarterly, as most other types of investment firm do. Such data could alert regulators, investors and other Wall Street actors to hidden risks. It could also reveal proprietary information to competitors. Those in favor of stronger regulation are optimistic that the new chairman of the Securities and Exchange Commission, Gary Gensler, who has a tough reputation on Wall Street, will see things their own way. “The reasons for family offices being exempted are clearly unjustifiable right now, and we believe the SEC will be quick to change that,” said Dennis Kelleher, CEO of Better Markets advocacy group. The SEC is already on a separate review to potentially increase Bloomberg has reported what all investment firms, including family offices, are required to disclose about their holdings. The new disclosures could include the companies’ derivative positions and the stocks they are short selling. Family office representatives are pushing back. They say they are preparing for their biggest lobbying effort as they successfully avoided getting incorporated into tough new regulations after the 2008 financial crisis. Your Strategy: Insist Archegos’ family office setup was irrelevant to the implosion: “What Archegos did and the fact that they got into trouble had nothing to do with the family office structure,” said Brian Reardon, lobbyist for the private investor The Coalition, which works for family offices in Washington. The collapse of Archegos Capital Management LP at the end of March under the leadership of former hedge fund manager Bill Hwang sparked the lobbying battle. After being banned from the hedge fund industry for insider trading, Hwang opened a family office in 2013 and eventually invested $ 200 million in around $ 20 billion in assets. It used a heavily indebted portfolio that focused on a handful of stocks. Previously: God and Man Collide in Bill Hwang’s Duel Lives on Wall Street The explosion that followed revealed that neither regulators nor brokers had any idea how large Archegos’ positions had become. “The losses are dire,” said Andrew Park, senior policy analyst for Americans for Financial Reform. “But the greatest madness is that these losses all came from a company that no one knew about until a few weeks ago.” His group has asked the SEC to examine whether the exemption for the registration of family offices leads to “regulatory blind spots”. The big bank brokers who had to run the Archegos positions, including Morgan Stanley, Nomura Holdings Inc. and Credit Suisse Group AG, lost billions of dollars, prompting some bank executives to call for heightened scrutiny as well. “In all fairness, the transparency and lack of disclosure regarding these institutions is only different from the hedge fund institutions. And that’s something the SEC is sure to be concerned about, “said James Gorman, chief executive officer of Morgan Stanley, in an April 16 call for earnings. “Better information is always a good way to find out where potential problems can arise.” Reardon, of the Private Investor Coalition, said his group plans to speak to the SEC, the Commodity Futures Trading Commission, and lawmakers to argue why some of the disclosure advocates have asked for it not to be needed. Angelo Robles, founder of the Family Office Association, is also preparing for action. He said he plans to contact law firms and U.S. senators if regulators take an aggressive stance on family offices. “The fallout is likely to be more regulation of swaps,” said Robles, whose Greenwich, Connecticut-based group has more than 200 members worldwide, referring to the nature of the derivative Archegos commonly used. Banks said they could absorb the losses, but the shock that a little-known family office could have such an effect is a rallying cry for supporters of Wall Street reform. Better Markets’ Kelleher said he had already pressured his case with SEC officials, in part on the grounds that the family office would get more publicity on sizes and positions could help keep them out of risk to the financial system. The legislators have also shown interest. Ohio Democrat Sherrod Brown, who heads the Senate Banking Committee, has asked Archegos brokers to disclose information about their family office operations. Family offices that serve a single family and have no outside clients generally do not need to register as investment advisers with the SEC. The reason for the exemption is that they only serve a wealthy client who does not need the protection for investors in other funds. Additionally, offices with assets less than $ 100 million or managing funds for just one person can avoid regular disclosure of your holdings to the SEC. Offices that serve more family members are required to file their holdings with the SEC, but can request and often receive an exemption that allows them to keep the filing confidential. Even these reports, like those of hedge funds and mutual funds, usually only include direct ownership of stocks and no derivative positions, like the total return swaps that led to Archegos’ demise. Large banks have brokered the stock swaps for Archegos for a fee. Such swaps allowed the company to spend relatively small amounts – it essentially used borrowed money to build a huge portfolio – while hiding ownership of individual stocks. If the SEC required all investment firms, including family offices, to disclose derivatives and short positions that would not necessarily compromise family offices’ privacy if they were still able to file holdings with the SEC in confidence. The lack of disclosure has enabled some family offices to pursue similarly complex strategies without careful scrutiny. Fewer regulatory compliance has meanwhile helped a number of hedge fund managers turn their businesses into family offices. For example, BlueCrest Capital Management returned money to investors in 2016 to focus on managing the assets of billionaire co-founder Michael Platt, his partners and employees. John Paulson said last year he converted his Paulson & Co. hedge fund into a family office following a similar move by Leon Cooperman’s Omega Advisors. Family offices have proliferated this century, in part due to the boom among tech billionaires. Worldwide, more than 10,000 family offices manage the assets of a single family, at least half of which started this century. According to a 2019 estimate by researcher Campden Wealth, family office assets worldwide were nearly $ 6 trillion, above the entire hedge fund industry. Since most families closely monitor the extent of their wealth and very few public records are available to keep track of their wealth, the exact number may be higher or lower. It is rare for family offices to take as much risk as Archegos. However, hedge funds converting to family offices are more likely to stick with their trading strategies, which often involve leveraged bets that can have a broader market effect. Some family offices have also recently set up so-called blank check companies – shell companies, the purpose of which is part of the Private Investor Coalition’s plan to notify regulators that they already have the tools to deal with threats to the financial system Locate, Reardon said. The SEC is in the process of implementing a lengthy rule that requires all funds, including family offices, to privately disclose some of their derivative positions to the agency. In theory, this would have allowed the SEC to see what Archegos was doing. Archegos’ obligation to register as an investment advisor would not have prevented the explosion, however, said Reardon, whose coalition formed in 2009 to secure the offices. If regulators crack down on family offices in the US, some might simply decide to give the country away leave. “In reality, the typical single-family office is a small team of highly mobile people,” said Keith Johnston, chief executive officer of SFO Alliance, a London-based investment club for single family offices. “There is a risk that if employees or headquarters consider themselves over-regulated, they will simply be relocated to jurisdictions where they are not.” More articles like this can be found at Sign up now to stay one step ahead of the most trusted business news source. © 2021 Bloomberg LP

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