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1 1 (May 10, 2021)

handle is hein.crs/govedgb0001 and id is 1 raw text is: ~nfo nrn~ Pt k4.k v~~e it~ May 10, 2021 Family Office Regulation in Light of the Archegos Fallout In late March 2021, Archegos Capital Management and its investment bank fmanciers startedliquidating huge stock positions, causing significant turbulencein capital markets. The stock sell-offs led to pronounced declines among a number of stocks and left various investment banks with large losses. The developments sparked an array of responses fromfmancialregulators. Some scrutinyhas turned to Archegos's regulatory status as afamily office-a lightly regulated entity with numbers in the thousands. What Happened? Archegos, a family office managing as sets for investor Bill Hwang, reportedly had $20 billion in net worth immediately before its collapse. Its entire investment portfolio, assembledby borrowing frommultiple investment banks, reportedly totaled $100billion. In March 2021, Archegos defaulted on its loans after losses on a concentrated portfolio ofrisky stocks. As a result, Archegos's $20 billion in net worth disappeared, and the losses spread to severallenders and counterparties to the firm. Credit Suisse, Nomura, Morgan Stanley, andUBS accumulated collective losses reportedly estimated tobe about $9.5 billion. The event came as a surprise not only because of the size of the losses but also because ofhow Archegos was able to concealits investmentpositions. Archegos investedheavily in a handfulof stocks using financialinstruments called equity total return swaps. These instruments allowed Archegos to receive economic exposure to therelevant stocks without directly owning them, thus avoiding direct- ownership-based disclosure requirements. With los ses of this magnitude tracing back to a single family office, policymakers havevoiced 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. How Was Archegos Formed? The origins of Archegosbeganin 2001 when Bill Hwang launched hedge funds Tiger Asia Management and Tiger Asia Partners. In 2008 and 2009, the SEC alleged that Hwang committed insider trading and attempted to manipulate the markets. In 2012, the SEC arranged a settlement with Hwang in which he and the two hedge funds agreed collectively to pay $44 million. It also prohibited Hwang fromas sociating with brokers, dealers, municipal securities dealers, municipal advisors, transfer agents, or credit rating agencies. This effectively banned Hwang from managing hedge funds. Later, in April 2020, the SEC commissioners voted to vacatethe ban. In 2013, the same year the ban was imposed, Hwang reportedly converted one of the former hedge funds into a family office, Archegos. What Are Family Offices? Family offices are investment firms that solely manage the wealth of family clients or the manager's own money. Surveys say that they primarily investin stocks, fixed income instruments, private equity, andrealestate and do not offer their services to the public. Robert Casey, a consultant, estimates that as of 2020, there were 3,500 family offices with more than $2.1 trillion in assets under management in the United States. Historically, family offices have largely focused on family wealth preservation and management for wealthy families. That landscape has shifted in recent years as the offices have grown in number and size. A report frominves tment management firm UBS found that around70% of the largestfamily offices globally were formed in the past two decades (Figure 1). Through the years, various hedge fund founders and traders such as Hwang have transitioned to founding family offices. Unlike earlier generations of family offices, some ofthesefirms are said to employ aggressive investment strategies. Figure 1. Founding Year of the Largest Family Offices (Percent of UBS Surveyed Offices Founded in Each Period) Source: UBS, Global Family Office Report 2020. Notes: UBS survey of 121 ofthe world's largest single family offices covering $142 billion in net worth. Some Proposed Polic Solutions Some observers propose to subject family offices to regulation as investment advisers under the Investment Advisers Act of 1940 (Advisers Act, P.L.76-768). Others argue for enhanced disclo sure requirements for family offices and other market participants through Sections 13(f) and 13(d) of the Securities Exchange Act (Exchange Act, P.L. 73-291) to address perceived loopholes. The Investment Advisers Act Congres s passedthe Advisers Act to codify a fiduciary duty of investment advisers to their clients and to mitigate or tips:/'crsreports.congress.gc

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