By Lene Powell, J.D.
In the wake of the spectacular collapse of Archegos Capital Management, CFTC Commissioner Dan Berkovitz urged the commission to revisit regulatory requirements for family investment offices, warning that a recent regulatory rollback hampers the agency’s ability to protect the integrity of the commodity markets. In a statement, the commissioner noted that family offices operate in both securities and derivatives markets, and reiterated his position that exempting family offices from even basic requirements increases risks to markets and market participants.
Archegos meltdown. Archegos Capital Management, LP, is a family investment office based in New York City. According to an archived website, the firm was transformed from two hedge funds called "Tiger Asia" to a family office in 2013, after the funds and their founder Bill Hwang agreed to pay $44 million to settle SEC insider trading charges and Hwang was barred from the securities industry. According to news reports, the firm ran into financial disaster when stocks the fund was indirectly invested in took a nosedive, causing billions in margin calls over several days.
Fallout for banks. Several banks in financial relationships with Archegos experienced major fallout from the collapse, according to news reports. Credit Suisse announced in a Form 6-K that losses could be "highly significant and material to our first quarter result." Nomura filed a Form 6-K announcing a $2 billion loss. Nomura said, however, that it maintains higher capital reserves than required by regulation and will not experience issues related to operations or financial soundness.
Berkovitz warning. Examining the collapse, Berkovitz noted that family offices can be quite large. According to one report, the average wealth of family offices surveyed in North America was $1.3 billion, with $852 million in assets under management. As a result, the failure of a family office can cause "significant harm" to markets, said Berkovitz.
Despite their size and market impact, family offices are not subject to certain CFTC regulations because they do not solicit investments from the public. Berkovitz explained that the CFTC recently exempted family offices from certain basic requirements related to market protection and integrity, over his strenuous objection.
First, in 2019, the Commission exempted family offices operating in CFTC-regulated markets from providing notice that they are exempt from CFTC registration requirements. Without this notice filing, the CFTC is generally unaware of the very existence of these large commodity pools, is hampered in its ability to oversee their activities, and does not even know whom to contact should issues arise, said Berkovitz. He added that the notice filing requirement is not onerous.
"The information required would fit on a post-it note, and the CFTC estimated the annual cost of the filing to be merely $28.50," said Berkovitz. "There is no rational justification for exempting large family offices with billions of dollars under management from minimal notice requirements with relatively trivial costs."
Second, in 2020, the CFTC exempted family offices from a new rule barring statutorily disqualified persons from acting as CPOs. Berkovitz objected to the exemption because "disqualification should mean disqualification" and allowing bad actors to operate in family offices unduly gives them free rein.
"[C]onvicted felons, market manipulators, and other financial market miscreants can operate freely within the confines of a family office, unbeknownst to the CFTC. In my view, there is no reasonable justification for such a policy," said Berkovitz.
In Berkovitz’s view, the CFTC needs basic information about family offices that are operating commodity pools, and the qualifications of operators should not be less than for others operating exempt and non-exempt pools. He urged the Commission to revisit these issues soon.