US Regulator Urges Controls Over Family Offices

Tom Burroughes

6 April 2021

A top US regulator has called for controls over family offices, criticizing how they are exempt from certain market rules and worrying that the multi-billion dollar demise of Archegos highlights potential systemic risks.

“The Archegos failure highlights the importance of strengthening the CFTC’s oversight of these large funds and preventing bad actors from trading in our markets,” Dan M Berkovitz, commissioner, at , as would otherwise have been the case following the Dodd-Frank legislation enacted after the 2008 financial crash.

“The collapse of Archegos Capital Management and the billions of dollars in losses to investors and other market participants is a vivid demonstration of the havoc that errant large investment vehicles called `family offices’ can wreak on our financial markets. Family offices can be active in both securities and commodities markets,” Berkovitz said in a statement on the regulator’s website.

“Unfortunately, in the last two years the CFTC has loosened its oversight of family offices. In 2019, and again in 2020, the Commodity Futures Trading Commission (CFTC) approved rules that exempted family offices from some of our most basic requirements,” he continued.

“I objected to these exemptions at the time, warning in 2019 that ` able to monitor the activities of large family offices. In order to do this, the Commission should have basic information about family offices that are operating commodity pools. The qualifications of persons operating family offices should be no less than for persons operating other exempt and non-exempt pools. I urge the Commission to revisit these issues soon,” he said.

Hedge funds that morph into family offices are not typical family offices, which tend to be far less heavily leveraged than appears to be the case with Archegos.

In July last year, John Paulson, who earned billions of dollars by correctly anticipating the sub-prime mortgage wreck of a decade ago, exited the business and converted his operation to a family office.

Others taking the route are Leon Cooperman, Steven A Cohen, Eric Mindich and Jonathon Jacobson, although for different reasons. Another example is Clifton Robbins' switch at his Blue Harbour Group business.

Firms change to a family office structure for different reasons, such as a desire to wind up a firm and retire, or because of lackluster performance, or to avoid certain regulatory oversight and costs.