“Family Office”? What’s In a Name

The Implosion Heard Around the (Financial Markets) World

What Can We Expect from the Regulators?

Robin Powers, Partner, Rimon, P.C.

Archegos Capital Management’s collapse last week, and the resulting losses for several global banks, has and will impact financial markets for the foreseeable future. Regulatory efforts will likely focus on the ever-expanding shadow banking sector and shed light on its transparency (or lack thereof) and the risks. Shadow banking is a blanket term to describe financial activities that take place among non-bank financial institutions outside the scope of federal regulators and generally is defined to include family offices. *

Scrutiny of nonbanks was already a priority for Treasury Secretary Janet Yellen after last year’s Treasury market turmoil surrounding hedge funds, dislocations in the repurchase agreement market in 2019, and of course, the GameStop story earlier this year.

The current regulatory examination follows on the heels of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) (commonly referred to as Dodd-Frank) which overhauled financial regulation in the aftermath of the 2009 financial crisis. Under the Dodd-Frank legislation, family offices won a special carve-out from Congress that allows them to avoid SEC registration if they serve a single family and don’t give investment advice. Family offices made the case to Congress at the time that they only make conservative investments to preserve family wealth and they do not try to beat the markets. And so, despite managing around $10 billion, Archegos is not directly regulated by the SEC because it manages Hwang’s wealth as a single-family office.

CFTC Commissioner Dan Berkovitz said, “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.” He added, “A ‘family office’ has nothing to do with ordinary families. Rather, it is an investment vehicle used by centimillionaires and billionaires to grow their wealth, reduce their taxes, and plan their estates.”

On March 31st U.S. Treasury Secretary Janet L. Yellen led the first meeting of the Financial Stability Oversight Council (FSOC) under the new Biden administration. The FSOC was scheduled to discuss hedge fund activity and analysts expect it also addressed Archegos.
As calls for closer scrutiny of the shadow banking sector grow louder, we can expect policymakers to revisit systemically important financial institution designations for nonbank financial entities. Being designated as systemically important would allow for tougher regulation and oversight from the Federal Reserve.

Want to know more.  You can always contact me, Joe Rosenbaum, about any posting on Legal Bytes, but if you want to know more about the content of this post or you need assistance, feel free to reach out to Robin Powers directly or any of the Rimon professionals with whom you regularly work.

* Over 10,000 family offices globally manage an estimated $5-15 trillion in assets – larger than the entire hedge fund industry. The largest family offices operate like sophisticated investment firms, but they don’t have the same oversight. Unlike hedge funds, family offices do not have to disclose their assets, bank relationships, and other operational information.

Federal Reserve Expands Main Street Lending Program

On April 30th, the Federal Reserve Board announced an expansion of its Main Street Lending Program to help small and medium-sized businesses. The expansion adds additional loan options for businesses and increases the maximum size of businesses eligible for support under the program.  Although no start date for the expanded program has been announced yet, highlights of the expansion are:

  • Creating a new loan option, with increased risk sharing for borrowers with greater leverage;
  • Lowering certain loan minimums to $500,000; and
  • Expanding the pool of eligible businesses.

The Federal Reserve Board has published FAQs related to the program and you can read and download a copy at Main Street Lending Program – Frequently Asked Questions.

The US Chamber of Commerce has also published a guide to the program and you can read and download a copy at USCC Guide to Main Street Lending Program.

Once these expanded options are launched, there will be a total of three loan options—referred to as new, priority, and expanded and you can read more information about each of these loan options here:

Main Street New Loan Facility (MSNLF)

Main Street Priority Loan Facility (MSPLF)

Main Street Expanded Loan Facility (MSELF)

While there are different criteria and parameters for each of these loan options, lenders will be able to apply industry-specific expertise and underwriting standards to measure a borrower’s income and under the new program,  businesses with up to 15,000 employees or up to $5 billion in annual revenue are now eligible.

As always, if you want more information or need assistance feel free to contact me Joe Rosenbaum, or any of the Rimon Law lawyers with whom you regularly work.  Stay well. Stay safe!

 

 

OFAC Targets Sports & Entertainment Figures

Jill Williamson, Partner, Rimon, P.C.

On August 9, 2017, the Office of Foreign Assets Control (OFAC) at the U.S. Treasury Department, issued a Press  Release and identified Mexican national Raul Flores Hernandez and the Flores Drug Trafficking Organization (Flores DTO) as Significant Foreign Narcotics Traffickers pursuant to the Foreign Narcotics Kingpin Designation Act, also known as the Kingpin Act. OFAC also designated a large number of individuals and 42 entities for involvement with, and acting as fronts for, Raul Flores Hernandez.

Many of these individual and entities are in the sports and entertainment industries, including  professional soccer player, Rafael Marquez Alvarez (Rafa Marquez), Mexican singer Julio Cesar Alvarez Montelongo (Julion Alvarez), Mexican Soccer Club Club Deportivo Morumbi and the Grand Casino Guadalajara.

As of the issuance date of these designations, no U.S. persons, companies, nor any individuals in the US, are allowed to conduct transactions with these individuals or entities.  Penalties under the Kingpin Act can run as high as $10MM per violation, with individual violators subject to imprisonment for up to 30 years.  Even civil penalties for inadvertent violations can run over $1M per violation.  It is worth noting that OFAC violations are based on strict liability.

If you would like more information, a better understanding or need guidance regarding compliance with these regulations, contact Jill M. Williamson, a Rimon Law Partner based in Washington, DC. Of course you can always contact me, Joe Rosenbaum, or any of the lawyers at Rimon with whom you regularly work.