“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.

Investment Adviser Marketing – New Rules for a New World

SEC Amends Rules Applicable to Investment Adviser Marketing
– Niccolo Barber, Rimon Law

On December 22, 2020, the SEC amended the Investment Advisers Act of 1940, with respect to advertisements and payments to solicitors by investment advisers. The amendments create a single rule (“Rule”) that supplants the existing advertising and cash solicitation rules, marking the first time in more than 40 years the SEC has updated its rules governing adviser marketing.

Among the many amendments, the Rule promulgates new requirements relating to an adviser’s use of performance results in advertising materials. Advisers should keep the following points in mind moving forward:
• Gross vs. Net Performance Results. The Rule prohibits any presentation of gross performance in adviser advertisements unless the advertisement equally presents net performance figures. This restriction is predicated on the SEC’s concern that displays advertising of gross performance without any additional context, could create the impression that investors received the full amount of the presented returns shown. Accordingly, advisers should clearly indicate when performance results are portrayed on a gross basis. In addition, to facilitate investors’ understanding of the advertised performance results, net performance must be presented with at least equal prominence to gross performance results in a format designed to facilitate comparison between them.
• Hypothetical Performance. Advisers sometimes include hypothetical performance in their advertisements, such as model performance, back-tested performance, and targeted and projected performance returns. Although the Rule does not prohibit the use of hypothetical performance in advertising materials, it does prescribe significant conditions to its use based on the SEC’s belief that presentations of hypothetical performance pose a high risk of misleading investors. Specifically, an adviser may not utilize hypothetical results unless it: (i) has adopted and implemented policies and procedures reasonably designed to ensure the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience; (ii) provides sufficient information to enable the intended audience to understand the criteria used and the assumptions made in calculating the advertised hypothetical performance; and (iii) provides sufficient information to enable the intended audience to understand the risks and limitations of using hypothetical performance in making an investment decisions.
Of course, the above points are a high-level overview of the detailed requirements promulgated under the Rule. To read more about the Rule you can read my article entitled SEC Finalizes Amendments to Investment Adviser Advertising Rules and to read the full text of the Rule itself or download your own copy, check out SEC Final Rule – Investment Adviser Marketing. Should you have any questions about the Rule and its implications act on your advertising materials, contact me, Nicco Barber, or any of the Rimon lawyers with whom you regularly work.