House panel to vote on increasing family office oversight

The House Financial Services Committee is set to vote this week on legislation that would increase regulatory oversight of some family offices.

Currently, advisory firms that manage the finances of wealthy families don’t have to register with the Securities and Exchange Commission. That would change under a bill written by Rep. Alexandria Ocasio-Cortez, D-N.Y., which would exempt from SEC registration only family offices with less than $750 million in assets.

Any family office that has more than $750 million in AUM would have to register with the SEC as “exempt reporting advisers,” a designation that would subject them to a “a lighter regulatory regime” similar to that which applies venture capital funds, according to a memo posted by the committee.

The bill, which is designed to give the agency more information about the size, portfolios and leverage taken on by family offices, appears to be the first legislative response to the collapse last spring of Archegos Capital Management.

In late March, Archegos defaulted on margin calls involving swaps transactions that forced the sale of approximately $20 billion in underlying securities, which caused major investment banks to lose nearly $10 billion.

“The recent meltdown of the Archegos Capital Management family office, which led to over $10 billion in losses across some of the world’s largest banks, demonstrated that family offices can be deeply interconnected with the rest of the financial markets and their activities could affect the stability of financial markets,” the committee memo states.

In addition to setting the SEC registration threshold for family offices, Ocasio-Cortez’s bill would repeal a provision in the Dodd-Frank financial reform law that allows family offices with clients who are non-family members to avoid SEC registration.  

The bill would ban bad actors — people who have been barred from the financial industry or the target of final SEC orders involving fraud, manipulation or deceit — from being involved with family offices.

It also would require offices with less than $750 million to register with the SEC if they’re “highly leveraged or engage in high-risk activities.” Even family offices that don’t register with the SEC would still have to file annual reports with the agency.

The bill is one of several the committee is scheduled to take up Wednesday.

David Guin, a partner at the law firm Withers Bergman, doesn’t think the legislation's prospects are very good because it sets an arbitrary threshold for SEC registration.

“I still think it is unlikely to pass in its current form,” Guin said. If the SEC is going to step up oversight of family offices, “it is more likely they would adopt a risk-based approach rather than simply a dollar amount.”

Many of the bills approved by the committee this year have come on party-line votes, including legislation that would mandate environmental, social and governance reporting by public companies.

Ocasio-Cortez’s family office legislation could follow the same pattern and eventually hit a wall in the Senate. The Senate is evenly split between Democrats and Republicans, and the GOP can filibuster legislation.

“Even if it passes the House, I’m not sure it will get enough support in the Senate,” Guin said.

An Ocasio-Cortez spokesperson was not immediately available for comment.

The House committee on Wednesday also is scheduled to vote on bills related to the meme stock trading frenzy earlier this year, including one that would require the SEC to study payments for order flow and authorize the agency to prohibit them.