(Bloomberg) -- Ralph Hamers, the former chief executive officer of UBS Group AG, looked sullen as he explained how the bank lost hundreds of millions of dollars after the implosion of investment firm Archegos Capital Management.

“Clearly what we will do going forward is demand even more transparency with our clients,” Hamers told a CNBC interviewer in April 2021, when he still headed the Swiss bank. “Is there more regulation that we can get, in order to ensure we have complete oversight over the positions our clients have?” 

Three years later, those kinds of rules haven’t materialized. 

Now with Archegos founder Bill Hwang’s criminal trial underway, sworn testimony is dredging up years-old anxieties over family offices, the type of investment firm he managed. Hwang gathered a $36 billion fortune, borrowing huge sums from a number of banks including UBS and amassing giant, risky positions in relative secrecy until Archegos unraveled.

Hwang and his co-defendant, former Chief Financial Officer Patrick Halligan, have pleaded not guilty to fraud charges and are in the fifth week of testimony in their trial in lower Manhattan. 

Family offices have long escaped regulations applied to other types of investment firms. Watchdogs and legislators looked past them, doubting that just one family’s wealth could prove consequential for the rest of the market.

Archegos upended that notion.

Leaving $10 billion of losses in its wake and contributing to the downfall of Credit Suisse, Archegos’ demise showed that family offices left unchecked can roil banks and public companies alike. While some new rules took shape after its downfall, they didn’t ultimately zero in on this amorphous segment of the investing world.

‘Misplaced’ Assumption

“It’s clear that Congress thought of family offices as being relatively small,” said Tyler Gellasch, CEO of Healthy Markets Association. “The Archegos collapse suggests that this assumption is now misplaced.”

The number of single family offices operating globally number at least 10,000, the majority created in the last 15 years, according to a 2023 report by Ernst & Young. Thousands of these firms exist in the US with more than $2 trillion under management as of 2020, just before the Archegos collapse.

Of course, there was nothing typical about Archegos. Scott Becker, the firm’s former risk-management chief, testified in the trial that he committed crimes at the firm “because it was part of my job.”

When Archegos faced overwhelming margin calls in March 2021, Hwang suggested reassuring banks by playing up the family office angle, emphasizing “we don’t have clients, so we didn’t have to worry about investors redeeming from the fund because of negative performance,” Becker testified.

Regulatory Scrutiny

Funds managing just one family’s fortune don’t need to disclose as much as other firms, which regularly open their books to scrutiny from regulators. Though Congress made more investment firms register with the Securities and Exchange Commission as part of the Dodd-Frank reforms following the 2008 financial crisis, the rules specifically exempted family offices. 

In the intervening years, family offices got more comfortable with investing risk, hiring talent from hedge funds. In some cases their assets eclipse hedge funds in size. Archegos was formed from the ashes of a hedge fund. 

For a fleeting moment it seemed like the Archegos debacle could change some of the secrecy many family offices enjoy. At least two big reforms gathered steam after it collapsed.

One was the idea that banks should be forced to disclose more about their positions — the kind of change that would have satisfied Hamers’ call for additional transparency. The Federal Reserve said it was concerned about banks relying on “incomplete and unverified information” from client funds, in guidance published after Archegos’ demise.

“If regulators demanded more public disclosures, that would help banks and market participants better see and manage their risks,” Gellasch said. “But it would also likely reduce the leverage and profitability of some funds’ strategies.”

Another was to subject family offices to more oversight. Democratic Congresswoman Alexandria Ocasio-Cortez of New York championed this approach, introducing a bill in 2021 that would force a subset of family offices to register as investment advisers. The Family Office Regulation Act of 2021 would require those with more than $750 million in assets to register with the SEC, and publicly report holdings on a quarterly basis, as most other investment firms do. 

‘Deeply Interconnected’

“Family offices have now grown to the point that they are deeply interconnected with the rest of the financial system,” Ocasio-Cortez said in a meeting of the House Committee on Financial Services in 2021, invoking Archegos. “Their activities could affect the stability of our financial markets.” 

But the bill was never adopted. While large investors with portfolios exceeding $100 million in US equities are already required to divulge holdings quarterly, many family offices fall below that threshold.

One overhaul that did occur after Archegos concerned rules for swaps trading, which the SEC finalized in November. Another rule addressing large position disclosures for security-based swaps aimed at preventing fraud and manipulation has yet to be finalized.

That data could potentially help regulators pinpoint epicenters of market turmoil, said Edwin Hu, associate professor at University of Virginia Law School and a former SEC official.

But family offices are likely to remain a black box, Hu said.

In Hwang’s trial, Archegos’ Becker testified that he told UBS that the fund’s position in one stock, Viacom, was about 35% of its equity — when in reality it was more like 84%. 

Prosecutors asked ex-UBS risk manager Bryan Fairbanks what he would have thought had he known the full scale of Archegos’ exposure to a single stock.

“We would’ve been horrified,” Fairbanks testified.

--With assistance from Bob Van Voris.

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