Archegos fallout exposes risks from less regulated family offices, says former SEC counsel

Family offices have grown in the U.S., but that segment remains lightly regulated — and that could be a problem for the financial industry, warned a former counsel at the Securities and Exchanges Commission.

The risks posed by large family offices came under the spotlight after the multibillion-dollar Archegos Capital Management was last week forced to unwind more than $20 billion in trades.

The move led to a severe sell-off in certain stocks including U.S. media giants ViacomCBS and Discovery, rattling the broader market. Shares of several big banks said to be involved in the trades also saw their own stocks tank.

“This could … spread out into a much bigger problem because these family offices I think have really taken off, and they can pretty much do anything they want because there’s just not a lot of oversight,” Thomas Gorman, the former SEC counsel, told CNBC’s “Squawk Box Asia” on Thursday.

Gorman, now a partner at law firm Dorsey & Whitney LLP, pointed out that Archegos had built massive positions in the markets with borrowed money and used instruments that were also “not terribly heavily regulated.”

That contributed to the big losses that the fund faced, he said.

Amy Lynch, a former SEC regulator, warned that the Archegos episode may not be an isolated event.

She told CNBC’s “Squawk Box Asia” on Thursday that financial markets are turning “quite frothy” and could be approaching “the point of the bubble bursting.”

“And typically before that happens, you start to see this kind of blow ups because firms are taking on a lot of risks, a lot of leverage and when their trade goes wrong, they end up with a big margin call which is what happened with Archegos,” said Lynch, who’s now founder and president of consultancy FrontLine Compliance.

A margin call refers to a broker’s demand that an investor tops up his or her account to meet the minimum amount required. That can happen when assets held in the account have decreased in value, and the investor can choose to deposit more money or sell some of the assets.