Industry Response to SEC Derivatives and Senior Securities Rule Proposal

June 01, 2016

As discussed in the March 2016 edition of The Investment Lawyer, proposed Rule 18f-4 under the Investment Company Act of 1940 (1940 Act) would substantially limit the ability of registered investment companies and business development companies (BDCs) (collectively, funds) to invest in derivatives and incur other forms of leverage. Under the proposed rule, a fund may enter into derivatives and financial commitment transactions subject to the satisfaction of three conditions: (i) for funds that utilize derivatives, compliance with notional portfolio limitations, (ii) compliance with uniform asset segregation requirements, and (iii) implementation of board-approved procedures and derivatives risk management programs for certain funds that utilize derivatives.

In some cases, the proposed rule could cause certain types of funds, such as leveraged ETFs and managed futures mutual funds, to cease operations as currently structured or otherwise operate in a form other than as a registered investment company.

The Securities and Exchange Commission (SEC) received more than 175 comment letters in response to the proposal. While many commenters welcomed the SEC’s interest in addressing the patchwork of SEC and Staff guidance under Section 18 of the 1940 Act, the vast majority of the letters requested that the SEC change primary aspects of the proposed rule. This article summarizes and reviews the principal arguments made in those letters.

Read "Industry Response to SEC Derivatives and Senior Securities Rule Proposal."