Analysis of the SEC’s Proposal to Update the Regulation of Funds’ Use of Derivatives

April 10, 2020
| The Investment Lawyer

The US Securities and Exchange Commission (SEC) on November 25, 2019, unanimously approved for publication a rule proposal (Proposal) related to the use of derivatives and certain other transactions by registered investment companies (that is, open-end funds other than money market funds; closed-end funds; and exchange-traded funds) and business development companies (collectively, funds). The Proposal includes:

  • New Rule 18f-4 under the Investment Company Act of 1940 (1940 Act), which would provide an exemption from the applicable restrictions on issuing “senior securities” under Sections 18 and 61 of the 1940 Act, allowing funds to enter certain transactions that create leverage, subject to certain conditions (Proposed Rule);
  • New rules relating to leveraged/inverse funds and vehicles, including new sales practices rules under the Securities Exchange Act of 1934 (Exchange Act) and the Investment Advisers Act of 1940 (Advisers Act) and a related amendment to Rule 6c-11 under the 1940 Act; and
  • Amendments to fund recordkeeping requirements and reporting forms.

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