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What You Need to Know About the SEC’s New Proposal on the Use of Derivatives by Registered Investment Companies and Business Development Companies

December 18, 2015
Client Alert

On December 11, 2015, the Securities and Exchange Commission (the SEC) Commissioners voted three to one in favor of proposing new Rule 18f-4 that is designed to modernize the regulation of derivatives usage by open-end funds, closed-end funds, exchange-traded funds and business development companies (the Proposal).1 The Proposal, if adopted, would replace over 30 years of SEC and staff guidance on the use of derivatives by registered funds and business development companies with new limits on funds’ use of derivatives transactions. Consequently, certain funds, such as managed futures funds, would likely be forced to cease operating as registered investment companies under the Investment Company Act of 1940 (the 1940 Act).

The SEC stated that the Proposal is intended to address the investor protection concerns embodied in the 1940 Act associated with funds’ use of leverage by reducing undue speculation by funds that use leverage and reducing the risk that funds will operate without adequate assets to meet their obligations. The SEC hopes that the Proposal will establish an updated and more comprehensive approach to the regulation of funds’ use of derivatives and other transactions that create leverage.

The Proposal is the third in a series of SEC proposals2 designed to address the impact of investment activities on investors and the financial markets, and the risks associated with increasingly complex portfolio composition and operations of the asset management industry.3

Read full version here.

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