Derivatives Blamed for Bond Fund Declines; Donohue Calls for More Regulation
Buddy Donohue, the SEC’s Director of the Division of Investment Management, called for a sweeping regulatory review of the use of derivatives by mutual funds. In his speech titled “Investment Company Act of 1940: Regulatory Gap between Paradigm and Reality?” Mr. Donohue argued that the recent poor performance of fixed income funds “may rest with the use of derivatives to magnify the economic exposure.” Mr. Donohue argues for better disclosure, more Board oversight, and the use of segregated accounts to offset positions.
OUR TAKE: This is a familiar SEC song. When the fund industry takes a hit, the SEC often blames derivatives. Mr. Donohue says he likes the use of derivatives for hedging purposes rather than speculation, but there doesn’t seem to be a clear line of demarcation.