SEC Solicits Info to Consider More Derivatives Regulation for Funds
The SEC has issued a concept release seeking information about the use of derivatives by registered funds (mutual funds, ETFs, and closed-end funds) to determine “whether regulatory initiatives or guidance are needed to improve the current regulatory regime.” The SEC states that it seeks to take a “more comprehensive and systematic approach to derivatives-related issues” under the 1940 Act as opposed to the case-by-case approach it has previously applied. The SEC is most interested in leverage and senior-security issues under Section 18, measuring diversification, limiting exposure to broker-dealers that serve as derivatives counter-parties, and valuation.
OUR TAKE: Expect the SEC to ultimately adopt rules that significantly reduce the ability of registered funds to utilize derivatives. We expect the SEC to restrict use of OTC derivatives (i.e. security-based swaps) especially for leverage or exposure rather than for hedging.