SEC Requires Increased Disclosure and Compliance for Derivatives
The staff of the SEC’s Division of Investment Management has issued a Guidance Update telling funds that invest in commodities (e.g. futures, swaps) to increase disclosure and compliance. Most significantly, a fund that uses performance information of other funds or private accounts in its registration statement must include the performance of “all other funds and private accounts managed by the adviser that have investment objectives, policies, and strategies substantially similar to those of the fund.” The staff also instructs funds to review derivatives risk disclosures, tailor them to the derivatives used by the fund, and ensure that the prospectus describes the types of derivatives used, their purpose, and economic exposure. The staff also tells firms to adopt compliance policies and procedures to ensure that disclosures reflect derivatives use. Also, the staff reminds boards of their obligation to oversee derivatives use. The Guidance Update is part of the harmonization project that allows registered investment companies that must also register as CPOs to substitute SEC compliance for CFTC requirements.
OUR TAKE: Expect SEC examiners (and the disclosure staff) to focus on derivatives disclosure and compliance procedures because the CFTC will be watching.