On 28 October 2020, the U.S. Securities and Exchange Commission adopted Rule 18f-4 under the Investment Company Act of 1940, as amended. The rule replaces the SEC’s decades-old patchwork of guidance with a comprehensive framework for the use of derivatives transactions by registered funds. The final rule retains the key elements of the proposal, with certain modifications in consideration of industry feedback and market disruptions surrounding the coronavirus (COVID-19) outbreak.

In this alert, we provide summaries and practical takeaways for the three key elements of the Rule—VaR limits, derivatives risk management, and board responsibilities—as well as an overview of key exceptions, alternatives, and reporting requirements.