SEC Concept Release Requests Industry Comments on Funds’ Use of Derivatives


At an open meeting on August 31, the Securities and Exchange Commission (SEC) unanimously voted (4-0) to approve the issuance of a Concept Release on the regulatory framework governing the use of derivatives by investment companies under the Investment Company Act of 1940 (1940 Act).1 The Concept Release solicits comments from investors, industry participants, and industry professionals on a broad range of topics relating to use of derivatives by mutual funds, exchange-traded funds,2 closed-end funds, and business development companies (funds) in connection with a comprehensive review being conducted by the SEC and its staff. The purpose of the review is to assist in determining whether regulatory guidance or changes are needed and, if so, what type of changes would be appropriate. Comments will be due during the first week of November and may be submitted online or via email. All comments received will be publicly available.

At the open meeting, Chairman Mary Schapiro noted that the derivatives markets have recently undergone significant changes and that the limits on leverage and senior securities set forth in the 1940 Act were historically intended to apply to stocks and bonds and did not contemplate derivatives. Chairman Schapiro stated that the regulatory framework surrounding funds’ use of derivatives has developed on an ad hoc basis and that the Concept Release will help the SEC determine whether the regulatory regime needs to be updated. Eileen Rominger, Director of the Division of Investment Management, noted at the open meeting that derivative instruments are widely used in the industry and emphasized the importance of obtaining information, analysis, and opinions from investors, industry participants, and professionals in response to the Concept Release.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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