SEC Issues Concept Releases on Investment Company Derivative Use, Mortgage Securities and Rule 3a-7


On August 31, the Securities and Exchange Commission issued three concept releases regarding: (i) the use of derivatives by investment companies (Derivatives Release), (ii) companies engaged in the business of acquiring mortgages and mortgage-related instruments (Mortgage Securities Release), and (iii) the treatment of asset-backed issuers under Rule 3a-7 (Rule 3a-7 Release). In the concept releases, the SEC requests comments from the public on a variety of issues. Comments for all of the concept releases should be received on or before November 7.

Derivatives Release.

The SEC and its staff are reviewing the use of derivatives by management investment companies registered under the Investment Company Act of 1940 (the 1940 Act), including exchange-traded funds (ETFs) as well as business development companies (collectively, Funds). In the Derivatives Release, the SEC requests comments on a range of issues, including potential implications for Fund leverage, portfolio concentration, diversification, valuation, exposure to securities-industry issuers, collateralization, counterparty risk and related matters. Comments received by the SEC will be used to determine whether regulatory initiatives or guidance are needed to improve the current regulatory regime for Funds and, if so, the nature of any such initiatives or guidance. Separate from the Derivatives Release, the SEC is presently examining the impact of leveraged and inverse ETFs, which rely heavily in derivatives in order to obtain their investment objectives, on market volatility in August 2011.

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