On November 25, 2019, the SEC proposed a new exemptive rule under the Investment Company Act of 1940—Rule 18f-4—intended to overhaul the current regulatory framework governing the use of derivatives by registered investment companies. The SEC initially proposed a derivatives rule in December 2015, and this proposal contains several significant changes from the 2015 proposal. The new rule would supersede historical guidance provided by the SEC and its staff relating to the use of derivatives by registered funds.

The proposed rule would permit a fund to engage in derivatives transactions, notwithstanding the prohibitions and restrictions on the issuance of “senior securities” under Section 18 of the 1940 Act, subject to the following conditions:

• Derivatives Risk Management Program. A fund would be required to adopt a written derivatives risk management program (DRMP) with, among other things, risk guidelines reflecting how the fund’s use of derivatives may affect its investment portfolio and overall risk profile. A fund would also be required to appoint a derivatives risk manager (DRM) to administer the DRMP.

Comments on the SEC’s proposal are due March 24, 2020.