SEC Issues Concept Release on Funds’ Use of Derivatives


The Securities and Exchange Commission held an open meeting on August 31, 2011 to announce the publication of a concept release (the “Concept Release”) on the use of derivatives by investment companies under the Investment Company Act of 1940, as amended (the “1940 Act”). The Concept Release requests data and comments regarding the types of derivatives used by mutual funds and other investment companies, such as business development companies and exchange-traded funds, the purposes for which funds use derivatives, and whether funds’ use of derivatives has undergone or may be undergoing changes. The Commission requests comments to the Concept Release to help it determine whether “the regulatory framework, as it applies to funds’ use of derivatives, continues to fulfill the purposes and policies underlying the [1940 Act] and is consistent with investor protection.”

The Concept Release represents the latest step in the Commission’s ongoing review of the use of derivatives by funds. The Concept Release states that, as part of this review, the SEC staff has met with industry groups and fund complexes, and has considered the American Bar Association’s Section of Business Law’s July 2010 “Report of the Task Force on Investment Company Use of Derivatives and Leverage.”

The Concept Release discusses the history and application of certain 1940 Act provisions which govern derivatives activity and invites comment on the attendant costs, benefits, and risks associated with the use of derivatives. In addition to a general request for comments on any matters relevant to the use of derivatives by funds, the Concept Release specifically discusses and requests comment on (i) the application of the 1940 Act’s restrictions on senior securities and leverage to derivatives; (ii) the application of the 1940 Act’s restrictions on investments in securities-related issuers to derivatives; (iii) the application of the 1940 Act’s provisions concerning portfolio diversification and concentration to derivatives; and (iv) the valuation of derivatives.

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