SEC Staff Evaluating the Use of Derivatives by Funds

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In a release issued yesterday, the Division of Investment Management of the Securities and Exchange Commission (SEC) announced that its staff is “conducting a review to evaluate the use of derivatives by mutual funds, exchange-traded funds (ETFs) and other investment companies.” The review will examine whether and what additional protections are necessary for those funds under the Investment Company Act of 1940. The SEC also stated that its staff would consider whether “existing rules sufficiently address matters such as the proper procedure for a fund’s pricing and liquidity determinations regarding its derivatives holdings” and whether “funds’ derivative activities should be subject to special reporting requirements.”

In a statement accompanying the release, SEC Chairman Mary Schapiro said, “It’s appropriate to engage in a more thorough review of the use of derivatives by ETFs and mutual funds given the questions surrounding the risks associated with the derivative instruments underlying many funds.”

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