On March 25, 2010, the Securities and Exchange Commission (the “SEC”) announced that its staff is conducting a review of the use of derivatives by mutual funds, exchange traded funds, and other investment companies (collectively, “funds”). 1 The SEC staff will evaluate the use of derivatives by those funds and, to the extent that the review suggests that additional protections may be necessary under the Investment Company Act of 1940 (the “Investment Company Act”), will determine what changes in SEC guidance or rules may be warranted.

Although the SEC staff recognizes that funds’ use of derivatives is not a new phenomenon, the review will provide it with an opportunity to rethink the SEC’s current regulatory protections and conclude whether those protections have kept pace with derivatives’ increasing complexity and howfund managers use them.2 Specifically, the SEC staff expressed its intention to explore at least the following issues relating to the use of derivatives by funds...