On December 11, 2015, the US Securities and Exchange Commission (SEC) voted 3–1 in favor of proposing a new rule—Rule 18f-4 (Proposed Rule) under the Investment Company Act of 1940 (1940 Act). If adopted, the rule will have a significant effect on the use of swaps, security-based swaps, futures contracts, forward contracts, options, and other derivative instruments and financial commitment transactions by registered investment companies (i.e., mutual funds, exchange-traded funds (ETFs), and closed-end funds) and business development companies (BDCs). In this White Paper, we refer to these entities generally as “funds.”

The Proposed Rule is the SEC’s third significant proposed rulemaking for the registered fund industry within the last year and, together with the other rulemakings, represents a noteworthy departure from the SEC’s traditional approach to regulating both derivatives and registered funds in general. The Proposed Rule comes more than four years after the SEC issued its Concept Release on registered funds’ use of derivatives and would replace a patchwork of SEC staff positions that have developed over the last 35-plus years with comprehensive regulation that would change funds’ use of derivatives and financial commitment transactions compared to current practices.