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SEC to Propose Derivatives Rules

The SEC announced last Friday that it would hold a meeting on December 11 to “consider whether to propose a new rule and amendments to certain proposed forms related to the use of derivatives by registered investment companies and business development companies.” The scheduled meeting comports with Chair Mary Jo White’s statements in October that she hoped that the Commission would be able to propose the rules by the end of the year. The rules have long been under development, with the Wall Street Journal reporting in September 2014 that a staff recommendation was underway and White noting the same publicly as early as December 2014.  In 2011, the SEC issued a proposed concept release on the use of derivatives by funds and other investment companies.  In that release, the SEC asked questions on several specific issues implicated by funds' use of derivatives, including leverage restrictions, fund portfolio diversification, concentration, and valuation issues. 

In an October speech, White said “the staff is considering whether broad risk management programs should be required for mutual funds and ETFs to address the risks related to their liquidity and derivatives use, as well as measures to ensure the Commission’s comprehensive oversight of those programs.  The staff is also reviewing options for specific requirements, such as updated liquidity standards, disclosures of liquidity risks, or measures to appropriately limit the leverage created by a fund’s use of derivatives.” While funds may use the instruments to manage risk, White said that “these instruments also frequently result in leveraged investment exposures and potential future obligations that can create risks for the funds.”