SEC Updates Regulatory Framework for Registered Fund Derivative Investments

On October 28, the SEC adopted new Rule 18f-4 (the Derivatives Rule) under the Investment Company Act of 1940 (1940 Act) relating to registered funds’ (excluding money market funds) use of derivatives. Under the Derivatives Rule, funds using derivatives generally will have to: (i) adopt a derivatives risk management program administered by a derivatives risk manager and overseen by the fund’s board of directors, and (ii) comply with an outer limit on fund leverage risk based on value at risk, or “VaR.” Funds that use derivatives only in a limited manner will not be subject to these requirements, but will have to adopt and implement policies and procedures reasonably designed to manage the fund’s derivatives risks. In addition, the SEC amended Rule 6c-11 under the 1940 Act to allow leveraged/inverse ETFs, which rely on derivatives to achieve their investment objectives, to operate without the expense and delay of obtaining an exemptive order if they satisfy the conditions under Rule 6c-11.