Concept Release on Use of Derivatives by Funds: SEC Issues Concept Release on the Use of Derivatives by Investment Companies Regulated under the Investment Company Act of 1940

Sullivan & Cromwell LLP - September 15, 2011

The Securities and Exchange Commission recently published a concept release and request for comments (the “Release”) on a wide range of issues relating to the use of derivatives by investment companies regulated under the Investment Company Act of 1940, including mutual funds, closed-end funds, exchange-traded funds and business development companies (collectively, “funds”).

The stated purpose of the Release is to assist in the SEC’s evaluation of whether the current regulatory framework, as it applies to funds’ use of derivatives, continues to fulfill the purposes and policies underlying the Act and is consistent with investor protection. The SEC states that it intends to use the comments it receives to help determine whether regulatory initiatives or guidance are necessary to improve the current regulatory regime and the specific nature of any such initiatives.

The Release solicits broad public comment and comprehensive information on any matters that may be relevant to the use of derivatives by funds, and it focuses particular attention, and requests specific comment, on issues relating to:

  • senior securities and leverage restrictions;
  • diversification requirements;
  • exposure to securities-related issuers;
  • concentration limitations; and
  • valuation.

Somewhat surprisingly, in light of the breadth of the SEC’s request for information and comments, comments on the Release are due within a relatively short 60-day period, on November 7, 2011.