SEC Approves New Rule Governing Funds’ Use of Derivatives

Posted on October 29th, 2020 at 4:01 PM
SEC Approves New Rule Governing Funds’ Use of Derivatives

From the Desk of Jim Eccleston at Eccleston Law LLC:

The U.S. Securities and Exchange Commission (“SEC”) approved a rule which will regulate the use of derivatives by mutual funds and other investments. The new rule would provide a more concrete standard for the use of derivatives, which is currently governed by a patchwork system comprised mostly guidance published by SEC staff.

The SEC’s approval of the new rule was not unanimous. Two commissioners dissented because they did not believe the new rule provided enough protection for investors. Derivatives can boost the performance of a portfolio, but also come with increased risk.

The new rule will amend Section 18 of the Investment Company Act to allow for exceptions to Section 18’s limitations on registered funds’ use of derivatives. To be eligible for such an exception, funds will need to have a derivatives management program which is overseen by the board of directors of the fund. Additionally, funds will be required to limit their leveraged risk to comply with the value-at-risk metric. The new rule will also apply to exchange-traded funds. Funds will have up to 18 months to comply with the new rule.

Eccleston Law also practice a variety of other areas of practice for financial investors and advisors including Securities FraudCompliance ProtectionBreach of Fiduciary DutyFINRA Matters, and much more. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.

Tags: ecceleston, ecceleston law, sec, new rule

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