SEC Proposes New Framework For Regulating Funds' Use Of Derivatives And Leverage

On December 11, 2015, the Securities and Exchange Commission (Commission) proposed a rule that, if adopted, would rescind nearly 30 years of Commission and staff guidance that is currently relied upon by most mutual funds, closed-end funds and business development companies or "BDCs" (collectively, funds) when entering into derivatives, short sales or other transactions that create conditional or unconditional future payment obligations on a fund.¹ As proposed, Rule 18f-4 under the Investment Company Act of 1940 (1940 Act) would become the exclusive means by which funds may enter into such transactions. In order to rely on the proposed rule, funds would be required to comply with leverage restrictions, segregation requirements, substantial board oversight and, in some cases, the adoption of a formal risk management program, among other obligations.