Special Update On Proposed Derivatives Rules For Registered Funds And BDCs

At an open meeting on December 11, 2015, the Securities and Exchange Commission ("SEC") proposed a new "exemptive" rule, Rule 18f-4, which addresses investment company use of derivatives and other leveraging arrangements. It would require most funds that use derivatives to implement a derivative risk management program (including appointing a derivatives management officer). The proposed rule applies to mutual funds, ETFs, closed-end funds and BDCs.

The rule is intended to modernize and harmonize funds' treatment of derivatives under Section 18 of the Investment Company Act of 1940, as amended (the "1940 Act"), by updating and modifying previous guidance issued in 1979 in Investment Company Act Release 10666 and more than 30 no-action letters in which SEC staff permitted fund practices involving specific types of derivatives.¹