SEC Adopts Modernized Regulatory Framework for Derivatives Use by Registered Investment Companies and Business Development Companies

November 18, 2020

The SEC recently adopted Rule 18f-4 (Rule), and rule and form amendments under the Investment Company Act of 1940, as amended (1940 Act), designed to provide a modernized and comprehensive approach to the regulation of the use of derivatives and other financial instruments by registered investment companies and business development companies (funds).

The Rule permits a fund to enter into certain derivatives and financial commitment transactions notwithstanding the limitations of Section 18 of the 1940 Act, provided certain conditions are met. For derivatives transactions, the Rule generally requires a fund to:

  • adopt and implement a written derivatives risk management program (unless the limited derivatives user exception applies) and designate a derivatives risk manager;
  • limit its leverage risk to a prescribed value-at-risk (VaR) limitation (unless the limited derivatives user exception applies) and report confidentially to the SEC on Form N-RN if certain events occur with respect to the VaR limitation;
  • comply with certain reporting and disclosure requirements; and
  • maintain a variety of written records pertaining to the fund’s use of derivatives transactions.

The release adopting the amendments (Adopting Release) also includes amendments to Rule 6c-11 under the 1940 Act (which permits most exchange-traded funds (ETFs) to operate without obtaining an exemptive order) to cover certain leveraged or inverse ETFs.

This Seward & Kissel client memorandum discusses the Rule and other amendments included in the Adopting Release in more detail: Please Click Here

The Adopting Release is available: Please Click Here


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Business Development Companies, Compliance, Exchange-Traded Funds (ETFs), Investment Advisers, Investment Companies, Mutual Funds, Regulatory