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SEC Staff Reviews Use of Derivatives

The SEC has announced that it will conduct a a review of the use of derivatives by mutual funds, exchange-traded funds (ETFs) and other investment companies. The review is intended to reevaluate current regulations governing funds' use of complex securities, and evaluate if these regulations and protections need modernization, given the increased complexity of derivative instruments. The SEC's study will focus on whether:

  • current market practices involving derivatives are consistent with the leverage, concentration and diversification provisions of the Investment Company Act;
  • funds that rely substantially upon derivatives, particularly those that seek to provide leveraged returns, maintain and implement adequate risk; management and other procedures in light of the nature and volume of the fund's derivatives transactions;
  • fund boards of directors are providing appropriate oversight of the use of derivatives by funds;
  • existing rules sufficiently address matters such as the proper procedure for a fund's pricing and liquidity determinations regarding its derivatives holdings;
  • existing prospectus disclosures adequately address the particular risks created by derivatives, and
  • funds' derivative activities should be subject to special reporting requirements.

Pending the SEC review, the Commission has announced that:

the staff has determined to defer consideration of exemptive requests under the Investment Company Act to permit ETFs that would make significant investments in derivatives. The staff's decision will affect new and pending exemptive requests from certain actively-managed and leveraged ETFs that particularly rely on swaps and other derivative instruments to achieve their investment objectives. The deferral does not affect any existing ETFs or other types of fund applications.

The SEC did not estimate a time when the study will be completed, or when/if the deferral of ETF requests would be lifted. The full text of the Commission's announcement is available at: