Analysis of Derivatives Proposal Sees More Active Role for Boards

Lawyers from Dechert outline several practical and legal concerns in a comprehensive analysis of the proposed SEC derivatives rule. Among other things, they observe that the proposal’s requirements for directors “would increase board members’ de facto involvement in the oversight of funds’ derivatives use compared to current practice.” Industry groups have voiced similar concerns. In its comment letter to the SEC on the proposed rule, the MFDF among other issues raised questions regarding the requirements on reporting to boards on the derivatives management program. The volume of the board reporting requirement would place directors in a more “active and time-consuming role” related to a fund’s use of derivatives compared to a director’s role in the current derivatives oversight regime, Dechert lawyers wrote. “Certain of these requirements could be viewed as assigning fund boards with responsibilities more appropriately handled by management.” The Dechert lawyers also noted that funds in smaller fund complexes or fund complexes of asset managers that do not already have sophisticated derivatives risk management programs in place, could face financial strain if the rule is adopted as proposed as it may require these firms to increase the financial and human capital resources dedicated to derivatives risk management. Additionally, the proposal might create “a de facto barrier to the use of derivatives transactions in more than a de minimis amount”  for some funds. The lawyers write that these funds might need to change and reduce the ways they use derivatives transactions to implement their investment objectives and strategies and to manage risk, which could reduce the efficiency of these fund activities and be detrimental to fund returns and investors.