SEC Proposes New Limits on Registered Funds’ and BDCs’ Use of Derivatives

26 January 2016
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Key takeaways

  • The SEC has proposed a new rule under the Investment Company Act relating to the use of derivatives, reverse repurchase agreements and other leverage-producing transactions by registered investment companies and business development companies ("Funds").
  • The proposed rule, if adopted, would provide an exemption permitting Funds to enter into derivatives and financial commitment transactions notwithstanding the restrictions on the issuance of “senior securities” under the Investment Company Act.
  • If adopted, the proposed rule would supersede existing SEC guidance on which Funds have historically relied to engage in such transactions and would impose new exposure limits, asset segregation requirements and compliance obligations on Funds that engage in such transactions (including additional board oversight and a requirement for certain Funds to adopt a derivatives risk management program and appoint a derivatives risk manager).
  • Comments on the proposed rule are due March 28, 2016.