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Derivatives Redux: A Historical Perspective As the SEC Proposes Rules Governing Investment Company Use of Derivatives  (Volume 53, Number 6– March 25, 2020)

Author:  Jay G. Baris.

Source: Volume 53, Number 06, March 15 2020 , pp.57-72(16)

Review of Securities & Commodities Regulation


Four years after it proposed controversial rules governing investment company use of derivatives, the Securities and Exchange Commission has tried again with a new approach designed to address investor protection concerns underlying Section 18 of the Investment Company Act. The new approach would limit a fund’s ability to leverage its assets by requiring a “value at risk” test, and would impose “sales practice rules” to cover transactions in “leveraged/inverse investment vehicles.” This article traces the history of Section 18 and the evolution of regulation of “senior securities” that create leverage for registered investment companies and business development companies, then summarizes and analyzes the latest proposed rules.

Keywords: Rule 18f-4: Mutual Funds; Exchange-Traded Funds (“ETFs”); Closed-End Funds; Business Development Companies (“BDCs”); Investment Company Use of Derivatives and Leverage; Derivatives Risk Management Program (“DRMP”); Relative VaR Test

Affiliations:  1: Shearman & Sterling LLP.

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