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SEC Proposes Restricting Derivatives for Registered Funds 

The SEC has proposed rules that would significantly restrict the use of derivatives by registered funds, including mutual funds and ETFs.  Under the proposal, a registered fund must limit aggregate exposure, measured as the aggregate notional amount, to 150% of the fund’s net assets.  Alternatively, a fund could obtain exposure up to 300% if the fund satisfies a value-at-risk test based on market risk without derivatives.  Funds that utilize “more than limited” derivatives transactions or use complex derivatives must establish a Board-approved derivatives risk management program administered by a derivatives risk manager.  Additional disclosure will also be required.

OUR TAKE: The proposal, while burdensome for any fund that utilizes derivatives, will significantly restrict hedge funds, hedge fund-of-funds, and other “registered alternative” funds seeking to operate under the Investment Company Act.