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.