On November 25, 2019, the U.S. Securities and Exchange Commission (the SEC) issued a release (the Proposing Release)
- reproposing new Rule 18f-4 (the Proposed Rule) under the Investment Company Act of 1940, as amended (the Act), intended to address the investor protection purposes and concerns underlying Section 18 of the Act with regard to the incurrence of leverage or other obligations arising from the use of derivatives by mutual funds (excluding money market funds), exchange traded funds (ETFs), registered closed-end funds and companies electing to be treated as business development companies (BDCs) under the Act (collectively, Funds)
- proposing new Rule 15l-2 under the Securities Exchange Act of 1934, as amended (the Exchange Act), and new Rule 211(h)-1 under the Investment Advisers Act of 1940, as amended (the Advisers Act) (collectively, the sales practices rules), that would require a broker, dealer or investment adviser that is registered (or required to be registered) with the SEC to exercise due diligence in approving a retail customer’s or client’s account to buy or sell shares of certain “leveraged/inverse investment vehicles” (described below)
- proposing amendments to Forms N-PORT, N-LIQUID (proposed to be renamed Form N-RN) and N-CEN, intended to provide the SEC with information regarding Funds’ derivatives exposure, and for Funds subject to the limit on fund leverage risk, certain additional information, including value at risk (VaR)-related information
The SEC first proposed Rule 18f-4 in December 2015 (the 2015 Proposal). Under the 2015 Proposal, a Fund would have been prohibited from investing in a derivatives transaction unless the Fund (i) complied with one of two alternative portfolio limitations, (ii) maintained certain qualifying assets and segregated those assets on its books and records and (iii) depending on the extent to which the Fund used derivatives, adopted a written derivatives risk management program including certain specified elements.
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