On Nov. 25, the Securities and Exchange Commission (SEC) voted 5-0 to propose or repropose new rules revamping the framework for permissible use of derivatives and short sales by investment companies (other than money market funds), including mutual funds and exchange-traded funds, as well as closed-end funds and business development companies (Funds).

The new proposed rule departs from the SEC’s December 2015 proposal (which was ultimately dropped following the change in federal administration) in at least two notable ways:

  • First, it abandons the concept of notional caps, which had been criticized by former Commissioner Michael Piwowar and former Investment Company Institute general counsel David Blass as being “too restrictive” for Funds that use derivatives, for example to offset risks, because of the divergence between notional amount and meaningful levels of riskiness. The new proposed rule would retain the concept of an overall value-at-risk limit.
  • Second, the new proposed rule replaces asset segregation requirements (from Investment Company Act Rel. No. 10666) with portfolio-level stress tests and other components of a derivative risk management program.

Comments on the proposals are due 60 days following publication of the proposing release in the Federal Register. Details of the proposals can be found in the proposing release, which is available here.