Alert March 30, 2010

Exemptive Applications for ETFs that Rely Significantly on Derivatives on Hold While SEC Staff Reviews Derivative Use by Registered Funds

The SEC staff is conducting a review of the use of derivatives by mutual funds, exchange‑traded funds (“ETFs”) and other investment companies, which may result in changes to SEC rules and guidance in this area.  Among the issues the staff has indicated it will explore are:

  • how current market practices square with the leverage, concentration and diversification provisions of the Investment Company Act of 1940
  • the risk management and other procedures followed by funds that rely substantially upon derivatives
  • oversight of derivatives use by fund boards
  • valuation and liquidity determinations for derivatives holdings
  • prospectus risk disclosures regarding the risks of derivatives
  • whether a fund’s derivative activities should be subject to special reporting requirements
The staff is deferring consideration of requests from ETFs for exemptive relief that would allow them to make significant investments in derivatives until the review is complete. This decision affects new and pending requests from certain actively-managed and leveraged ETFs that particularly rely on swaps and other derivative instruments to achieve their investment objectives.  The deferral does not affect any existing ETFs or other types of fund applications.