SEC Seeks Public Comment on Use of Derivatives by Funds

The Securities and Exchange Commission is seeking public comment on the use of derivatives by mutual funds over the next 60 days after publication in the Federal Register. If it determines that new regulations to protect investors are necessary, the SEC will consider passing and enforcing them.

Concerned about derivatives’ use of leverage and increased complexity, particularly in light of the 2008 financial crisis, the SEC began investigating the use of derivatives, swaps and leverage by the $13 trillion mutual fund industry in March 2010.

In this go-around, the SEC is asking for detailed information from funds on how they use derivatives and what benefits, risks and costs they find the instruments offer.

In particular, the Investment Company Act of 1940 restricts the manner in which mutual funds may incur indebtedness and leverage their portfolios, the SEC again notes.

“The derivatives markets have undergone significant changes in recent years, and the Commission is taking this opportunity to seek public comment and ensure that our regulatory approach and interpretations under the Investment Company Act remain current, relevant and consistent with investor protection,” said SEC Chairman Mary L. Schapiro.

See "SEC Urges Mutual Funds to Clarify Use of Derivatives," MME, Aug. 2, 2010.

See "SEC Hones in on Risk Disclosures," MME, July 12, 2010.

See "Regulators Crack Down on Risky Strategies," MME, April 19, 2010.

See "SEC May Put Cap on Funds' Exposure to Derivaitves," MME, March 26, 2010.