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This post will bring to a close, for now, our survey of the requirements of new Rule 18f-4, which investment companies must comply with by August 19, 2022. This post considers whether a Chief Compliance or Risk Officer should seek to treat some or all of their funds as Limited Derivatives Users and how that choice, in turn, relates to the decision about whether to treat reverse repurchase agreements as derivatives transactions. But first, we review the compliance procedures required by Rule 18f-4 for (nearly) every fund. We also provide links to compliance checklists provided in earlier posts.…

Yesterday, the Investment Adviser Association published our article on “Dealing with the New Derivatives Rule: A Guide of Legal and Compliance Professionals” in the “Compliance Corner” of its September 2021 IAA Newsletter.

At a high level, the article:

  • Provides a background on the limitations on senior securities under the Investment Company Act of

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This eleventh installment of our review of the compliance requirements of new Rule 18f‑4 as it applies to business development companies, closed-end funds and open-end funds other than money market funds (“Funds”) completes our discussion of unfunded commitment agreements. Here we consider what changes may be required for a Fund to comply with paragraph (e) of Rule 18f‑4. We suspect this may prove relatively easy for an open-end Fund.…

This is the tenth installment of our review of the compliance requirements of new Rule 18f‑4 as it applies to business development companies, closed-end funds and open-end funds other than a money market fund (“Funds”). We have previously discussed the asset sufficiency risk posed by unfunded commitment agreements and the means by which paragraph (e) addresses this risk. This post will use these concepts to develop a working definition of when a firm or stand-by commitment should be treated as an unfunded commitment agreement.…

This is the ninth installment of our review of the compliance requirements of new Rule 18f‑4. Our last post explained why unfunded commitment agreements present asset sufficiency risk but did not create leverage risk. In this post, we will explain how paragraph (e) of the new rule controls asset sufficiency risk, tracing its origins back to Release No. IC-10666 (“Release 10666”).…

Subject to Steve’s caveat regarding the definition of an “unfunded commitment agreement,” we continue our exploration of Rule 18f-4 with a focus on the treatment of such commitments under paragraph (e) of the new rule. Like paragraph (d), (e) applies only to business development companies, closed-end funds and open-end funds other than money market funds (“Funds”). We begin with a conceptual question: how can a contract to lend money and a contract to repay borrowed money both be “senior securities” under Section 18?…

This is the sixth installment of our discussion of the compliance requirements of new Rule 18f‑4 and wraps up our discussion of paragraph (d) of the new rule and its application to business development companies (“BDCs”), closed-end funds and open-end funds other than money market funds (collectively, “Funds”). This posts identifies which Funds need to update their asset coverage procedures for compliance with Section 18 of the Investment Company Act of 1940 and what those updates should entail.…

This is the fifth installment of our discussion of the compliance requirements of new Rule 18f‑4 and completes our consideration of paragraph (d) of the new rule and its application to business development companies, closed-end funds and open-end funds other than money market funds (“Funds”). Our two previous posts considered the application of that paragraph to reverse repurchase agreements (“reverse repos”) and “similar financing transactions.” This posts identifies transactions that the adopting release (the “Release”) indicates would not be similar to reverse repos. These transactions fall into two categories: (a) derivatives instruments that will be subject to the conditions of paragraph (c) of Rule 18f‑4 and (b) transactions not at all subject to Rule 18f‑4.…

This is the fourth installment of our discussion of the compliance requirements of new Rule 18f‑4. Our last post considered the application of paragraph (d) of the new rule to reverse repurchase agreements (“reverse repos”) and the compliance alternatives provided to business development companies, closed-end funds and open-end funds other than money market funds (collectively, “Funds”). Paragraph (d) also applies to financing transactions that are similar to reverse repos. This post discusses examples of “similar financing transactions” provided in the adopting release (the “Release”).…

This post is the third installment of our discussion of the compliance requirements of new Rule 18f‑4. From this point forward, we will be dealing with exemptions that apply only to business development companies (“BDCs”), closed-end funds and open-end funds other than money market funds (collectively, “Funds”). We first consider paragraph (d) of Rule 18f‑4, relating to reverse repurchase agreements (“reverse repos”).…