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In our extensive examination of the requirements for Limited Derivatives Users under Rule 18f‑4(c)(4) we have tried to be conscientious in pointing out matters open to interpretation. While we have not been shy about arguing for interpretations that would reduce a fund’s derivatives exposure and thus ease compliance with these requirements, we acknowledge that these are just our informed opinions. Absent guidance from the SEC staff, chief compliance officers and counsel to fund directors and trustees will need to consider these matters and reach their own conclusions.

This post wraps up our examination of the Limited Derivatives User requirements with a list of these interpretive questions. While we are sure it is incomplete, at least it provides a starting point for consideration.…

Our last post explained why the Limited Derivatives User provisions of Rule 18f‑4(c)(4) may not “provide [the] objective standard to identify funds that use derivatives in a limited manner” anticipated by the SEC. Inconsistencies in methods of determining the notional amounts of derivatives transactions may cause funds that use such transactions in the same manner and to the same extent to be treated differently under the rule. The previous post also questioned whether requiring Limited Derivatives Users to perform the complex calculations required to determine their derivatives exposure each day might “incur costs and bear compliance burdens that may be disproportionate to the resulting benefits.”

This post points out some alternatives that would address our concerns, although it may be too late to implement one of them.…

This post continues our assessment of whether the Limited Derivative User requirements of Rule 18f-4(c)(4) effectively and efficiently accomplish the SEC’s aim of providing “an objective standard to identify funds that use derivatives in a limited manner.” Here we question whether the “gross notional amount” of a derivatives transaction measures the means and consequences, rather than the extent, of its use.…

This post will address another ambiguity in the “10% buffer” Rule 18f-4 provides for excluding the notional amount of derivative transactions that hedge currency or interest rate risks (“Hedging Derivatives”) when calculating the Derivatives Exposure of a Limited Derivatives User. The ambiguity is whether, once the notional amount of a Hedging Derivative exceeds the 10% buffer, a fund should add back to its Derivatives Exposure (a) the entire notional amount of the Hedging Derivative or (b) only the notional amount in excess of the 10% buffer. We chose answer (b) in our post on The 10% Buffer and Changes in Hedged Investments. This post explains why.…

This post continues our examination of the “10% buffer” for Hedging Derivatives, which refers to the amount by which the notional amounts of Hedging Derivatives can exceed the value, par or principal amount of the hedged equity and fixed-income investments. In this post we consider whether funds should apply the 10% buffer to Hedging Derivatives in the aggregate or on a “hedge-by-hedge” basis.…

This post continues our examination of the “10% buffer” for Hedging Derivatives, which refers to the amount by which the notional amounts of Hedging Derivatives can exceed the value of hedged equity investments, par amount of hedged fixed-income investments or principal amount of hedged borrowings. In this post we examine what it means for Hedging Derivatives to exceed the 10% buffer.…

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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