Dechert Submits Comment Letter to SEC on the Proposed New Restrictions on the Use of Derivatives by Registered Funds and BDCs

Dechert submitted this comment letter to the Securities and Exchange Commission (“SEC”) in response to the SEC’s December 2015 proposed Rule 18f-4 under the Investment Company Act of 1940 (“1940 Act”). Proposed Rule 18f-4 would supersede prior SEC and staff guidance, which—for the last several decades—has allowed registered investment companies and business development companies (“funds”) to avoid being considered to have issued senior securities when engaging in transactions involving leverage in violation of Section 18 of the 1940 Act by daily segregating assets or otherwise covering fund obligations arising from these transactions. The proposed rule would provide exemptive relief to permit a fund to engage in derivatives and other transactions that create leverage, but only where such activity is subject to strict conditions. The proposed conditions would substantially limit a fund’s ability to engage in such practices, and cause a fund to incur new costs of compliance.

Dechert’s letter addresses each element of the rule proposal, including the:

• Proposed new and inflexible notional portfolio limitations;
• Proposed new asset segregation requirements;
• Proposed requirement that a fund’s board approve a derivatives risk management program and appoint a derivatives risk manager;
• SEC’s cost-benefit analysis;
• Proposed related amendments to reporting forms; and
• Proposed transition and compliance periods for the proposed rule.