SEC Adopts Changes to Reporting Forms

Regulation of Derivatives Use by RICs and BDCs

Recognizing the proliferation of new derivate products in our markets, the SEC voted to adopt a new regulatory framework for the use of derivatives by mutual funds, ETFs, closed-end funds, and business development companies. The SEC’s press release stated that, “The new rule and rule amendments will provide a modernized, comprehensive approach to the regulation of these funds’ derivatives use that addresses investor protection concerns and reflects developments over the past decades.” The regulatory framework comes with new Rule 18f-4 requirements to create a derivatives risk management program. It also speaks to changes to reporting forms including Forms N-Port and N-CEN to report activity and Form N-RN (retitled and amended Form N-LIQUID) to report on compliance with VaR based limits on derivatives exposure.

New Rule 18f-4 allows funds to enter into derivatives transactions and other transactions previously restricted under section 18 of the Act, for which many market participants previously sought exemptive orders. Rather than continue a hodge podge approach, this rulemaking puts in place requirements allowing the activity under a regulated framework that includes:

  • Implementation of a derivatives risk management program, including risk guidelines, stress testing, backtesting, internal reporting and escalation, and a required periodic review;
  • Compliance with an outer limit of fund leverage risk not to exceed 200% of the VaR of a designated reference portfolio of the fund under a relative VaR test, or 20% of a fund’s net assets under the absolute VaR test (exceptions for testing for funds with limited exposure, and expansions of the outer limits for certain leverages/inverse funds); and
  • Permisison to enter into reverse repurchase agreements and unfunded commitments, subject to conditions.

In taking action, the SEC rescinded 1979 derivatives guidance. New rulemaking on derivatives use by RICs and BDCs was originally proposed in 2015 but met substantial resistance and never made it to a final rule. In November 2019, the derivatives regulation framework was reproposed. In the final vote, the two Democratic-appointed commissioners dissented, favoring elements of the original 2015 proposal.

Rule 6c-11 of the Investment Company Act for leveraged funds is also amended to conform with Rule 18f-4.

The SEC did not provide a clear date when amendments to Form N-Port, N-Cen and Form N-RN would be ready. Compliance with Rule 18f-4 is required 18 months following the publication in the Federal Register, expected in the coming months. The SEC indicated that a firm may begin relying on compliance with Rule 18f-4 in lieu of exemptive orders when ready, even if the forms’ changes are not yet completed. In final state, compliance with the new requirements includes compliance with the reporting requirements. If you have any questions on the new regulatory framework, please contact us at


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