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Speech by SEC Chairman: 

Opening Statement at SEC Open Meeting 

Item 1 – Use of Derivatives by Funds 

by

Chairman Mary Schapiro 

U.S. Securities and Exchange Commission

Washington, D.C. 

August 31, 2011 

Good morning. This is an open meeting of the U.S. Securities and Exchange

Commission on August 31, 2011. 

Today we will consider whether to issue three separate releases soliciting 

public comment on issues arising under the Investment Company Act of 

1940. 

z The first relates to the use of derivatives by mutual funds and other 

investment companies regulated under that Act. 

z The next two are companion releases regarding who is considered to 

be – and not to be – an “investment company” as that term is defined

under the Act. In particular, we focus on asset-backed securities 

issuers and issuers that are in the business of acquiring mortgages 

and mortgage-related instruments. 

The derivatives, asset-backed and mortgage markets have undergone 

significant changes in recent years. And the Commission is taking this 

opportunity to seek public comment in order to help ensure that our 

regulatory approach and interpretations under the Investment Company 

Act remain current, relevant, and consistent with investor protection. 

Concept Release on Mutual Funds’ Use of Derivatives 

The first item on the agenda involves the use of derivatives by funds. 

In March 2010, the Commission announced a staff review of the use of 

derivatives by mutual funds, exchange traded funds, and other investment 

companies regulated under the Investment Company Act. That review 

focuses on the growing use of derivatives by funds and on whether the 

regulatory guidance surrounding that use can be improved. 

The concept release we are considering today would inform our review and 

help us determine whether we should update the regulatory regime for the 

benefit of fund investors. 

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Background 

We face this issue today because in 1940, when the Investment Company 

Act was adopted, derivatives as we now know them did not exist. The Act 

imposes important leverage, valuation, diversification, and industry 

concentration requirements to help protect fund investors. However, those 

limitations were written with stocks and bonds in mind, not complex 

financial derivatives. As a result, fund investments in derivatives are not 

always wholly captured by the statutory limitations and requirements. Or if 

captured, the measures may not be quite right. 

The controls in place to address fund investments in traditional securities 

can lose their effectiveness when applied to derivatives. This is particularly 

the case because a relatively small investment in a derivative instrument 

can expose a fund to a potentially substantial gain or loss – or outsized 

exposure to an individual counterparty. 

The Commission’s approach to the regulation of funds’ use of derivatives 

has developed on an ad hoc basis as new derivative instruments were 

introduced and new derivative hedging strategies gained popularity. 

Current Review of Funds’ Use of Derivatives 

The current derivatives review gives us the opportunity to re-think our 

approach to regulating funds’ use of derivatives. We are engaging in this 

review with a holistic perspective, in the wake of the financial crisis, and in 

light of the new comprehensive regulatory regime for swaps being 

developed under the Dodd-Frank Act. 

But we want public input to help us get it right – input from those who use 

derivatives, input from those who invest in funds, and input from those who

manage funds with derivatives strategies. 

I very much look forward to commenter input as we continue our in-depth 

review of the role of derivatives in fund portfolios and improvements that 

can be made to the regulatory regime. 

Before I turn it over to the staff, I would first like to thank those who 

worked very hard to develop the concept release before us today. 

From the Division of Investment Management: Eileen Rominger, Doug 

Scheidt, Nadya Roytblat, Ned Rubenstein, Steve Van Meter, and Michael 

Didiuk. 

This group was assisted by Mark Cahn, Meridith Mitchell, David Blass, Lori 

Price, Bob Bagnall, and Sarah Buescher in the Office of the General 

Counsel; Craig Lewis, Bruce Kraus, Harvey Westbrook, Adam Glass, Kelsey 

Pristach, and John Niarhos in the Division of Risk, Strategy, and Financial 

Innovation; Jim Reese in the Office of Compliance Inspections and 

Examinations; Thomas Eady, Jack Habert and Gregg Berman in the Division

of Trading and Markets; and Amy Starr in the Division of Corporation 

Finance. 

 

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