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SEC Seeks Public Comment on Use of Derivatives by 

Mutual Funds and Other Investment Companies 

FOR IMMEDIATE RELEASE 

2011-175

Washington, D.C., Aug. 31, 2011 – The 

Securities and Exchange Commission today 

voted unanimously to seek public comment 

on a wide range of issues raised by the use 

of derivatives by mutual funds and other 

investment companies regulated under the 

Investment Company Act. 

Additional Materials 

Concept Release; Request for Comments 

Submit Comments 

The SEC is seeking public input through a 

concept release, which is a Commissionapproved document that poses an idea or 

ideas to the public to get their views. The 

Commission will use the comments received in response to this concept 

release to help determine whether regulatory initiatives or guidance is 

needed that would continue to protect investors and fulfill the purposes 

underlying the Investment Company Act. 

“The derivatives markets have undergone significant changes in recent 

years, and the Commission is taking this opportunity to seek public 

comment and ensure that our regulatory approach and interpretations 

under the Investment Company Act remain current, relevant, and 

consistent with investor protection,” said SEC Chairman Mary L. Schapiro. 

The concept release is a continuation of the SEC’s ongoing review of mutual

funds’ use of derivatives announced last year. The concept release requests

public input on the issues that the SEC staff has been examining for 

potential ways to improve the regulation of mutual funds’ use of 

derivatives. 

Public comments should be received within 60 days from the date of 

publication in the Federal Register. 

# # # 

Video: Open Meeting

Chairman Schapiro 

discusses the use of 

derivatives: 

Windows Media Player

Text of

Chairman's statement 

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http://www.sec.gov/news/press/2011/2011-175.htm 4/19/2012
FACT SHEET 

Soliciting Public Comment on the Use of Derivatives by Funds 

Background 

Investment Companies 

Investment companies regulated under the Investment Company Act such 

as mutual funds, ETFs, and closed-end funds play a significant role in the 

U.S. economy and world financial markets. At the end of 2010, for 

example, registered investment companies held more than $13.1 trillion in 

assets and more than 40 percent of all U.S. households owned their shares.

Investors in these funds rely on investment advisers as well as boards of 

directors to manage and oversee the funds. 

Use of Derivatives 

Subject to the various safeguards contained in the Investment Company 

Act as well as SEC rules and guidance, funds are permitted to invest in 

derivatives. Derivatives, which are a type of financial instrument whose 

value is derived from another underlying product, include such things as 

futures, certain options, options on futures, and swaps. A common 

characteristic of most derivatives, which are among a panoply of 

investments that a fund may make in managing its portfolio, is that they 

involve leverage. 

Recent SEC Activity 

When the Investment Company Act was enacted in 1940, it did not 

contemplate funds investing in derivatives as they may do today. Indeed, 

the use and complexity of derivatives have grown significantly over the past

two decades. 

Over the years, the Commission and its staff have addressed a number of 

issues raised by the use of derivatives on a case-by-case basis. In March 

2010, the SEC announced that the staff had initiated a broad review to 

evaluate the use of derivatives by funds to determine whether and what 

additional protection might be necessary under the Investment Company 

Act: http://www.sec.gov/news/press/2010/2010-45.htm

Purpose of the Concept Release 

To better inform its review, the staff is recommending that the Commission 

issue a Concept Release to solicit public comment on funds’ use of 

derivatives and on the current regulatory regime under the Investment 

Company Act as it applies to funds’ use of derivatives. The Commission 

would use the comments to help determine whether regulatory initiatives or

guidance is needed that would continue to protect investors and fulfill the 

purposes underlying the Investment Company Act. 

What Does the Concept Release Ask? 

The Concept Release asks for information on how different types of funds 

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use various types of derivatives as well as the benefits, risks and costs of 

using derivatives, among other things. Additionally, it asks for comment on 

several specific issues under the Investment Company Act implicated by 

funds’ use of derivatives, such as: 

Restrictions on Leverage – The Investment Company Act restricts the 

manner in which, and the extent to which, funds may incur indebtedness 

and may leverage their portfolios. The Concept Release discusses the 

treatment of derivatives under these restrictions. The Concept Release 

asks, among other things, how to measure the amount of leverage that a 

fund incurs when it invests in a derivative. 

Fund Portfolio Diversification – The Investment Company Act does not 

require the portfolios of funds to be diversified, but does require them to 

disclose in their registration statements whether they are diversified or not. 

The Act also prohibits a fund from changing its classification from 

diversified to non-diversified without shareholder approval. The Concept 

Release asks, among other things, how a fund should value a derivative to 

determine the percentage of the fund's assets that's invested in a particular

company for diversification purposes. 

Fund Investments in Certain Securities-Related Issuers – The Investment 

Company Act generally prohibits funds from acquiring any security issued 

by, or any other interest in, the business of a broker, dealer, underwriter or

investment adviser. However, funds that meet certain conditions may 

acquire some securities issued by companies engaged in such business. The

Concept Release asks, among other things, how investing in a derivative 

issued by a broker-dealer may be different from, or similar to, investing in 

the broker-dealer's stock or bond. 

Fund Portfolio Concentration – The Investment Company Act does not 

prohibit funds from concentrating their investments in a particular industry, 

but does require funds to disclose their industry concentration policies in 

their registration statements. It also prohibits funds from deviating from 

those policies without shareholder approval. The Concept Release asks, 

among other things, how funds determine the industry or industries to 

which they may be exposed through a derivative investment. 

Valuation of Fund Assets – The Investment Company Act specifies how 

funds must determine the value of their assets. The Concept Release asks, 

among other things, whether the Commission should issue guidance on 

how funds should value derivatives in their portfolios. 

What’s Next? 

The Concept Release will be published in the Federal Register and 

commenters will have 60 days from the date of publication to submit their 

comments. 

 

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