The SEC on Wednesday voted unanimously to seek public comment on whether specific regulation is needed for derivatives used by mutual funds, ETFs and other investment companies regulated under the Investment Company Act of 1940.
Commissioners also unanimously agreed to seek public comment on possible regulation of issuers of asset-backed securities and companies engaged in mortgages and mortgage-related instruments used by firms under the investment act.
The “concept release” approved Wednesday builds on the SEC's internal review begun in March 2010. The agency will seek information on how funds use derivatives and the risks, costs and benefits associated with them.
Mary Schapiro, SEC chairwoman said at the meeting that the agency wants input from “those who use derivatives, those who invest in funds, and those who manage funds with derivatives strategies.” Having that information “will help us determine whether we should update the regulatory regime for the benefit of fund investors,” she said.
Instead of continuing its “ad hoc” approach to regulating funds' use of derivatives, Ms. Schapiro said a review will give the agency a chance to take a “holistic perspective, in the wake of the financial crisis and in light of the new comprehensive regulatory regime for swaps” triggered by the Dodd–Frank Wall Street Reform and Consumer Protection Act.
Once the “concept release” is published in the Federal Register, the public has 60 days to submit comments.
According to the SEC, registered investment companies, including mutual funds, ETFs, and closed-end funds, held more than $13.1 trillion in assets by the end of 2010 and more than 40% of U.S. households owned shares in them.
“Derivatives as we now know them did not exist” when the act was adopted, Ms. Schapiro said. The act allows the SEC to impose requirements on leverage, valuation, diversification and industry concentration policies.
More specific guidance on derivatives transactions is welcome, said a spokesman for the Investment Company Institute, a mutual fund industry organization. “It has been more than 30 years since the commission last offered this type of guidance; mutual funds, ETFs and their shareholders would benefit from updated guidance.”