The SEC’s Proposed Rule on Registered Funds’ Use of Derivatives Explored
In December 2015, the U.S. Securities and Exchange Commission (SEC) proposed Rule 18f-4 under the Investment Company Act, which aims to regulate the use of derivatives and financial commitment transactions (FCTs) by registered investment companies, including exchange-traded funds (ETFs), mutual funds and closed-end funds, as well as business development companies. Under the proposed rule, funds using derivatives and FCTs will be subject to new limitations on leverage and new asset segregation requirements and many funds will be required to adopt formalized risk management programs.
Critics have hit back at the proposal, saying that the rule could result in higher transaction costs, decreased liquidity and undue restrictions on portfolio management. In addition, these critics say that if the rule is adopted as proposed, investors will have fewer options for diversifying their portfolios. New obligations for fund boards under the proposed rule have also added to concerns about the ever-increasing burdens placed on directors. At the same time, however, many view the proposed rule as a much-needed step toward developing a modernized, comprehensive regulatory framework to address an area that has grown increasingly complicated and murky as derivatives use by funds has grown in recent years.
In this two-hour LIVE Webcast, a panel of distinguished professionals and thought leaders assembled by The Knowledge Group will help companies using derivatives and finance lawyers understand the basic and complex aspects of this significant topic. They will provide an in-depth discussion of Rule 18f-4 and perspectives on key issues firms should consider when evaluating its potential impact on their business.
Key topics include:
- Rule 18f-4: An Overview
- What to Expect?
- Regulatory Updates
Willkie Farr & Gallagher LLP
Kirkland & Ellis LLP
- Background –Section 18 and 10666
- Evolution of Regime
- Current State of Play for Funds
- Issues Facing the SEC
- The Rule
- Rule vs. Guidance
- Portfolio Limits
- Asset Segregation
- Industry Reaction
- Stay with Status Quo
- Revise Portfolio Limits to Risk-Adjust Measurement of Derivative Exposure
- Base Portfolio Limit on Initial Margin
- Alternative VaR- or Risk-Based Approaches
- Expand Range of Permissible Liquid Assets for Asset Segregation
- Impact of Rule on Funds
- Portfolio Implementation May Change
- Heavy Compliance Burden
- End of Levered ETFs?
- Burden on Fund Boards
- Process and Timing
- SEC Internal Process and Current Status
- Coordination of Timing – Derivatives, Liquidity, Data Gathering, New Proposals
- If Adopted, What Should Funds Expect?
- Higher Posted Collateral to Satisfy Asset Segregation Requirements
- Higher Costs for Some Fixed Income and Alternative Strategies
- Impact on Liquidity
- Need for Board Education and Disclosure
Who Should Attend:
- Fund Managers
- Tax Managers
- Corporate Senior Management
- Internal Controls/Finance Departments of Hedge Funds and Private Equity Groups
- Global Investment Managers
- Derivatives Lawyers
- Other Related/Interested Professionals
P. Georgia Bullitt is a partner in the Asset Management Group of Willkie Farr & Gallagher LLP in New York. Ms. Bullitt focuses on securities and derivatives trading issues, regulation of broker-dealers, investment advisers and other financial intermediaries, and trade-related documentation. Her experience also includes advice on structured products, regulation of foreign exchange (including questions regarding retail forex), and private banking. Ms. Bullitt represents broker-dealers, registered and unregistered investment advisers and registered and unregistered funds in connection with a broad range of regulatory issues, including compliance with the federal securities laws, fiduciary matters, and trading and market practices relating to securities, derivatives and foreign exchange. Her clients include both institutional and retail broker-dealers, traditional money managers, pension plan advisers, mutual fund advisers, alternative managers, commodity trading advisers, mutual funds, hedge funds, private equity funds and BDCs. Ms. Bullitt regularly provides advice regarding a broad range of Dodd Frank and CFTC registration – related issues, including swap clearing, registration of SEFs and SDRs, retail and ECP FX transactions, ISDA DF Protocol, swap reporting, and CPO and CTA registration. She also provides assistance to firms in negotiating bilateral and cleared swap documentation.
P. Georgia Bullitt is a partner in the Asset Management Group of Willkie Farr & Gallagher LLP in New York. …
Aaron Schlaphoff is a partner in the New York office of Kirkland & Ellis LLP, where he is a member of Kirkland’s Investment Funds Group. Prior to joining Kirkland, Mr. Schlaphoff was most recently an attorney fellow in the Division of Investment Management at the U.S. Securities and Exchange Commission. Mr. Schlaphoff was a key member of the team that developed the SEC’s proposed rule relating to the use of derivatives and financial commitment transactions by registered funds, and worked with various SEC divisions and offices on derivatives-related policy and legal matters. In the private funds area, Mr. Schlaphoff advised various SEC divisions and offices, including the Office of Compliance Inspections and Examinations (OCIE) and the Division of Enforcement, on interpretive matters under the Advisers Act, as well as on market practice in the hedge fund and private equity fund industries.
Aaron Schlaphoff is a partner in the New York office of Kirkland & Ellis LLP, where he is a member …
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About Willkie Farr & Gallagher LLP
Willkie Farr & Gallagher LLP provides strategic legal representation and counsel to market-leading public and private companies worldwide. We combine core experience—in asset management, business reorganization and restructuring, M&A, private equity, corporate and securities law, intellectual property, complex litigation, regulatory compliance and real estate—with other key disciplines to deliver practical solutions for business-critical transactions and bet-the-company litigation. Willkie's Asset Management practice, with over 40 years of experience, is a leader in the fund industry, providing an extensive array of legal services to all types of funds and their managers, directors, shareholders, clients and service providers. Our Commodities/Derivatives Group regularly advises commodity pool operators, commodity trading advisors and institutional participants on regulatory compliance programs and exchange-traded futures and options.
About Kirkland & Ellis LLP
Kirkland & Ellis is a global leader in providing sophisticated advice to investment fund sponsors and select institutional investors with respect to all alternative investment strategies. With some of the largest and most active clients in the industry, Kirkland is uniquely positioned to provide market intelligence and cutting-edge solutions to address the spectrum of legal, regulatory, compliance, and tax issues that arise in structuring and maintaining alternative assets. In the past three years alone, Kirkland has advised more than 280 private investment fund sponsors, raising more than 380 funds representing more than $305 billion of capital commitments.