Joint Letter on SEC Proposal on Use of Derivatives by RIC’s and BDC’s

MFA submitted a joint letter to the SEC on its “Use of Derivatives Rule for Registered Investment Companies (RICs) and Business Development Companies (BDCs), and Required Due Diligence by Broker-Dealers and Advisers Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse Investment Vehicles”.  The SEC Proposal imposes limits on the use of derivatives by RICs and BDCs by setting value at risk (VaR) thresholds on a fund, among other requirements, and establishing a new sales practice due diligence requirement with respect to the sale of leveraged/inverse investment funds.  In our letter, we recommended modifications to the Proposal, which would achieve the SEC’s objectives to limit excess speculation and protect investors in ways that would be simple to administer and enforce. We recommended that in a final rule the SEC:

  • Provide Funds with flexibility in selecting either the absolute or relative VaR test to use with respect to their strategy;
  • Raise the absolute and relative VaR test limits to at least 20% and 200%, respectively;
  • Allow Funds to develop their VaR calculation models by using more data points than provided by the Proposal;
  • Allow Funds that breach their VaR test seven calendar days to come back into compliance;
  • Eliminate a “time out” period for a Fund to trade derivatives after a breach of its VaR test;
  • Eliminate the sales practice rule for leveraged/inverse Funds; and
  • Eliminate the Fund requirement to publicly report VaR-based limit breaches and derivatives exposures.