December 22, 2020
The Securities and Exchange Commission (the “SEC”) adopted Rule 18f-4 (the “Rule”) under the Investment Company Act of 1940 (the “1940 Act”), including rule and form amendments, to provide an updated approach to the regulation of funds’ use of derivatives and certain other transactions. The Rule allows mutual funds (other than money market funds), ETFs, registered closed-end funds, and business development companies, to enter into derivatives transactions and certain other transactions despite the restrictions under Section 18 of the 1940 Act.
The following entities have been amended in connection with the Rule
In order to enter into these types of transactions, the following conditions must be met including:
If a fund is a “limited derivatives user,” it is not required to meet the first two conditions listed above, so long as it adopts and implements written policies and procedures reasonably designed to manage its derivatives risks.
* Must be administered by a Board-approved derivatives risk manager. This person must be an officer (or officers) of the fund’s investment adviser, and may not be a portfolio manager of the fund.
Form N-PORT. Amendments require a fund to report information regarding its derivatives exposure if it is relying on the limited derivatives user exception, and (for applicable funds) information regarding its compliance with the VAR-based limit on leverage risk. Certain information will be reported confidentially to the SEC.
Such amendments to Form N-PORT consist of reporting:
Form N-RN (formerly Form N-LIQUID). Amendments require a fund to notify the SEC confidentially when a fund exceeds its applicable VAR limit for five business days. A fund must report this information within one business day (following the fifth business day after its VAR limit exceedance). The fund must file a second report when it is back in compliance.
Form N-CEN. Amendments require funds to check a box to identify whether they relied on the Rule during the reporting period, including on whether they relied on various specific provisions of the Rule.
Form N-2. Amendments conform Form N-2’s senior securities table to the provisions of the Rule that provide that a fund’s derivatives transactions and unfunded commitment agreements entered into in compliance with the Rule will not be considered for purposes of computing asset coverage under Section 18(h) of the 1940 Act.
Rule Effective Date:
February 19, 2021
Rule Compliance Date (and Release 10555 rescinded):
August 19, 2022
* A fund may rely on the Rule after its effective date but before the compliance date, provided that the fund satisfies the Rule’s conditions. In addition to meeting certain other conditions, funds that rely on the Rule before the compliance date must also comply with amendments to Form N-PORT and Form N-CEN, once the updated forms are available for filing on EDGAR.
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