According to SEC official Susan Ervin, fund directors are going to be find it increasingly harder to oversee derivative use by investment companies because the markets will become more differentiated. Ervin is the senior adviser to the SEC’s Division of Investment Management director. She made her statements before the Mutual Fund Directors Forum in Washington on April 28 but noted that the views she was expressing are her own.
Ervin said that in the coming years, derivative contracts could be traded on swap execution facilities, exchanges, or over the counter and that it will be hard for fund advisers to manage these different venues. Because of this, fund directors will have to engage in effective oversight.
Another panelist, ProFunds Group general counsel Amy Doberman, says that this oversight will have to be determined by the complexity and kind of funds and the types of derivatives (and their uses). Doberman, however, did also say that directors need to understand certain basics, such as:
• How derivatives move their funds’ investment objectives forward.
• The monitoring, disclosure, and approval processes for derivative use.
• The types of reports that fund advisers can provide regarding derivative use.
• The internal limits and thresholds regarding derivatives use established by fund advisers.
Currently, the SEC is looking at whether there should be new rules or amendments to regulate fund use of derivatives or whether the 1940 Investment Company Act should continue to suffice.
Related Web Resources:
Oversight of Fund Use of Derivatives To Be More Complex, SEC Official Warns, BNA, April 29, 2011
Mutual Fund Directors Forum
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Ex-Employee Accuses Bank of America of Securities Fraud Involving Complex Derivatives Products, Stockbroker Fraud Blog, October 29, 2010
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