December 31, 2015
The SEC is trying to control fund use of derivatives. However, there has been no harm no identifiable harm to investors because of a funds use of derivatives. Instead, the SEC is taking action for fear that FSOC or some other regulator will take its turf if they do not take action. The SEC is taking action for the sake of taking action instead of trying to solve some wrong that has plagued the markets.
To the extent that derivatives increase a funds risk profile, it can and should be resolved by clear disclosure.
The SECs action will also kill some very innovative and necessary products such as leveraged ETFs, inverse ETFs, alt funds and commodity funds.
The SECs division of investment management is tasked with facilitating appropriate innovation, and not killing asset classes which will only leave many investors straight debt and equity funds, which are very correlated to each other and the capital markets. More plainly, this proposal may hurt the ability of investors to diversify their portfolio and invest in alternative asset classes.
The SECs efforts will be better spend seeking better disclosure and chasing down wrongdoers.