SAF Submits Comments on Leveraged/Inverse Funds & Due Diligence

The Shareholder Advocacy Forum submitted comments to the Securities and Exchange Commission regarding proposed rules that will restrict access to certain investment products and introduces a merit-based qualification examination to evaluate who can and cannot purchase these products.

The proposed rules re-introduce a 2015 Obama-era rule that targets certain mutual funds and exchange traded funds utilizing derivatives to leverage the fund. Leverage, generally speaking, is “achieving a right to return on a capital base that exceeds the investment which he has personally contributed to the entity or instrument achieving a return.” Often mislabeled as “speculative in nature,” leveraged/inverse investment vehicles and derivatives are used practically to hedge investments, with only a consequential result of enhancing speculative capacity. Hedging appeals to many investors because it allows them to reduce potential loss by taking an offsetting position.

SAF appreciates the opportunity to provide comments to the Commission regarding the proposed rule. Additionally, we believe the proposed rule should be withdrawn in its entirety. However, should the rule move forward, it should be narrowly tailored to exempt certain ETF’s from elimination in the marketplace:

  • The contemplated alternative value at risk methods – stressed VaR, expected shortfall, or both – are riddled with concerns and uncertainty not found in standard VaR.
  • The sales practices rules, along with Proposed Rule 18f-4 present a common and dangerous misconception as the preferred way to protect investors. For example, under the proposed rule financial professionals are required to obtain certain information from their clients, such as investment experience and knowledge regarding geared investment vehicles, options, stocks and bonds, commodities, and other financial instruments to determine access to certain ETFs and mutual funds before financial professions evaluate and determine if their clients are eligible to purchase these products.
  • The SEC’s Division of Economic and Risk Analysis (DERA) is “unable to quantify the effects on efficiency, competition, and capital formation because we lack the information necessary to provide a reasonable estimate.” This is concerning as the SEC’s own internal analysis is unable to quantify the cost of the proposed rules on the marketplace.
  • Recognizing the unique role these products can play for certain investors, the SEC has (appropriately in our view) proposed an exception for such funds that would eliminate the need to comply with the proposed VaR based leverage risk limit if certain “alternative provisions” are met.

Click here to view our comments.