Economist Doubts that SEC Proposed Leverage Regulation Would Protect Investors

Delta Strategy Group analyst and former SEC Chief Economist James A. Overdahl found serious flaws in SEC proposed Rule 18f-4, which regulates the use of derivatives by registered investment companies.

According to Mr. Overdahl's economic analysis, as proposed, Rule 18f-4 would be inefficient and ineffective in protecting investors and limiting undue speculation. Further, he found that the proposed rule actually might harm investors by placing additional constraints on funds that follow safe derivative strategies while inducing certain funds to shift their exposure to less liquid but riskier instruments. Mr. Overdahl's analysis suggests that the proposed rule does not adequately estimate the cost to affected funds of the proposal's measures.

A core conclusion of the analysis is that the proposed rule's gross notional limit on the amount of leveraged market exposure that registered investment companies can take is misplaced; the data indicates that aggregate notional amounts do not distinguish between speculative and conservative strategies, he warned.