The U.S. Securities and Exchange Commission is reviewing the use of derivatives by mutual funds and exchange-traded funds to determine whether any new regulatory restrictions are needed. In the meantime, the SEC is suspending exemption decisions.

The regulator said Thursday that it intends to explore a range of issues related to funds use of derivatives, including whether:

• current market practices are consistent with the leverage, concentration and diversification provisions of the securities laws;

• funds that rely heavily on derivatives, particularly those that seek to provide leveraged returns, maintain and implement adequate risk management procedures;

• fund boards of directors are providing appropriate oversight; existing rules sufficiently address proper pricing and liquidity determinations;

• existing prospectus disclosures adequately address the particular risks created by derivatives; and

• funds’ derivative activities should be subject to special reporting requirements.

The SEC said that pending the conclusion of its staff review, it will defer consideration of exemption requests permitting ETFs to make significant investments in derivatives. The staff’s decision will affect new and pending requests from certain actively-managed and leveraged ETFs that particularly rely on swaps and other derivative instruments to achieve their investment objectives, it said. However, the move does not affect any existing ETFs or other types of fund applications.

“It’s appropriate to engage in a more thorough review of the use of derivatives by ETFs and mutual funds given the questions surrounding the risks associated with the derivative instruments underlying many funds,” said SEC chairman, Mary Schapiro.

“Although the use of derivatives by funds is not a new phenomenon, we want to be sure our regulatory protections keep up with the increasing complexity of these instruments and how they are used by fund managers,” said Andrew Donohue, director of the SEC’s Division of Investment Management. “This is the right time to take a step back and rethink those protections.”