Order Reprints Print Article A new Securities and Exchange Commission rule sets limits on leverage. Above, the SEC’s headquarters in Washington, D.C. Zach Gibson/Bloomberg Text size One thing that the existence of leveraged funds proves is that if investors want something, chances are the financial-services industry will find a way to provide it, even if it means bending the rules. For over a decade, funds have been able to do an end-run around leverage restrictions by employing swaps and other derivatives—financial contracts that can amplify an investor’s exposure to benchmarks such as the When Congress created the modern fund industry with the Investment Company Act of 1940, it wasn’t envisioning swaps, which didn’t exist until 1981. In the wake of major blowups of highly leveraged closed-end funds in the 1929 crash, the new law restricted a fund’s borrowing to 50% of assets, meaning you might get a maximum of 1.5 times the upside or downside of a portfolio. In practice, mutual funds hardly used leverage at all, due also to restrictions on the kinds of borrowing permitted, primarily from banks.