SEC doubles down on fund names rule: “Growth”, “Value”, “ESG” better watch out
“As the fund industry has developed over the last two decades, gaps in the current Names Rule may undermine investor protection. Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”
The Securities and Exchange Commission (SEC) has announced amendments to the Investment Company Act “Names Rule” to address fund names that might mislead investors about a fund’s investments and risks, modernizing and strengthening investor protection efforts.
The “Names Rule” focuses on fund names that could potentially mislead investors regarding a fund’s investments and associated risks. These amendments aim to enhance investor protection while accounting for changes in the fund industry over the past two decades since the rule’s inception.
SEC Chair Gary Gensler said: “As the fund industry has developed over the last two decades, gaps in the current Names Rule may undermine investor protection. Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”
80 percent investment policy reviewed at least quarterly
A fund’s name is often the initial piece of information investors encounter when evaluating investment options, serving as a critical signal in assessing their choices. Currently, the Names Rule mandates registered investment companies with names implying a focus on a particular type of investment to establish an “80 percent investment policy.” This policy necessitates investing at least 80 percent of the fund’s assets in those specified investments.
The amended Names Rule seeks to fortify investor protections by expanding the requirement for adopting an 80 percent investment policy. Funds will need to review their portfolio assets’ alignment with the 80 percent investment policy at least quarterly, with specific time frames (usually 90 days) for compliance restoration should a fund deviate from its policy.
This expansion also encompasses funds with names suggesting a focus on investments with specific attributes, such as terms like “growth” or “value,” or references to thematic investment focuses like Environmental, Social, or Governance (ESG) factors. Funds will be obligated to ensure that any terms suggesting an investment focus are consistent with their plain English meaning or established industry usage.
To bolster compliance with names-related regulatory requirements, the amendments impose additional reporting and recordkeeping obligations on funds. The amended Names Rule will come into effect 60 days after publication in the Federal Register. Funds with net assets exceeding $1 billion will have 24 months to comply with the amendments, while those with net assets less than $1 billion will have a 30-month compliance period.