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SEC Adopts Amendments to Fund Names Rule

SEC Adopts Amendments to Fund Names Rule. Broker-dealer, brokerage, financial services, RIA, SEC, Securities and Exchange Commission, Names Rule, ESG, Environmental, Social, Governance

The Securities and Exchange Commission adopted amendments to the Investment Company Act “Names Rule,” which addresses fund names that are “likely to mislead investors about a fund’s investments and risks.”

The Commission says the amendments “modernize and enhance” the Names Rule and other names-related regulatory requirements to further the Commission’s “investor protection goals and to address developments in the fund industry in the approximately 20 years since the rule was adopted.”

During a Wednesday morning open meeting, SEC commissioners approved the Names Rule amendments by a 4-1 vote and discussed some of its requirements.

According to the SEC, a fund’s name is typically the first piece of information that investors receive about a fund, and fund names offer important signaling for investors in assessing their investment options. The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”).

The amendments to the Names Rule will allegedly enhance the rule’s protections by requiring more funds to adopt an 80 percent investment policy, including funds with names suggesting a focus in investments with particular characteristics, for example, terms such as “growth” or “value,” or certain terms that reference a thematic investment focus, such as the incorporation of one or more environmental, social, or governance factors. The amendments also include a new requirement that a fund review its portfolio assets’ treatment under its 80 percent investment policy at least quarterly and will include specific time frames – generally 90 days – for getting back into compliance if a fund departs from its 80 percent investment policy.

The amendments will also include enhanced prospectus disclosure requirements for terminology used in fund names, including a requirement that any terms used in the fund’s name that suggest an investment focus must be consistent with those terms’ plain English meaning or established industry use. The amendments will also include additional reporting and recordkeeping requirements for funds regarding compliance with the names-related regulatory requirements.

The Commission says that they felt it was time to update the rule due to developments in the fund industry since the adoption of the Names Rule in 2001, including the increase in fund assets under management and the proliferation of diverse fund strategies, such as those with thematic investing and ESG.

In May 2022, the proposal suggested preventing funds that use ESG alongside other investment criteria from using ESG terminology in their names, but it did not make it into the final rule.

“As the fund industry has developed over the last two decades, gaps in the current Names Rule may undermine investor protection,” said SEC Chair Gary Gensler. “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 SEC says the amendments will become effective 60 days after publication in the Federal Register. Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments, and fund groups with net assets of less than $1 billion will have 30 months to comply.

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