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SEC Proposes Enhancing Investment Company Act “Names Rule”

The Securities and Exchange Commission wants the change to prevent misleading or deceptive fund names

The Securities and Exchange Commission has proposed amendments to enhance and modernize the Investment Company Act “Names Rule.” The proposal is in place to address changes in the fund industry and compliance practices that have developed in the approximately 20 years since the rule was adopted.

The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment (among other areas) have a policy in which at least 80% of the value of their assets are placed into those specific investments. The proposed amendments, if passed, would require more funds to adopt the 80% investment policy. This would extend the 80% requirement to fund names with terms suggesting that funds focus on investments with particular characteristics. This would include fund names that carry words like “growth” or “value,” or phrases indicating that investment decisions incorporate one or more environmental, social, or governance (ESG) factors.

The amendment would also limit temporary departures from the 80% investment requirement and clarify the Names Rule’s derivative investments treatment.

“A lot has happened in our capital markets in the past two decades. As the fund industry has developed, gaps in the current Names Rule may undermine investor protection,” said SEC chair Gary Gensler. “In particular, some funds have claimed that the rule does not apply to them—even though their name suggests that investments are selected based on specific criteria or characteristics. Today’s proposal would modernize the Names Rule for today’s markets.”

The proposal follows a request for comment the SEC issued to gather public feedback on potential reforms to the rule in March 2020.  The proposing release will be published in the Federal Register, with the comment period remaining open for 60 days after publication.

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