SEC: Don’t Use ‘Protected’ or ‘Guaranteed’ in Fund Names

It goes on the say that the SEC has recently heightened its scrutiny of fund names suggesting safety or protection from loss and has determined “to object to names that may create an impression of protection or safety or absence of risk of loss, where the name does not include qualifying language that defines the scope and limits of such protection.”

For example, it notes that some funds that seek to manage the fund’s volatility by investing a portion of the fund’s assets in cash, short-term fixed income instruments, short positions on exchange-traded futures, or other investments included the term “protected” in their name. The SEC was concerned that these names could convey to investors a level of protection from loss that was not present because the degree to which a managed volatility strategy may succeed or fail is uncertain. In response to its concerns, some funds have chosen to replace the term “protected” with terms such as “managed risk.”

“The staff acknowledges that a fund’s name, like any other piece of information about a fund, cannot tell the whole story about the fund,” it concludes. “We also acknowledge that the staff has recently requested name changes in situations in which a fund had provided prospectus disclosures that explained limitations on the scope of “protection” provided by the fund that were not revealed by the name itself. We have made these requests because we believe that, in practice, investors sometimes focus on a fund’s name to determine the fund’s investments and risks, either because the name sometimes appears without the clarifying prospectus disclosures (e.g., in advertisements) or because of the prominence of a fund’s name or for other reasons.”