The Securities and Exchange Commission said Monday that it’s seeking comments from the public on modifying the securities regulator’s current requirements that restrict the use of potentially misleading fund names.
The securities regulator wants feedback on its Names Rule, or rule 35d-1, which the commission adopted in 2001 as an investor protection measure designed to help ensure that investors are not misled or deceived by a fund’s name.
Under the Names Rule, if the fund’s name suggests a particular type of investment, industry or geographic focus, 80% of fund assets must be invested in that manner. But the 80% requirement doesn’t apply to fund names describing investment objective, strategy or policies. Since the rule was enacted, several types of funds that raise questions about these parameters — including index funds; funds that use derivatives; and funds focused on environmental, social and governance criteria — have proliferated.
ESG funds, for example, “often include these parameters in the fund name,” the SEC states. The staff, the agency adds, “has observed that some funds appear to treat terms such as ‘ESG’ as an investment strategy (to which the Names Rule does not apply) and accordingly do not impose an 80% investment policy, while others appear to treat “ESG” as a type of investment (which is subject to the Names Rule).”
A fund’s name “is often the first piece of fund information investors see and, while investors should look closely at a fund’s underlying disclosures, a fund’s name can have a significant impact on their investment decision,” the SEC said.