Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > SEC

SEC Wants Feedback on Misleading Fund Names

Your article was successfully shared with the contacts you provided.
(Photo: Shutterstock)

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.

The importance of fund names to investors and certain challenges regarding the application of the Names Rule are prompting the agency to assess whether the existing rule “is effective in prohibiting funds from using names that are materially deceptive or misleading, and whether there are alternatives that the commission should consider,” the SEC said.

“This request for comment is another important step in our efforts to better inform and protect Main Street investors and improve the investor experience,” said SEC Chairman Jay Clayton, in a statement. “We are looking to investors and market participants for input on how our framework can be improved to help ensure that fund names inform and do not mislead investors.”

According to the agency, “Market and other developments since adoption of the rule, such as increasing use of derivatives, impact the rule’s application.”

The request for comment asks whether the rule continues to accomplish its purpose to protect investors and help ensure they are not misled by a fund’s name. The comment period is 60 days.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.