SEC Should Nix Fund-Names Rule: ICI's Pan

ICI President and CEO Eric Pan told the Securities and Exchange Commission on Tuesday to discard its plan to require certain funds to adopt a policy to invest at least 80% of their assets in accordance with the investment focus that the fund’s name suggests, updating the rule’s notice requirements and establishing recordkeeping requirements.

Pan told the SEC in a comment letter that its current fund names rule “has worked well for 20 years. It recognizes that a fund’s name does not, and cannot, communicate everything that investors want to know about a fund before investing.”

Prospective investors, Pan continued, “understand that a name is simply a starting point for understanding the fund’s investment strategies. In addition to the name, there are extensive documents prepared by funds describing their strategies, objectives and holdings.”

The SEC under its proposed changes to its Investment Company Names rule “now wants a fund’s name to stand alone, despite all this comprehensive disclosure.”

The comment period expired Tuesday.

Pan argued that the rule “would place enormous costs on funds to comply with this new, complex regime,” and that the costs “will ultimately be paid by investors. The proposal also places the Commission in the position of second-guessing how investment professionals choose investments and execute strategies. This is not the SEC’s job.”

According to the SEC’s own estimates, “fund industry costs could range between $500 million and an astronomical $5 billion. Costs could easily reach the high end of this range, or even higher, due to the fundamental differences between the current and proposed rule,” Pan said.

He also argued that the SEC proposal “inappropriately elevates the importance of a fund’s name and doesn’t help investors. It will simply add needless expenses and force funds to change how they operate just to stay in compliance with the new rule.”

Funds may, for instance, “be compelled to rebalance their investments or sell positions in a short time frame — possibly at fire sale prices — because the new SEC rule is so rigid. In addition to forced sales, the rule could lead to unwanted tax implications for investors and tracking error. None of these outcomes would be expected or welcomed by fund investors.”

IAA Supports ESG Plan, Recommends Changes

The comment period also expired Tuesday on the SEC’s plan: Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices.

The Investment Adviser Association in Washington told the SEC it supports its proposal but suggested the agency tweak the rule.

“We strongly recommend that the Commission use a materiality standard for disclosure.  Otherwise, investment advisers would be required to disclose immaterial information to investors that would not be decision-useful, could obscure material non-ESG-related disclosures, and may mislead investors by overemphasizing ESG factors relative to other more important factors,” said IAA general counsel Gail Bernstein in a comment letter.

IAA recommended the SEC:

• Include a materiality standard in investment advisers’ and funds’ ESG factor disclosure obligations and, to prevent greenwashing, focus on how investment advisers and funds market themselves to the public.
• Remove the proposed requirements relating to private fund investment advisers or, in the alternative, preserve the confidentiality of their proprietary information and allow them to provide aggregate, rather than private fund-specific, disclosures.
• Not require disclosure of proprietary or competitively sensitive ESG investment methods and strategies.
• To minimize duplicative disclosure, require reporting of third-party ESG frameworks at the investment-adviser level rather than at the strategy level unless the framework is being used at the strategy level.
• Provide greater flexibility for investment advisers to provide ESG proxy voting information.