SEC: Change of fund names rule


With a focus on environmental, social and governance (‘‘ESG’’) concerns and the further protection of investors in the modern fund industry, the US Securities and Exchange Commission (the “SEC”) considered a proposal to update the Names Rule of funds, adopted in 2001, and the labelling for investment products under Investment Company Act of 1940 (the “Proposal”). The Proposal is part of a broader effort to ensure that fund names and investment product labels accurately reflect a fund’s investment strategy and goals, and to provide investors with more transparency and information about ESG considerations.

Purpose of the Proposals

The Proposal requires funds to disclose additional information about their ESG investments and strategies. This includes disclosure of the criteria used to select ESG investments; the extent to which the investments align with the fund’s ESG goals; and the methods used to evaluate the ESG performance of the investments. The Proposal aims to help curb ‘greenwashing’ and capture the concerns of the investors who rely inordinately on a fund’s name to understand its investment strategy.  As noted by the SEC Chair Gary Gensler, ‘a fund’s name is often one of the most important pieces of information that investors use in selecting a fund’. The Proposal is designed to help enhance transparency of the asset management field by aiming to stop fund providers from labelling their products as ESG unless their investment process relies on ESG more so than other factors. Ultimately, this aims to improve investor protection against potentially misleading and deceiving investment companies.

sEC’s proposals

To achieve the above, SEC proposes, among others, the following:

  • Expand the 80% Investment Policy Requirement: The Proposal aims to broaden the scope of the Names Rule’s 80% requirement to apply to any fund names with terms that focus on investments and issuers of investments with particular characteristics.
  • Derivatives and Names Rule: Under the Proposal, a fund must evaluate the derivatives instrument for compliance towards the 80% investment requirement.
  • Unlisted Closed-End Funds and Business Development Companies (“BDC”): The Proposal prohibits a registered closed-end fund or a BDC whose shares are not listed in the national securities exchange from changing its 80% investment policy unless shareholders vote to do so.
  • Compliance with 80% Investment Policy: The Proposal would include a new provision in the Naming Rule providing that a fund’s name, in specific circumstances, may still be considered materially deceptive or misleading even if the fund complies with its 80% investment policy.
  • Prospectus Disclosure: The Proposal would require amendments to registration forms. This would require any fund having an 80% Investment Policy to include disclosure in its prospectus defining the terms used in the fund’s name, including the specific criteria the fund uses to select the investments that the term describes.
  • Materially Deceptive and Misleading Use of ESG Terminology: The Proposal describes ‘integration funds’ as funds that consider one or more ESG factors together with the other (non-ESG) factors in the fund’s investment decision making process.
  • Notice Requirement: The Proposal requires that 60 days’ notice is provided to fund shareholders of any change in the fund’s 80% Investment Policy.
  • Records: The Proposal requires the funds to maintain certain records, depending on whether the fund would be required to adopt the 80% Investment Policy.

next steps for firms

Fund firms should ensure that their ESG funds comply with the Proposal requirements, particularly in regard to the accuracy and transparency of the fund name and investment product label; the fund’s investments should align with its stated ESG goals, and the fund name and label should accurately reflect the nature of those investments. Fund firms also need to consider the circumstances where they might be able to deviate from the changes to the Rule.

We can assist with reviewing fund materials with respect to ESG disclosures and fund policies, to ensure investors are equipped with the information needed to make informed investment decisions For more information on the proposed updates, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.











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