It’s All in the Name: SEC Targets Misleading Fund Names in Push for Increased Investor Protection

On September 20, 2023, the US Securities and Exchange Commission adopted amendments to rule 35d-1 under the Investment Company Act of 1940 (the “Names Rule”) to target misleading practices by US investment funds, including “greenwashing” (see the final rule here). The Names Rule, which applies to certain registered investment companies and business development companies generally targets what the SEC considers to be misleading fund names.

Under the amended Names Rule, a fund can only use a name suggesting an investment focus in certain types of investments, industries, countries or geographic regions, or investments that have particular characteristics if, among other requirements, it has adopted a policy to invest, under “normal circumstances,” at least 80% of the value of its assets in investments in accordance with the investment focus that the fund’s name suggests. 

The Names Rule amendments are designed to broaden the scope of the requirement for certain funds to adopt a policy to invest at least 80% of the value of their assets in accordance with the investment focus that the fund’s name suggests, as well as to update the rule’s notice requirements and establish recordkeeping requirements. 

The amended Names Rule requires a broader scope of funds to adopt the 80% investment policy. Under the current Names Rule, which was originally adopted in 2001, only fund names that suggest focus on a particular type of investment, industry, country, or geographical region, as well as fund names suggesting that a fund’s distributions were tax-exempt, were subject to the 80% investment policy requirement. However, the amended Names Rule goes further, capturing fund names that suggest investment characteristics (e.g., terms such as “growth”, “value” or ESG terms), as well as a thematic investment focus (e.g., artificial intelligence).

You can find our detailed client note on the amendments here.

From an ESG perspective, the proposals are very similar to the ones proposed by the EU under SFDR and the UK under their upcoming SDR proposals. our client note also contains a summary comparison table of the three regimes.