SEC expands rule to ensure fund portfolios match their names
The SEC voted Wednesday to expand the scope of a rule meant to ensure investment funds’ portfolios match the strategies suggested by their names, but the changes aren’t as restrictive about the use of environmental, social and governance factors as those the agency initially proposed.
The Securities and Exchange Commission approved, 4-1, amendments to the so-called fund names rule that requires funds to invest 80% of their assets in alignment with the fund’s focus as conveyed by its label. The current rule covers investment types, industries and geographies.
The changes adopted by the SEC would widen the names rule to apply to more funds and encompass names purporting to include investments with certain characteristics, such as “growth,” or “value,” or certain investment themes, such as ESG, according to an SEC fact sheet.
“I think of it as truth in advertising,” SEC Chair Gary Gensler said at an open meeting. “In essence, if a fund’s name suggests an investment focus, the fund in turn needs to invest shareholders’ dollars in a manner consistent with that investment focus. Otherwise, a fund’s portfolio might be inconsistent with what fund investors desired when selecting a fund based upon its name.”
The goal of the rule is to help investors better sort out the thousands of funds on the market.
“It’s intended to make it easier for all shareholders easily to understand what they’re investing in,” said Abigail Hemnes, partner at the law firm K&L Gates.
Under the final rule the SEC approved Wednesday, investment companies would have the latitude to define the terms they use in a fund name and their criteria for selecting investments to align with the terms. Those terms would have to be consistent with their plain-English
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