What's in a name? The SEC has found that it's more than you might think.
In 2001, the Commission put in place the Names Rule, which requires that funds' names be in line with their focus and with the majority of investments they offer (which are built on the "Investment Company Names" portion of the Investment Company Act of 1940).
According to the rule, if a fund suggests specificity regarding its investment types, then those investments must make up 80 percent of the fund's assets. Examples include:
The rule has been stretched over the years as the array of funds available has proliferated. Today's big concern in the world of fund-naming? ESG.
Many companies, including investment services providers, would like to increase their potential for earnings by tapping the ESG well. That's where problems can begin to arise.
According to the SEC, when companies use terms like ESG, sustainability, or green in their names, they give investors an impression regarding their services. The new rule changes will only allow firms to use this terminology if ESG considerations are prioritized above other considerations in the decision-making process.
In the meantime, firms can evaluate their offerings and document their processes to ensure their funds fit appropriately into the new guidelines. They can evaluate sentiment from their clients and their desire for funds with an ESG focus, then continue to shape their funds and portfolios accordingly.
If your firm is considering offering additional ESG-focused options to its clients, our compliance consultants can help you to ensure that you've developed policies and procedures that will protect you and help to keep you in compliance with the SEC's new guidelines.