U.S. fund industry slams new SEC fund-name rules

The U.S. fund industry is blasting new rules that more tightly regulate investment fund names in an effort to combat greenwashing and prevent investors from being misled.

The U.S. Securities and Exchange Commission (SEC) adopted rule changes today that aim to modernize the so-called “names rule” — which is intended to ensure that investors aren’t being misled about a fund’s investment approach and risks.

“Typically, a fund’s name is the first piece of information that investors receive about a fund, and fund names offer important signaling for investors in assessing their investment options,” the SEC said in a release.

To beef up the existing rules in this area, the regulator’s revisions will expand the number of funds that are required to adhere to existing rules that require them to adopt investment policies that pledge to invest at least 80% of their assets in line with the fund’s name.

The SEC said the changes will increase investor protection “by requiring more funds to adopt an 80% investment policy, including funds with names suggesting a focus in investments with particular characteristics, for example, terms such as ‘growth’ or ‘value,’ or certain terms that reference a thematic investment focus, such as the incorporation of one or more environmental, social or governance factors,” the regulator said.

The revisions also introduce a new requirement for funds to review their adherence to the 80% requirement at least quarterly — and it would require funds that stray from those requirements to get back in compliance by a specific deadline (typically within 90 days).

Additionally, the rules include added disclosure, reporting and record-keeping obligations.

“As the fund industry has developed over the last two decades, gaps in the current names rule may undermine investor protection. Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors,” said SEC chair Gary Gensler.

The U.S. fund industry, however, is not pleased with the changes. Eric Pan, president and CEO of the Investment Company Institute (ICI), said in a statement that the rule will hurt American retail investors.

“The only thing that this rule achieves is to insert the SEC deeper into funds’ investment decision-making processes. Portfolio managers won’t be able to make routine investments without the SEC second-guessing whether it fits neatly with the subjective terms that make up their fund’s name,” he said.

“The current SEC has decided once again that it knows better than investors, that investors need changes to fund names they simply haven’t asked for, and that the higher costs, which will be ultimately borne by investors, are merely inconvenient details,” Pan said.

U.S. shareholder group, As You Sow, was more enthusiastic about the regulator’s efforts, noting that it will particularly help combat greenwashing.

“When investors put their hard-earned savings into an ‘ESG’ or ‘fossil free’ fund, they expect to reduce their climate risk and not own big oil, coal and deforestation. These new rules will help provide needed truth in advertising and make a statement that financial greenwashing with misleading or deceptive ESG labels is not acceptable,” said Andrew Behar, CEO of As You Sow.

“Today, we see funds with ESG in their names holding dozens of fossil fuel extraction companies and coal-fired utilities. The plain English meaning of ‘fossil free’ should rule out these holdings. We call on asset managers to embrace the spirit of these rules and ensure that their ESG funds have holdings that align with the fund name and prospectus language,” he added.

However, Pan said, “This enormous expansion of the fund names rule has nothing to do with ESG.”

“The rule sweeps more than three-quarters of all the funds in the U.S. into its dragnet, going far beyond ESG funds — the supposed root of the rulemaking — with no justification,” he said. “The agency has also failed to take a reasoned and calibrated approach to improving fund disclosure, as they should have before making sweeping changes to rules surrounding fund names.”

The rule changes will take effect 60 days after publication in the Federal Register.

Fund groups with net assets of US$1 billion or more will have 24 months to comply with the new requirements, while smaller firms, with less than US$1 billion in assets, will have 30 months meet the new rules.