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SEC ups scrutiny of misleading fund names

The SEC is considering revising the 19-year-old Names Rule to assess whether the rule is effective in preventing misleading or deceptive fund names, which could have a considerable effect on various investment funds, including ESGs.

Lancelot King, counsel in Seward & Kissel’s Investment Management Group, comments on a broad range of regulatory, compliance, and transactional matters affecting investment companies and registered investment advisers.

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SEC Revises Fund Names Rule

Lancelot King, counsel, Seward & Kissel LLP:

“There is an argument for not adopting a stringent Names Rule requirement and allowing flexibility with respect to funds that use terms such as “ESG” or “sustainable” in their fund names.  To the extent ESG refers to a fund’s investment strategy, a rigid application of a Names Rule requirement that mandates certain standardized disclosure for ESG funds would not be particularly helpful to investors; it would not provide any meaningful information about the fund, which might be employing a relatively distinct strategy that could reflect one of a wide variety of approaches to investing sustainably.

Given the broad ESG landscape, implementing specific requirements for characterizing or describing terms such as ESG may not be practical.  Rather, it may be best for the SEC to require a fund that uses a term such as “ESG” in its fund name to simply disclose in the fund’s underlying disclosures what the fund means when it uses such a term.

Note that numerous funds that use an ESG investment approach do not even include terms such as “ESG” in their fund names at all, indicating that several funds do not rely on names to convey their ESG mandate.  And whether a term such as “ESG” or “sustainable” is in a fund name or not is not necessarily indicative of how robust a fund’s ESG investment process is.

Furthermore, it is worth noting that, as ESG has become more mainstream and familiar, intermediaries are enhancing their diligence on fund managers and increasingly scrutinizing the methodologies that underlie a fund’s ESG investment approach.  In this respect, fund names may be of diminishing importance, at least with respect to certain investment decisions.”