SEC Targets Misleading Fund Names in Request for Comments
The SEC is requesting public comment on its current requirements that restrict the use of potentially misleading fund names. The request seeks feedback on whether the current requirements are effective and whether there are viable alternatives that the SEC should consider. In 2001, the SEC adopted rule 35d-1 under the 1940 Act (also known as the “Names Rule”) to prohibit funds from using materially deceptive or misleading names. The rule requires a registered investment company or business development company with a name suggesting that the fund focuses on a particular type of investment to invest at least 80% of its assets accordingly. Market and other developments since adoption of the rule, such as increasing use of derivatives, impact the rule’s application, the SEC said. The request for comment is an attempt to determine whether the rule continues to accomplish its purpose to protect investors and help ensure they are not misled by a fund’s name. Among the topics and questions highlighted in the SEC’s release are: Should the Names Rule apply to terms such as “ESG” or “sustainable” that reflect certain qualitative characteristics of an investment? Should the Names Rule apply to terms such as actively managed”, “tax managed”, “long-term”, and “short-term”? The SEC is encouraging funds, advisers, investors, and other market participants to submit comments. The request for comment will be published on the SEC’s website and in the Federal Register and will be open until 60 days after publication in the Federal Register.