MFDF Files Comments to SEC Proposals on ESG, Names Rule

MFDF Files Comments to SEC Proposals on ESG, Names Rule

The Mutual Fund Directors Forum submitted two comment letters to the SEC this month covering recent proposals on ESG disclosure by funds and investment advisers as well as a on a proposal that would amend the Names Rule.

The SEC’s proposal regarding ESG disclosure for certain advisers and funds would divide ESG funds into three categories – ESG Integrated Funds, ESG Focus Funds and ESG Impact Funds.  Each category would be accompanied by different disclosure requirements.  The Forum’s letter focuses on ESG Integrated Funds and ESG Focused Funds and recommends that the SEC adopt a rule that would require the same type of disclosure for those fund types.  Rather than the tabular approach proposed for ESG Focused Funds, the Forum stated that investors would be better served by clear and concise disclosure about how the adviser actually approaches ESG for a particular fund – thereby allowing investors to more readily see differences among funds.  In addition, the Forum’s letter expresses significant concerns about the greenhouse gas emissions disclosures that would be required regarding a fund’s portfolio holdings for all funds that focus on the “E” in ESG, even if those funds do not pursue a strategy designed to reduce such emissions.  We believe that such disclosure would be confusing to investors, expensive to obtain (if available at all) – and that the associated costs would be passed on to shareholders who have not demanded such information.

On the same day it released the proposal on ESG, the SEC also released the Investment Company Names rule proposal. It is important to note that the scope of this proposed rule includes more than ESG fund names. The Forum’s comments touch on concerns regarding the application of the Names Rule to strategy-based terms (expanding outside a category or classification of securities), the proposal’s prohibition against the use of an ESG term in its name by an ESG Integration Fund, and the time-period in which a fund has to cure a breach of the 80% requirement of the Names Rule. The letter expresses concern that the rule as currently proposed may prevent innovation in the fund space.

Click here to read the Forum’s letter on ESG disclosure for funds and investment advisers.

Click here to read the Forum’s letter on the proposed amendments to the Names Rule.