The Securities and Exchange Commission (“SEC”) has brought in amendments to the longstanding “Names Rule” (the “Rule”), in force under the ICA.
The amendments to the Rule require SEC registered funds with investment names or labels that suggest focuses on specific types of investments, industries, or groups of industries to invest at least 80% of the value of the relevant assets in investments reflecting those names or labels.
The amendments are designed to give institutional and individual investors clarity as to the nature of the funds they’re investing in, including implementing strict requirements as to which funds and products can be labelled as ‘ESG compliant’ or with similar tags.
Funds will be barred from using “materially deceptive or misleading names”, with the SEC stating that the terms used to describe the fund(s) and which suggest an investment focus “must be consistent with those terms’ plain English meaning or established industry use”.
The 2023 expansion is estimated to increase the percentage of registered funds subject to the Names Rule from 60 to 76%, with funds affected not just those using ESG tags, but nomers including but not limited to: the fund’s returns, industry, geographic location, type of security, and others all targeted.
The Rule now requires more detailed disclosure in funds’ prospectuses to define the terms used in a fund’s name, as well as the criteria used for selecting the investments making up the fund. Funds will also be required to keep detailed records of the investments making up individual products, as well as the methodology used to determine which investments met the criteria for inclusion.
The amendments include a 90 day ‘grace period’ to allow funds to either relabel the fund, or change the makeup of the underlying investments, should the investments in the fund which adhere to the fund’s label drop below the 80% threshold.
For more details see these pages on the SEC's website (here and here).