Impact on Fund Names | SEC Adopts Rule Amendments
SEC Releases
Brief Introduction
On September 20th, the SEC adopted Rule enhancements to prevent misleading or deceptive Investment Fund Names.
The main focus by the SEC of this new Rule is to address Fund Names that are likely to mislead investors about a Fund’s investments and risks.
Investor Protection has been a continued goal for the SEC throughout 2023, and this new Rule further supports that.
Effective Date of the New Rule
- Amendments will become effective 60 days after publication in the Federal Register.
- Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments.
- Fund groups with net assets of less than $1 billion will have 30 months to comply.
Who is this Applicable to (10,300 Funds)?
Investment Company Names include:
- Mutual Funds
- ETFs
- Business Development Companies (BDCs)
7 Key Changes Under the New Rule
- Applying the rule’s 80% investment policy requirement to any Fund name with terms suggesting that the Fund focuses on investments that have, or investments whose issuers have, particular characteristics.
- The primary types of names that the amended rule is anticipated to cover include:
- Fund names with terms such as value or growth or certain terms that reference a thematic investment focus, including terms indicating that the Fund’s investment decisions incorporate one or more ESG factors.
- The primary types of names that the amended rule is anticipated to cover include:
- A broadened scope of applicability of the Names Rule, which includes its 80% requirement.
- Focus areas:
- Funds whose names suggest a focus in investments with particular characteristics.
- Funds whose names suggest a focus in particular investments.
- Funds whose names suggest a focus in geographies or industries.
- Focus areas:
- In most cases, within 90 days, requiring Funds that drift from the 80% requirement to come back into compliance in a timely manner.
- Requiring a Fund to disclose how it selects investments in line with its name and defines the terms in its name.
- Requiring a Fund to indicate on periodic reports which holdings count toward the 80% requirement.
- Funds will be required to use the notional number of derivatives, rather than the market value, for determining compliance with the 80% requirement.
- Under the amended Form N-PORT requirements, Funds must report the definitions of the terms used in its name (this was not proposed for public comment and is a new requirement).
Vigilant’s Conclusion and Industry Takeaways
Overall, the new Rule Amendments have received a variety of industry feedback, with some showing support and others showing strong pushback.
The following has been noted below from the industry:
- SEC Commissioner, Mark Uyeda, highlighted the likely significant increase for Funds initially and on-going in complying with the amendments.
- SEC Chairman, Gary Gensler, was supportive of the Rule, stating that it will help with a Fund’s name matching the Fund’s portfolio.
- SEC Commissioner, Hester M. Peirce, was also supportive of the Rule where she felt it was more practical and better than what the SEC proposed. She added that a crucial part of the implementation of this Rule was Fund Managers being allowed to define the terms in their name. One important note stemming from SEC Commissioner, Mark Uyeda, was also the concern for cost.
- SEC Commissioner, Caroline A. Crenshaw, supported the Rule stating many positives, one towards protecting investors by ensuring that a Fund says what it means, and means what it says.
- SEC Commissioner, Jaime Lizárraga, displayed support to the Rule as well, emphasizing the importance of investor protection for the SEC, and how this allows for enhanced transparency in Fund disclosures, and helps align investments with investors’ preferences.
- The President & CEO of ICI, Eric Pan, was strongly against the Rule and how it now sweeps more than three-quarters of all Funds in the U.S.
It appears clear that there are two differing viewpoints with the Rule Amendments. One is great support on investor protection moving forward while the other highlights the cost and lift it will take to comply.
With the SEC continuing to stay active in this aggressive regulatory environment regarding new Adopted Rules, Proposed Rules, Charges, and more, it can be difficult to stay ahead and monitor them. At Vigilant, utilizing our in-house Industry Veterans with over 370+ years of experience at the Director Level, we help our clients stay abreast of the activity by the SEC to help comply and update certain areas (as applicable).
If you are in the evaluation stage of outsourcing compliance responsibilities on a limited or full time basis, contact Vigilant today to schedule a call with our Executive Team to learn more about how we can help.