Updates to the Names Rule Finalized by the SEC

On September 20, 2023, the U.S. Securities and Exchange Commission (SEC) formally finalized updates to the Investment Company Act “Names Rule,” which has been in place since 2001. The updates encompass a variety of new requirements and disclosures for funds scoped into the Names Rule, and are generally meant to modernize the rule as a result of market trends since the rule’s inception. 

During the live webcast of the rule’s finalization, SEC staff repeatedly referred to the importance of a fund’s name in a potential investor’s process of whether or not to invest in a fund. This point was made particularly to emphasize the case of investor protection around truth in advertising for retail investors. The updated rule expands the existing 80% investment policy requirement to include funds that use names suggesting particular characteristics such as “growth” or “value,” as well as fund names focused on a particular theme such as a specific industry or geographic region, or otherwise suggests the incorporation of environmental, social, and governance (ESG) factors. As a result, a fund that uses terms within its naming convention such as, “green,” “renewable energy,” “labor,” or other similar phrases will be required, in part, to provide disclosure in the prospectus as to how the terms are defined in relation to the strategy, written records at the time of investment and quarterly thereafter documenting whether an investment is included within a fund’s 80% basket (and the basis for that inclusion), and documentation of quarterly review of a fund’s compliance with its 80% policy (alinging with quarterly Form N-PORT reporting on such compliance), among other oversight and disclosure related requirements. 

While the SEC did not finalize its definition of an ESG Integration Fund (as had been drafted within the proposed rule), the SEC did clarify its position in the final rule on another matter pertinent to ESG funds. Specifically, the final rule notes that even if a fund has met its 80% policy, if a substantial portion of the remaining basket is invested in a manner materially different from what an investor could reasonably expect based on the fund’s name, the fund’s name would be deemed materially deceptive or misleading under section 35(d). As a result, a fund that presents itself as a renewable energy fund, but has substantial portions of its investments within its 20% bucket in fossil fuel issuers, may find it difficult to explain compliance with its 80% policy to an examiner under the updated rule. 

The compliance date for larger entities (funds with $1 billion or more of net assets under management) is 24 months from the rule’s effective date and 30 months from the rule’s effective date for smaller entities (funds with less than $1 billion of net assets under management). 

Takeaway 

Generally, while the SEC continues to avoid jumping into the deep end of ESG regulation, the updated Names Rule marks a significant step forward for the SEC’s advancement of ESG rulemaking and should serve as a reminder to compliance departments that ESG now falls squarely within the scope of firm’s compliance departments. 

How we help

Our ESG services can help you stay one step ahead of the ever-changing ESG landscape with: 

• Policy and procedure development and review 

• Disclosure verification 

• Marketing disclosures and review 

• Portfolio performance assessment 

To discuss the SEC’s proposed rules, or to hear our team’s perspective on this and other ESG issues, please contact our ESG Advisory Practice. 

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