ICI Questions Necessity and Legality of SEC Proposal on Investment Company Names

The Investment Company Institute ("ICI") questioned the necessity of the SEC’s proposed amendments to ICA Rule 35d-1 (commonly known as the "Names Rule") in light of requirements which already prohibit misleading fund communications.

In a Comment Letter to the SEC, ICI criticized the proposal, which is aimed at addressing "certain broad categories of investment company names that are likely to mislead investors about an investment company's investments and risks" (see related coverage). ICI raised the following issues:

• Existing Fund Communications Requirements. Rather than adopting a new set of "prescriptive limitations and reporting obligations" for fund names, the ICI argued that existing SEC and FINRA rules require fund communications to be clear and not misleading, making the SEC’s proposed requirements "unnecessary."

• Rulemaking Authority. ICI argued that the SEC’s proposal exceeds its rulemaking authority under the Investment Company Act. ICI stated that the SEC does not have the authority to adopt the proposal because the central concept of "particular characteristics" of an "investment focus" is "too vague and ambiguous" to be an exercise of the SEC’s authority to define materially misleading names and titles. In addition, ICI stated the proposal provides no indication that the approach would stay within the bounds of the SEC's authority to restrict only materially deceptive or misleading names (rather than regulating "all fund names in any manner [the SEC] saw fit").

• First Amendment. ICI also argued that the SEC’s proposal "raises significant constitutional concerns" by restricting speech protected under the U.S. Constitution’s First Amendment. ICI noted that the Supreme Court recently affirmed that the First Amendment protects both noncommercial and commercial speech.