SEC Tightens Investment Company Name Requirements

The SEC adopted amended Rule 35d-1 ("Investment company names") under the Investment Company Act to prevent investment companies from adopting names that may mislead investors (see related coverage).

The amendments (i) broaden the scope of the requirement for certain funds to adopt a policy to invest at least 80 percent of the value of their assets in accordance with the investment focus that the fund’s name suggests, (ii) update the rule’s notice requirements, and (iii) establish additional recordkeeping requirements.

The final amendments go into effect 60 days following publication in the Federal Register. Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments, and fund groups with net assets of less than $1 billion will have 30 months to comply.

Statements

• SEC Chair Gary Gensler said that the final amendments will "ensure that a fund’s portfolio matches a fund’s name." He stated that the final amendments address gaps in current regulations, where "some funds have claimed that the rule does not apply to them – even though their name suggests that investments are selected based on specific criteria and characteristics."
• SEC Commissioner Mark T. Uyeda dissented, saying that the amendment "overemphasizes the importance of a fund’s name, as if to suggest that investors . . . need not look at the prospectus disclosures." He warned of the "significant compliance costs" of the final amendments that "will be borne by investors."
• SEC Commissioner Hester M. Peirce stated that "allowing fund managers the ability to define the terms in their name is critical to the successful implementation of this rule." She added that the new "N-PORT requirements, while onerous and costly, could be a step towards modernizing the disclosure program by allowing more automation."
• SEC Commissioner Caroline A. Crenshaw said the amendments are "common sense changes that protect investors by ensuring that a fund says what it means, and means what it says."
• SEC Commissioner Jaime Lizárraga asserted that the new rule will help to address the issue of "greenwashing" where ESG financial products have often failed to accurately support their implied claims with the underlying investments made.