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SEC adopts amendments to prevent misleading or deceptive fund names

On Behalf of | Sep 25, 2023 | Financial News

The Securities and Exchange Commission has adopted rule amendments aimed at preventing misleading or deceptive names of investment funds, AdvisorHub reports.

The changes were made to the “Names Rule” portion of the Investment Company Act of 1940.  The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment to invest at least 80 percent of the value of their assets in those investments.

The amendments approved by the SEC include requiring more funds to adopt an 80 percent investment policy, including funds with names suggesting a focus in investments with particular characteristics, for example terms such as “growth” or “value,” or certain terms that reference a theme for investments, such as the incorporation of one or more Environmental, Social, or Governance factors.

There will also be a new requirement that a fund review its portfolio assets’ treatment under its 80 percent investment policy at least quarterly and there will be specific time frames for getting back into compliance if a fund departs from its 80 percent investment policy.  Funds will generally have 90 days to rebalance to bring the level of investments back to 80 percent.

The SEC said its intent was to modernize and enhance the Names Rule to further protect investors and to address developments in the fund industry since the rule was adopted 20 years ago.

“As the fund industry has developed over the last two decades, gaps in the current Names Rule may undermine investor protection,” said SEC Chair Gary Gensler. “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”

The SEC noted that a fund’s name is usually the first piece of information that investors receive about a fund, and the name is an important factor when investors are weighing their investment options.

The rule revisions were adopted by the SEC commissioners by a 4-1 vote. They will become effective 60 days after being published in the Federal Register. Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments, and groups with net assets of less than $1 billion will have 30 months to comply.

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