Ceres applauds the U.S. Securities and Exchange Commission (SEC) recently on its adoption of a new rule that strengthens accuracy and reliability in the naming of investment funds. Specifically, the Investment Company Names rule requires investment firms to define the terms used in a fund’s name and disclose how that fund implements the strategy such terms imply.
Also known as the Names Rule, it expands the scope of funds subject to an existing regulation that requires a fund to invest at least 80% of its assets in investments that are consistent with its label. While that regulation has only applied to fund names that suggest a certain type of investment, industry, or geography, the scope will now include words that suggest a particular investment focus or strategy, such as “sustainable”, “socially responsible”, “global”, or “growth”. The rule also revises the treatment of derivatives and expands fund disclosure, notice, and recordkeeping requirements.
“As individual investors increasingly seek responsible investment options that consider climate risks, regulations that bolster investor confidence and prevent greenwashing are critical,” said Steven M. Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets at Ceres. “The SEC’s new rule will help ensure truth-in-advertising for fund names and allow investors to make more informed decisions. We commend the SEC for its ongoing efforts to provide the market with consistent, decision-useful information.”
The Names Rule was proposed in May 2022 alongside the Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, which has not yet been finalized. Ceres submitted a comment letter addressing both proposals and a subsequent analysis of the comment file outlining support for the proposals with several recommended changes.
While the Names Rule is not limited to addressing climate-related language and marketing, it will improve investor understanding of how funds that call themselves responsible are executing those strategies. The adoption of the Names Rule represents an important step forward in enhancing market transparency and trust.
