The US Securities and Exchange Commission was poised to adopt a new rule on 20 September aimed at preventing investment companies from using misleading names to market their funds to investors.
The rule was proposed in response to a growing trend of investment funds labelling themselves as ESG-focused, suggesting that they invest in companies that meet certain environmental, social or governance criteria.
SEC chair Gary Gensler said in May that the proposal is aimed at "truth in advertising", as investment vehicles like exchange-traded funds with a thematic focus in areas like ESG or artificial intelligence have proliferated in recent years.
The rule would require investment advisers to make sure that a fund with a name that implies a focus on companies with a particular set of characteristics has 80% of its investments reflecting the plain English meaning or established industry use of a term in question.
If the reform is adopted, fund managers would also have to add disclosures to their prospectuses to define the terms in their fund names and the criteria used to determine which investments meet those criteria.
Closed-end funds, like mutual funds that issue a fixed number of shares in a one-off initial public offering, would have to hold a shareholder vote in order to change their investment policies, unless the fund manager conducts a tender or repurchase offer in advance of the change.
"Investment companies, especially mutual funds and ETFs, are increasingly using terms such as 'ESG' and 'sustainable' in their fund names to attract hundreds of millions of dollars from investors even when there has been little or no change in the funds' investment holdings," said Stephen Hall, legal director at the market reform advocacy group Better Markets, in a 19 September statement.
The fund industry has pushed back vigorously against the reform plan since its proposal in May 2022, arguing that the $5bn in new compliance costs initially estimated by the SEC was an underestimate and that these outlays would ultimately be borne by investors.
The SEC modified the proposal somewhat in response to these concerns, increasing the timeline that funds had to remedy temporary departures from the 80% investment to 90 days, up from 30 days.
The rule would have a wide-ranging impact, with the SEC officials estimating that it would affect roughly three-quarters of all funds.
If adopted, the rule would go into effect 60 days after its publication in the Federal Register. Fund groups with assets of $1bn or more would have 12 months to comply with the amendments, and fund groups with assets of less than $1bn would be given 18 months.
This article was published by MarketWatch, a Dow Jones title
