Better Markets filed a comment letter in response to the Securities and Exchange Commission’s proposal which would modernize the “Names Rule” to expand the scope of the existing 80% investment policy requirement and provide enhanced disclosures to investors.
Why It Matters. The Names Rule, implemented in 2001, requires funds with certain names to adopt a policy to invest 80% of their assets in the investments suggested by that name. The Names Rules has remained largely unchanged for more than two decades while the funds industry has changed dramatically. When the Names Rule was originally adopted, there were $7.2 trillion invested in registered investment companies. Today, that number has exploded to $34.5 trillion. Part of the reason for the increased flow of assets into registered investment companies, namely mutual funds and ETFs, is the rise of environmental, social, and governance (ESG) investment strategies. The rate of investor assets flowing into these types of funds reflects the appetite of investors not only for reliable long-range financial returns but also for investment options that align with an investor’s core values and beliefs. There is ample evidence that investors are increasingly taking ESG factors into account when making investment decisions.
What We Said. Revisiting and modernizing the Names Rule is an overdue necessity in light of the dramatic transformation the fund industry has experienced in the past two decades since the rule was first adopted. The Proposal would appropriately expand the scope of the 80% investment policy requirement to funds that incorporate certain terms in their names suggesting they focus on certain types of investments, including terms such as “growth” or “value, or reference to one or more ESG factors. The Proposal is a logical effort by the Commission to modernize the Names Rule to account for changing market trends, especially those that have emerged in the ESG investment landscape. The Proposal could also be better served if more examples of fund names were specifically identified as having to comply with the 80% investment policy requirement, such as allocation funds.
Bottom Line. Better Markets supports the Commission’s proposed rule to modernize the Names Rule by expanding the scope of the existing 80% investment policy requirement and providing enhanced disclosures to investors. The proposed amendments are particularly warranted today to account for the rise of ESG investment strategies and funds that include ESG buzzwords in their names to attract more capital. These changes will better ensure that a registered investment company’s name is not materially deceptive or misleading.
Read our full Comment Letter here or click the button below.