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September 18, 2023

At Upcoming Meeting, SEC Should Adopt Strong Enhancements to ESG Mutual Funds and ETFs “Names Rule” to Protect Investors from Greenwashing

WASHINGTON, D.C.—On Wednesday, September 20th, the U.S. Securities and Exchange Commission (SEC) will consider whether to adopt proposed rules governing investment company names (which includes mutual funds, ETFs, BDCs, etc.) that are likely to mislead investors about the fund’s investments and risks. Better Markets’ Legal Director and Securities Specialist Stephen Hall released the following statement in anticipation of the Commission’s vote on these critical reforms:

“The ‘Names Rule’ is a core investor protection disclosure rule that seeks to ensure that investors are not misled by the labels attached to funds.  It’s overdue for an update, as many funds are now using names to suggest an emphasis on the ESG factors.  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 fund’s investment holdings—a practice known as ‘greenwashing.’ In one example highlighted in our comment letter, an investment company that averaged net inflows of $78 million over a five-year period suddenly saw net flows swell to more than $500 million over the course of the next two years after it changed its name twice to include the terms ‘ESG’ and ‘sustainable.’

“The rule that the SEC proposed in June of 2022 would modernize the existing Names Rule, which requires that funds invest at least 80% of their assets in the investments suggested by the fund’s name.  The proposal would expand the scope of the 80% investment policy requirement to encompass ESG-related labels, require enhanced disclosures to investors in plain English, provide protections against changes in investment policies for investors in certain types of less liquid funds, and enhance recordkeeping requirements. Here’s a summary of the key issues, what’s at stake, and why the SEC should adopt these key reforms without diluting them:

  • INVESTORS OFTEN RELY ON A FUND’S NAME WHEN MAKING INVESTMENT DECISIONS. The Names Rule has ensured that investment fund names are not materially misleading or deceptive. That means investors seeking to invest in an investment fund whose name suggests a focus on a popular index or type of investment can be sure those funds are invested in a manner that is consistent with what the name suggests. The reforms in the proposed rule would ensure that labels suggesting certain investment characteristics such as ‘ESG’ and ‘sustainable’ are covered by the Names Rule’s 80% investment requirement. This is particularly important because as investor demand has increased for funds that invest in ESG or sustainability options, investment companies have drastically increased the number of funds that include those terms in their fund names to capitalize on the increasing demand. That means more inflows and also higher fees for the funds.  This has led to some investment companies engaging in ‘greenwashing’ by including specific terms in their fund’s name that do not accurately reflect the investment policy of the fund.
  • MORE DISCLOSURE AND RECORDKEEPING REQUIREMENTS. These reforms would require enhanced disclosures about how the fund name aligns with the fund’s investment policy, and it would require disclosure in the fund prospectus as to how the fund defines the terms in its name.  It would also establish recordkeeping requirements demonstrating how funds comply with the rule.
  • SHAREHOLDERS IN UNLISTED CLOSED-END FUNDS AND BDCS MUST VOTE TO CHANGE INVESTMENT POLICY. The proposed rule would require investors in unlisted closed-end funds and business development companies (BDCs) to affirmatively vote in favor of changes to the 80% investment policy of the fund. This requirement will ensure that investors in less liquid, unlisted funds can prevent the investment company from changing the investment policy of the fund after investors have already committed money to the fund, without a shareholder vote. This is important for investors in unlisted closed-end funds and BDCs because there are more limited options to sell their shares if they disagree with the change in investment policy.”

Learn more about the proposed rule in our comment letter.


Better Markets is a non-profit, non-partisan, and independent organization founded to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit



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