Regulators worldwide persist in their focus on disclosures and marketing involving environmental, social, and governance (ESG) issues. Echoing this trend, the U.S. Securities and Exchange Commission (SEC) adopted amendments to Rule 35d‑1 (the “Names Rule”) under the Investment Company Act of 1940, as amended (the “1940 Act”) on September 20, 2023. This amendment is in line with the consistent changes that the legal framework has been undergoing to incorporate ESG factors into business and investment practices. Morrison & Foerster LLP provided an in-depth review of these recent changes.
- The amendment to Rule 35d‑1 is of particular importance, as it relates to how investment companies name their funds. The rule previously required a fund that includes certain specific names to invest at least 80% of its assets in the type of investment suggested by its name. With the new amendment, the rule has expanded its focus to fund names that suggest a focus on ESG issues.
- Given the rising trend of ESG investing, this amendment serves to protect investors from potential deception by ensuring that fund names accurately reflect the fund’s investment strategies and risks. Moreover, this will standardize the criteria for fund names, adding more transparency to the investment process.
- On the other hand, it puts an increased responsibility on investment companies to ensure that fund names are appropriately predefined and managed, ensuring that there are no discrepancies between the fund’s name and its actual investments or strategies.
This amendment signifies not only the growing importance of ESG factors in investment decisions but also the need for more rigorous monitoring and control. Guided by these changes, legal professionals, including corporate lawyers and compliance officers, can better equip themselves to navigate the shifting regulatory landscape. They also have a responsibility to ensure that their corporate clients comply with these newly established rules and standards, ultimately contributing to a more sustainable future.