The Securities and Exchange Commission’s (SEC) recent amendment of the Investment Company Act’s “names rule” sends a clear message to companies: misleading or deceptive names won’t be tolerated. This rule pertains to the naming conventions of registered investment companies and business development companies, prohibiting names that could deceive investors about a company’s investments and risks. The recent amendment has expanded the scope of this rule and increased its disclosure requirements in response to the rise of investment funds suggesting they consider environmental, social, and governance-related (ESG) criteria as part of their investment strategies.
In their names, many of these funds use terms like “sustainable”, “green”, or “socially responsible”, but then ironically do not significantly invest in these areas. SEC’s amendment to the names rule is a step towards achieving greater transparency and deterring investment deception. Hester Peirce, SEC Commissioner, analogously stated that the amendment aims to provide the same level of clarity to investors as one would expect from a pizza shop sign: clear, comprehensive, and not misleading.
The names rule, in place since 2001, obliged registered investment companies to adhere to an 80% investment policy if their names suggested a certain type of investment focus. The amendments fortify this rule by demanding more funds to adopt an 80% investment policy. This call applies especially to those funds with names suggesting a focus on characteristics such as “growth”, “value”, coupled with a thematic investment focus referencing one or multiple ESG factors. Furthermore, the revised rule also necessitates companies with an 80% investment policy to review their portfolio assets at least quarterly, providing clear timeframes to achieve compliance if a company deviates from the policy.
The amendments also bring in additional reporting and record-keeping requirements related to the names-related regulations. Fund groups having net assets worth $1 billion or more now have 24 months to comply with the changes, while fund groups having net assets less than $1 billion have 30 months to comply.
The SEC’s message goes beyond the deceptive naming among investment funds and extends to individual public companies. Even if these companies are not directly under the ambit of the names rule, SEC wants them to maintain business transparency in correspondence with their company name and marketing methods.
Concluding, businesses, whether they are investment funds or individual public companies, should develop a deep understanding of the SEC’s message regarding misleading and deceptive names. They are all subject to the anti-fraud provisions of US federal securities laws if they materialize materially misleading and deceptive names.
For more details, refer to the original article by Spencer G. Feldman, a partner at Olshan Frome Wolosky, specializing in securities and capital markets.