What’s in a Name? Aligning Fund Names with Investor Expectations

Today, the Commission draws on more than two decades of experience analyzing fund names and considering how certain names may mislead investors about a fund’s investment focus, potentially resulting in misallocations of capital. Today’s proposal would modernize the existing “Names Rule” in light of current fund practices, enhance consistency of the rule’s application across funds, and provide key safeguards for investors.[1] Fund names, as with any type of branding, provide a critical means by which sponsors market their funds and convey information to investors, and today’s proposal recognizes that investors may often rely on fund names in deciding where to invest their savings. I’m pleased to support today’s proposal which would bring meaningful improvements in aligning investor expectations and understanding with a fund’s actual focus and the strategies it pursues.

The Investment Company Act prohibits a fund from adopting, as part of its name or title, words that are materially deceptive or misleading.[2] In 2001, the Commission adopted the Names Rule, which requires, among other things, that a fund with a name that suggests a focus on a particular type of investment, industry, country or geographic region, must invest at least 80% of its assets consistent with that suggested focus.[3] The 80% policy is intended to “help reduce confusion when an investor selects an investment company for specific investment needs and asset allocation goals.”[4]

Twenty years of experience with the original Names Rule, however, has brought a myriad of interpretive questions raising critical investor protection concerns. Most significantly, the current rule draws a distinction between terms describing an investment “focus” – such as stocks, government bonds, utilities, or health care, or a geographic focus such as Japan or Latin America – on the one hand, and terms describing an investment “strategy” – such as “growth” or “value” – on the other.[5] If you find yourself a bit confused about the difference between “focus” and “strategy,” you are not alone. In fact, experience has shown that when it comes to fund names, this distinction often elevates form over substance. That is, fund names suggesting a strategy may be just as likely to create reasonable investor expectations about the fund’s investment focus. And importantly, the distinction can create an incentive for funds to use names that create these reasonable expectations but still avoid application of the 80% policy. The proposal would eliminate this distinction to ensure that investors receive the benefits of the rule whenever a fund’s name suggests that the fund concentrates in investments with particular characteristics.[6]

What’s more, funds that are required to adopt and implement the 80% policy will also be required to disclose in their prospectus the precise meaning of the terms used in their name – a meaning which must be consistent with plain English or industry established usage – and the criteria used to select investments that the terms describe.

The proposal is also especially prudent and timely given the tremendous investor demand for sustainable investments. In recent years, we’ve seen a proliferation of funds using terms such as “ESG,” “sustainable,” or “green” in their names, and it’s important to protect against overstatement or exaggeration of the extent to which these concepts factor into a fund’s investment choices.[7] Thus, the proposed rule would deem it materially deceptive or misleading for a fund to use ESG terminology in its name if it gives no greater weight or prioritization to ESG factors than to other investment factors. The choice of if or how to incorporate or prioritize ESG is up to the funds; but what the names convey to investors must be consistent with those choices.

In sum, the proposal quite sensibly seeks to align the branding of funds with the reasonable expectations of investors. It is well thought-out and carefully crafted thanks to the expertise and hard work of the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel. And, in addition to IM’s rulemaking staff, I want to specifically express appreciation to the Disclosure Review staff for their contributions to this rulemaking; their experience assessing fund disclosures and applying the Names Rule in practice was invaluable in identifying areas where improvements are needed. I’m happy to support today’s proposal, and I look forward to reviewing the public’s comments.