Statement on Investment Company Names

Thank you, Mr. Chair, and thank you to the staff in the Divisions of Investment Management and Economic and Risk Analysis, and the Office of the General Counsel, and to others at the Commission who worked on this proposal. Thank you for meeting demanding deadlines under considerable pressure and for fielding my many questions with unwavering professionalism. Despite my admiration for the effort that went into this initiative and my appreciation for some of the motivating concerns, I cannot support today’s proposed amendments to the Names Rule.

A fund’s name helps investors cut through the jungle of investment company options available to them. It only does so, however, if it accurately describes the fund. Section 35(d) of the Investment Company Act, which outlaws “deceptive or misleading names,”[1] and the Names Rule, which the Commission adopted in 2001, recognize the outsized role a fund’s name plays in the investment selection process.[2] Of course, even a perfectly fitting name carries only a bit of information about a fund, and we must encourage investors to look beyond names to fund disclosure documents.

In the twenty-one years since the Names Rule’s inception, much has changed in the mutual fund industry and the way investors consume information. Revisiting Rule 35d-1 to see if it is performing for investors as designed and, if not, issuing additional guidance or even amending the rule makes sense. Hence, the Commission’s March 2020 request for comment on the rule.[3] I therefore was hoping to be able to support the proposal to amend to the Names Rule. The proposed amendments, however, may create more fog than they dissipate and may place unnecessary constraints on fund managers. Accordingly, I cannot support it.

I have several concerns. First, the application of the 80% investment policy requirement to names suggesting that a fund focuses on investments with “particular characteristics,” most prominently, those associated with ESG, will rely on subjective judgments. Given the breadth of terms such as ESG, growth, and value, how will industry implement the rule and how will we enforce it without engaging in Monday morning asset managing? The inability to draw discernible boundaries around a centrally important term renders creative enforcement actions based on second-guessing in hindsight almost inevitable. Applying the Names Rule to investment strategies, which is essentially what the proposal would do, may have the detrimental effect of forcing homogeneity in the way funds are managed. A better approach—one that many commenters in response to the Request for Comment suggested—would be to require better disclosure in the fund prospectus about the strategies managers use.

Second, the proposal would unduly constrain advisers’ ability to make decisions that are best for the funds they manage. To address concerns prompted by fund names becoming less indicative of fund investments over time, the proposal describes particular circumstances when a fund may be outside the 80% investment parameters, as well as proposing strict time frames for a fund to return to compliance. The proposal would put a strict 30-day time limit on temporary departures from the 80% rule. The release acknowledges that some fund investors might prefer a bit of give on the 30-day limit to allow managers room to minimize or avoid loss. The consequence of this intentionally inflexible approach may include inducing portfolio managers to make undesirable investments in order to remain in compliance with the rule or forcing funds to shut down in times of even relatively short-lived market stress. Would a fund with an emphasis on emerging markets in central Europe have been able to get right with this rule 30 days following Russia’s invasion of Ukraine? The rule also requires that a fund with multiple elements of focus in its name must have investments in all the elements, which again unnecessarily constrains decision-making. Such a requirement encourages more generic names so that managers can preserve flexibility in their portfolio management, but more generic names are less informative for investors.

Third, the outright prohibition on integration funds’ use of ESG in their names could result in substantive changes in the way some funds are managed. The proposal would deem integration funds incorporating ESG terminology in their names as per se materially deceptive or misleading. Integration funds are funds for which ESG factors are considered alongside, but have no more significance than, non-ESG factors in the fund’s investment decisions. So, putting this proposal together with the accompanying ESG disclosure proposal—spoiler alert—generates a puzzling result: integration funds would have heightened disclosure obligations, but would be unable to use their name to signal to investors that they are integrating ESG. Some advisers may choose to convert their integration funds into ESG-focused funds, which will decrease options for investors. Or an adviser might try to run from ESG to avoid the heightened disclosure requirements.

Finally, the proposed one-year implementation period is too short given the number of funds that may have to make adjustments in their portfolios or change their names.

I look forward to hearing what commenters have to say on these and other issues, including the treatment of derivatives for purposes of calculating adherence to the 80% test and the shareholder notice requirements.

I will conclude by once more thanking Commission staff for their efforts. In addition, I want to thank commenters who responded to our Request for Comment. I look forward to hearing from commenters on whether the proposal strikes the right balance in ensuring that fund names accurately represent fund holdings without unnecessarily constraining fund managers’ options.