What’s in a Name? The SEC’s Verdict, and Fallout, for Funds.

The new rule will force some managers to be more specific when they name their funds — and doing so could cost them money.


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The Securities and Exchange Commission is hitting asset managers with another regulatory change.

On Wednesday, the Securities and Exchange Commission passed amendments to the fund names rule, enacting stricter guidelines on when investment firms can use terms like ESG, value, and growth. The change comes on the heels of the agency’s passage of sweeping new rules for private equity, hedge funds, and other asset managers that offer unregistered investment funds.

The amendments to the names rule, which are designed in part to prevent practices like greenwashing, will change how asset managers market themselves. How much these rules affect the day-to-day management of the firms, though, remains to be seen.

“A fund’s investment portfolio should match a fund’s advertised investment focus,” Chairman Gary Gensler said at Wednesday’s meeting. “Otherwise, a fund’s portfolio might be inconsistent with what fund investors desired in selecting it based on its name.”

The regulation, which has been in place for decades, requires that at least 80 percent of a fund’s investments matches the name on the label. The amendments that just passed require more funds to adopt this policy and require that any funds subject to the rule review the portfolio at least quarterly. If the funds have less than 80 percent of their value allocated to the strategy, they now have 90 days to get back into compliance.

“The real knock-on impacts are investment advisers are going to need to be increasingly diligent in assessing and determining the name and monitoring compliance with the name,” asaid KPMG’s national practice leader for public investment companies Sean McKee. “Will it dramatically change the practice? Probably not. There may be some exceptions where advisers are going to have to think about whether their definitions are consistent with market expectations or not.”

This compliance time frame that the SEC landed on is a “pleasant” change from the proposed rule, which was initially 30 days, according to Behar.

The timeline for implementation is over the course of the next three years. Firms with more than $1 billion in assets under management have two years to comply, while smaller funds have 30 months.

What this all means practically is that funds using words like ESG, value, and growth have to be more careful about how they define their scope of work. “I think it’s long overdue,” said Andrew Behar, president of As You Sow, a nonprofit focused on corporate accountability.

“The name, the holdings, and the prospectus will have to have some linkage,” Behar added. “Right now, there’s none.”

The SEC will not be tightly controlling what is considered to be ESG. Instead, that is up to the investment firms to define within their policy documents — and they must adhere to what they outline. “It was great to see that the SEC, rather than determining names themselves, allowed companies to create and disclose their own definitions,” McKee said.

For asset management firms, there will be an added cost, McKee predicted. How much, though, is hard to determine. “Cost will depend on the nature of facts and circumstances specific to the manager and its products,” he said, adding that it likely won’t be as expensive as other rules that were recently finalized.

According to Behar, what comes next is learning how the SEC plans to enforce these rules. They could choose to be relatively relaxed in taking enforcement actions against funds. “We hope to see the SEC start to enforce it.”