Peirce noted that “the application of the 80% investment policy requirement to names suggesting that a fund focuses” on ESG considerations “will rely on subjective judgments,” and that enforcement of the rule would necessarily require the SEC to “engag in Monday morning asset managing.” She said, “he 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.” In a statement against the proposal, Commissioner Hester M. In a statement supporting the proposal, SEC Chair Gary Gensler noted that there are “gaps in the current Names Rule” that have resulted in funds claiming that the 80 percent investment requirement “does not apply to them – even though their name suggests that investments are selected based on specific criteria or characteristics.” Elaborating on these gaps, Commissioner Allison Herren Lee noted that the Names Rule currently distinguishes “terms describing an investment ‘focus’” like “stocks,” “bonds,” or “utilities,” that are covered by the rule from “terms describing an investment ‘strategy,’” like “growth” or “value” that are not covered by the rule. In addition, the proposal would bar funds that consider ESG factors along with other factors (sometimes referred to as “integration funds”) from using ESG-related terms in their names. “socially responsible investing,” “ethical,” or “green”). The proposal would expand the Names Rule to apply to fund names with terms indicating that the fund’s investment decisions incorporate one or more ESG factors (e.g. “domestic stock fund” or “international bond fund”) to invest at least 80% of its assets accordingly. The Names Rule currently requires funds with a name suggesting a focus on a particular type of investment (e.g. In a proposal addressing investment company and fund names, the SEC would expand the “Names Rule” (Rule 35d-1 under the Investment Company Act of 1940). As we predicted, this week on Wednesday the SEC announced that it was going to do both, proposing new ESG naming and disclosure requirements. Specifically, we noted that there were two ways that the SEC might achieve its goal: (1) by regulating how companies may use the term “ESG” in fund names and marketing materials, and/or (2) by providing additional disclosure guidance through rulemaking.
In that memorandum, we discussed the prevalence of investment companies that claim in their disclosures and marketing materials to further ESG goals, the inherent ambiguity of broadly purporting to further ESG goals, given the sheer breadth of the divergent issues encompassed by the acronym, and the Security and Exchange Commission’s (“SEC”) newly-prioritized focus on ensuring that ESG disclosures are not misleading. This alert updates a memorandum we published in October 2021 on Environmental, Social, Governance (“ESG”) funds.