The SEC requested comment on an Investment Company Act ("ICA") rule governing the names of SEC-registered investment companies.
ICA Rule 35d-1 (the "Names Rule") prohibits registered investment companies from using a name that is likely to mislead investors. ICA Rule 35d-1 provides, in part, that when an investment company refers to a certain type of asset (e.g., equities) in its name, at least 80% of the investment company must be invested in that type of asset. The SEC stated that it is assessing the effectiveness of the rule in prohibiting the use of deceptive names of funds.
The SEC identified several challenges to enforcing the Names Rule, including:
- not being well-suited to derivatives investments with a high level of exposure to a "type of investment" (as specified in the Names Rule) due to asset-based tests;
- funds using hybrid financial instruments that may not have all of the common asset type characteristics used in a fund's name;
- indices not being subject to the Names Rule, despite the growing number of index-based funds;
- the inconsistency of some funds not treating terms, such as environmental, social and governance factors ("ESG") as an investment strategy and, therefore, not being subject to the Names Rule, while other funds treat ESGs as an investment type and would be subject to the Names Rule; and
- asset managers using fund names to differentiate new funds (e.g.. emerging technologies).
Comments must be submitted within 60 days of publishing in the Federal Register.
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