In an open meeting held on May 25, 2022, the SEC approved two new proposals: (1) a proposal to amend Rule 35d-1 under the of 1940 Act (the "Names Rule"), and (2) an enhanced environmental, social, and governance ("ESG") disclosure proposal.

The proposed Names Rule amendment expands the scope of the rule to funds with a particular focus or issuers with certain characteristics.5 It seeks to modernize the "80 Percent" requirement, or the rule that a fund must invest at least 80% of its assets in accordance with the investment focus indicated in its name. The amendment specifically focuses on names that include "growth" and "value," as well as names that include one or more ESG factors. In relation to derivatives investments, the proposed amendment clarifies that in applying the 80% requirement, a fund should use a derivative investment's notional amount, not its market value. The proposed amendment would also require funds to adopt an 80% policy under the Names Rules in connection with its underlying investments.

In addition, Integration Funds that consider ESG factors alongside non-ESG factors would be prohibited from using ESG terminology in the Fund's name. Along with naming considerations, the second proposed amendment calls for increased fund ESG disclosure requirements.6 The proposals include a layered approach with different requirements for (1) Integration Funds, (2) ESG-Focused Funds, and (3) Impact Funds. Integration Funds would be required to describe in their prospectus how ESG factors are incorporated into the investment process. Meanwhile, ESG-focused Funds would be subject to higher level disclosure requirements. ESG-Focused Funds are those that use one or more ESG factors as significant or main considerations in selecting investments or engagement strategy. This definition includes funds that track an ESG-focused index or industries focused on ESG factors; these would be subject to more detailed disclosure, specifically which and how ESG factors are used in determining investments. Finally, the proposed amendments would require Impact Funds, which seek to achieve ESG objectives, to provide disclosure of how progress to achieve the stated objective is measured.7 Given that many structured products reference underlying ETFs as well as indices that have ESG objectives, and that the SEC is also stepping up its enforcement activity in respect of entities it alleges market products that misleadingly claim to be ESGoriented, market participants may want to keep a close eye on these developments.


5 See the SEC fact sheet:; see the full amendment text: .

6 See the SEC fact sheet:; see the full amendment text:

7 For a discussion and summary of other areas of the proposed amendments, see Mayer Brown LLP's Legal Update (May 26, 2022).

Originally published in REVERSEinquiries: Volume 5, Issue 2.
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