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: https://www.sec.gov/files/ic-34593-fact-sheet.pdf; see the full amendment text: https://www.sec.gov/rules/proposed/2022/ic-34593.pdf .
6 See the SEC fact sheet: https://www.sec.gov/files/ia-6034-fact-sheet.pdf; see the full amendment text: https://www.sec.gov/rules/proposed/2022/ia-6034.pdf.
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
Click here to read the articles in this latest edition.
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe - Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2020. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.