In an effort to combat greenwashing, the Securities and Exchange Commission (SEC) voted Wednesday to amend a 2001 rule that would now prevent misleading or deceptive usage of sustainable terms.
The agency voted on modernizing the Investment Company Act’s “Names Rule,” which ensures that investment names adequately represent and are aligned with its fund portfolio. Under the rule, funds with a name that focuses on a specific investment must invest at least 80% of its assets in that fund. Now, the rule will apply to fund names associated with certain themes such as environmental, social, and governance (ESG) investing, and include terms like “growth,” “value,” “sustainable,” “green,” and “socially responsible.”
Investment companies must also review their fund portfolios quarterly to confirm adequate compliance standing and will have 90 days to correct their position if they miss that 80% benchmark. The time to enter back into compliance was extended from a previous proposal, which would have required funds to do so within 30 days.
“As the fund industry has developed over the last two decades, gaps in the current Names Rule may undermine investor protection,” said SEC Chair Gary Gensler in a statement. “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”
Additionally, the proposed amendments will also require that terms in a fund’s name be consistent with its plain English meaning or established industry use; and will require a fund to define the terms used in its name in its prospectus, the SEC said.
The amended rule seeks to eradicate greenwashing within investments, in which funds advertise themselves as focusing on sustainability but do not invest in socially responsible practices.
“Such truth in advertising promotes fund integrity on behalf of fund investors.”
SEC Chair Gary Gensler
Furthermore, with this change, the SEC said it hopes to cut down a saturated market that can typically leave investors overwhelmed and confused with their fund strategies.
Commissioner Mark T. Uyeda was among those who dissented on the ruling, stating that the ruling “overemphasizes” the importance of a fund name, and would add “significant compliance costs” that would “ultimately be borne by investors.”
“As the release provides scant guidance on what is meant by “particular characteristics,” practically any term could be subject to the names rule,” he stated. “If we wanted all funds subject to the names rule, we should have simply said so.”
Immediately following the vote, Investment Company Institute (ICI) Eric Pan issued a statement criticizing the final rule, noting that it, “sweeps more than three-quarters of all the funds in the U.S. into its dragnet, going far beyond ESG funds—the supposed root of the rulemaking—with no justification.”
“The only thing that this rule achieves is to insert the SEC deeper into funds’ investment decision-making processes,” Pan added. “Portfolio managers won’t be able to make routine investments without the SEC second-guessing whether it fits neatly with the subjective terms that make up their fund’s name. This will hurt American retail investors.”
Better Markets, a nonprofit organization that supports public interest in financial markets, applauded the SEC on the amendment.
“The SEC’s names rule will help prevent funds from misleading investors with baseless if not false claims about ESG, climate, and sustainability,” said Better Markets’ Legal Director and Securities Specialist Stephen Hall. “This long overdue modernization of the Names Rule is particularly relevant today as investors seek to invest in mutual funds and ETFs [exchange-traded funds] that focus on ESG and sustainability… It will benefit all investors, while also resisting the often baseless arguments by the funds that seek to greenwash their investment products by including terms such as ’ESG’ and ’Sustainable’ in their names to attract investors, without changing the investment policy of the fund.
The rule amendments are set to become effective 60 days after publication in the Federal Register. Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments, and fund groups with net assets of less than $1 billion will have 30 months to comply, according to the SEC.
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