The Securities and Exchange Commission adopted a new rule Wednesday aimed at preventing investment companies from using misleading names to market their funds to investors.
The rule requires investment advisers to make sure that a fund with a name that implies a focus on companies with a particular set of characteristics has 80% of its investments reflect the plain English meaning or established industry use of a term in question. “Investment companies, especially mutual funds and ETFs, are increasingly using terms such as ‘ESG’ and ‘sustainable’ in their fund names to attract hundreds of millions of dollars from investors even when there has been little or no change in the funds’ investment holdings,” said Stephen Hall, legal director at the market-reform advocacy group Better Markets, in a Tuesday statement.
“The only thing that this rule achieves is to insert the SEC deeper into funds’ investment decision-making processes,” Pan said. “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.”
Uyeda also predicted that funds may seek to avoid these costs by “generic or exceedingly complex names that do little to help investors.”
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