SEC Matches Step with International Regulators: Amendments to the “Names Rule”
Oct. 10, 2023 (5 min read)
In a 4-1 vote two weeks ago, the SEC adopted amendments to the 2001 Investment Company Act “Names Rule,” [1] bringing about significant changes to fund-labeling regulations which could impact roughly 75% of U.S. investment funds totaling trillions in assets under management. Decision makers should continue to expect global priority of mitigating greenwashing and further regulation of “green marketing” in financial products and beyond.
These changes aim to protect investors from being misled or deceived about a fund’s investments and risks by ensuring alignment between fund names and investing strategies. The amended rule has expanded in scope to include thematic-focused funds with names like “artificial intelligence”, “growth”, “green”, “sustainable”, and “ESG”. Additionally, it enforces the 80% rule more rigorously, requiring quarterly portfolio compliance reviews to ensure at least 80% of a fund’s assets are closely aligned with its investment fund name. Funds falling short of the 80% requirement have 90 days to report and rectify the issue to the SEC.
The change is significant because it addresses greenwashing through clear and objective regulatory standards, enabling investors to make informed decisions regarding investment funds aligned with ESG objectives. This is in step with global regulatory efforts to curb greenwashing – including those in Singapore [2], Australia [3], the UK [4], EU [5], India [6], and Canada [7] – a trend financial institutions and fund managers operating across global markets should anticipate as they face regulatory fragmentation and diverging approaches combined with new financial, legal and reputational risks.
Sources:
- U.S. Securities and Exchange Commission. “SEC Adopts Rule Enhancements to Prevent Misleading or Deceptive Investment Fund Names.” https://www.sec.gov/sec-enhances-rule-prevent-misleading-or-deceptive-fund-names
- In May 2022, the Monetary Authority of Singapore (MAS) released its Environmental Risk Management Information Papers, setting out expectations for fund managers, among others, regarding ESG risk assessments across investment portfolios. https://www.mas.gov.sg/regulation/guidelines/guidelines-on-environmental-risk-management-for-asset-managers
- The Australian Sustainable Finance Initiative (ASFI) announced an expert group to provide input on the development of a green economy. The initiative builds on the Australian Securities and Investments Commission (ASIC) review of ESG marketing by superannuation and managed funds. https://www.asfi.org.au/
https://www.investmentmagazine.com.au/2023/05/australia-moving-ahead-with-sustainable-finance-taxonomy/?__cf_chl_tk=CDeW4Q1HledMojnz.VY.DGAWobJF2KNAfXECdwk6Qjw-1695949739-0-gaNycGzNDPs - The UK Financial Conduct Authority (FCA) has further delayed the announcement of the final Policy Statement relating to the Sustainability Disclosure Requirements (SDR) and investment labels, the Financial Conduct Authority (FCA) now intends to publish the final rules in Q4 2023. https://www.fca.org.uk/news/news-stories/fca-updates-sustainability-disclosure-requirements-and-investment-labels-consultation
- The EU Sustainable Finance Disclosure Regulation (SFDR), which came into effect on 10 March 2021, and the EU taxonomy regulation, which helps identify economic activities deemed “environmentally sustainable” and that became effective 1 January 2022, are core components of EU regulation designed to provide more transparency of investment products, financial advisers and any firm creating investment products. The European Commission is currently carrying out a comprehensive assessment of the framework, examining issues such as legal certainty, usability, and how the Regulation can play its part in addressing greenwashing. https://finance.ec.europa.eu/sustainable-finance/disclosures/sustainability-related-disclosure-financial-services-sector_en
- India Regulator Releases New Rules for ESG Investment Funds. In July 2023, the Securities and Exchange Board of India (SEBI) released new rules for ESG investment funds, which require at least 80% of assets to be invested in securities aligned with their specific strategies. In addition, asset managers must provide the Business Responsibility and Sustainability Report (BRSR) scores for their holdings and the name of the ESG rating provider each month. According to SEBI, the measures are introduced to facilitate green financing and mitigate the risk of greenwashing. Under the new guidelines, each ESG scheme launched by a mutual fund will need to invest at least 80% of assets into activities aligned with one of six themes which must be clearly stated in the fund’s name:
1. Exclusion
2. Integration
3. Best-in-class and positive screening
4. Impact investing
5. Sustainable objectives
6. Transition or transition-related investments
https://www.lw.com/en/insights/regulatory-updates-in-asia-esg-august-2023#:~:text=Regulator%20Releases%20New%20Rules%20for,aligned%20with%20their%20specific%20strategies - In January 2022, the Canadian Securities Administrators (CSA) published staff guidance on ESG-related investment fund disclosure, raising expectations about the disclosure and marketing practices of funds using ESG objectives or strategies. The guidance is both comprehensive and detailed, covering investment objectives and fund names. https://www.osc.ca/en/securities-law/instruments-rules-policies/8/81-334/csa-staff-notice-81-334-esg-related-investment-fund-disclosurehttps://www.osc.ca/en/industry/investment-funds-and-structured-products/ifsp-enews/esg-related-disclosure-funds-consider-esg-limited-extent
Danielle K. Santos | Research Associate & Policy Analyst, Business in Society Institute
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