SEC Enhances Rule to Avoid Misleading Investment Fund Titles, Greenwashing

Securities and Exchange Commission headquarters building in Washington, D.C.

(Credit: SEC)

by | Sep 25, 2023

The SEC has added an amendment to the Investment Company Act’s Names Rule, requiring fund titles to transparently portray the thematic focus of their fund. The rule is expected to target greenwashing or false sustainability claims.

Since fund names provide potential investors with a first impression of a given company, they have been identified as an important marketing tool for the fund. The SEC is therefore updating its 20-year-old rule to adapt to the increased presence of green marketing.

The new rule includes an “80% rule,” which ensures that funds’ names represent at least 80 percent of the value of the firm’s assets. This change will specifically respond to concerns about ESG funds as consumer groups look for stricter standards for defining ESG.

In order to address potentially ambiguous words such as “growth” or “value,” the new rule will ensure portfolio managers define exactly what that means for their fund. This includes telling investors how they plan to comply with the 80% rule. Further, the amendment includes additional recording and record-keeping requirements to ensure funds are continuing to meet the new regulations.

“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. “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.”

Fund groups with net assets of $1 billion or more will have 24 months to comply with the new amendment, and those with net assets of less than $1 billion will have 30 months.

Greenwashing Concerns, ESG Regulations on the Rise

Investors and consumers have expressed an increased interest in sustainability disclosures and transparency in recent years. As more companies set net zero goals and adopt ESG practices, increasing attention has been paid to holding corporations accountable for the specific actions made to reach those goals.

Some corporations have even faced legal challenges because of their misleading sustainability claims. For example, Delta and KLM both face lawsuits for portraying their companies as being environmentally friendly despite the immense carbon emissions caused by air travel.

Net-zero commitments and corporate sustainability goals are necessary for climate change mitigation, but only if targets are actually met. More investors are looking at how companies are delivering on their ESG claims, and the new naming amendment should contribute to a more transparent investment process.

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