SEC’s Amended ESG Names Rule Sends Clear Signal to Companies

The Securities and Exchange Commission amended the Investment Company Act’s “names rule,” which prohibits registered investment companies and business development companies, or funds, from using names that are likely to mislead or deceive investors about a fund’s investments and risks.

The SEC’s amendments, expanding the names rule’s scope and disclosure requirements, noted the proliferation of funds that imply they consider environmental, social, and governance-related criteria in their investment strategies. The funds use names that include terms such as “sustainable,” “green,” or “socially responsible” when they don’t substantially invest in such a manner.

The amended names rule highlights the need for investment funds and individual public companies to ensure transparency and avoid investment deception in their naming and promotion. SEC Commissioner Hester Peirce used a simple analogy, saying, “When you walk up to a shop with a sign that reads in large neon letters, ‘Pizza Shop,’ you expect to be greeted by the comforting smell of baking dough, sauce and cheese.” The amendments “aim to provide the same experience to investors,” she added.

Since its adoption in 2001, the SEC’s names rule has required registered investment companies whose names suggest a focus on a particular type of investment to adopt a policy to invest at least 80% of the value of their assets into those investments. The amendments enhance the rule’s protections by requiring more funds to adopt an 80% investment policy—specifically funds with names suggesting a focus on investments with characteristics such as “growth” or “value,” or even terms that reference a thematic investment focus, such as the incorporation of one or more ESG factors.

The amendments establish a new requirement that a fund review its portfolio assets’ treatment under its 80% investment policy at least quarterly and include timeframes for getting back into compliance if a fund departs from its 80% investment policy. Businesses must be aware of the changing legislation to ensure timely compliance.

The amended rule also includes additional reporting and recordkeeping requirements for funds regarding compliance with the names-related regulatory requirements. Fund groups with net assets of $1 billion or more have 24 months to comply with the amendments, and fund groups with net assets of less than $1 billion have 30 months to comply.

According to the SEC’s press release for the names rule amendments, there are now more investment funds registered in the US than there are public companies on US stock exchanges. Investors frequently turn to funds that allow them to invest in “themes” rather than individual stocks. An investor seeking a fund that provides exposure to a particular theme likely will first look at the fund’s name. A fund’s ever-changing mix of individual investments makes it less transparent and comparable to other funds for investors.

Although the names rule doesn’t apply to names of individual public companies, the SEC’s message is familiar: If a public company’s name, or the way it markets itself, implies that the company focuses on a particular type of business, it must conduct business accordingly.

Regulatory activity around misleading and deceptive advertising on ESG issues has been gaining momentum. Prime targets are greenwashing—making an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly, or pinkwashing—using the pink ribbon symbol to market a product without meaningfully supporting breast cancer research or awareness.

Investment funds and individual public companies should familiarize themselves with the SEC’s message, as materially misleading and deceptive names are subject to the anti-fraud provisions of the US federal securities laws.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Spencer G. Feldman is partner at Olshan Frome Wolosky with focus on securities and capital markets.

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