Sept. 20, 2023
More than half of U.S. households – 55 percent to be exact – invested in registered funds in 2022, many as part of their retirement accounts. By modernizing a truth-in-naming rule that is woefully outdated and out of touch with the needs of investors in our modern times, the actions we are taking today will strengthen protections for nearly 121 million retail investors.
The reforms before us will enhance transparency in fund disclosures and better align investments with investors’ preferences.
The Commission adopted the “names rule,” as it is commonly referred to, more than 20 years ago. It was put in place to address concerns with, and prevent, market practices where fund names could mislead or deceive investors.
Under the current names rule, 60 percent of funds must invest at least 80 percent of the fund’s assets in the investment focus suggested by its name.
With today’s reforms, more than three-quarters of funds in the marketplace will now be covered by an improved standard that more accurately represents the fund’s investment mix.
A fund’s name is the first data-point an investor encounters when weighing investment options. It stands to reason that an improved standard for funds to follow will give investors the confidence that a particular name means what it says and does what it means.
That said, funds themselves have the discretion to decide on the name and the investment mix.
The amended rule provides for accountability measures and flexibility to remedy any departures from the 80 percent policy.
Today’s reforms are informed by extensive staff experience over the last two decades in administering the rule. Since the names rule was first adopted in 2001, the Commission observed certain trends that warranted targeted action. These trends included broadening of fund investment options and growth in ESG investment strategies. In 2020, the Commission requested public comment on an updated framework for fund names in light of market developments since the original rule was adopted in 2001. This was followed by an additional opportunity for public comment as part of the proposed rule in 2022.
The fund industry today is diverse, with more funds pursuing ESG strategies or reporting more holdings in derivatives. One study found that by the end of 2021, approximately $8 trillion – or 1 in 8 dollars – of the total U.S. assets under management was invested in sustainable strategies. Between 2001 and 2021, ETFs and equity mutual funds that invest in specific sector funds increased by 70 percent.
The rise in investor-driven demand for ESG products has been accompanied by a concerning trend in disclosures that fail to accurately support the underlying investment mix – often referred to as “greenwashing.”
Our reforms today provide clarity to investors and enhance the investor experience by preventing a fund from calling itself a name that is misleading, deceptive, or inconsistent with its investments.
These reforms go to the heart of our investor protection mission. While I thank Commission staff for their work, what matters most are the actions we take today to protect the investing public. We are here for them and have a responsibility to protect, and advocate for, their interests. We can never lose sight of that. For the members of the public present here today, or watching these proceedings remotely, I thank you for joining us. It is especially gratifying to support today’s reforms knowing that they will benefit more than 120 million retail investors in our country.