May 31, 2022
On May 25, 2022, the SEC proposed amendments to the fund “Names Rule,”1 (Names Rule Amendments) and, separately, proposed amendments to several rules and forms that would require additional disclosure for funds and advisers that consider environmental, social, and governance (ESG) factors in their investment processes (ESG Amendments).
Names Rule Amendments
The Names Rule is designed to ensure that a fund’s name accurately reflects the fund’s investments and risks. To achieve this goal, the Names Rule currently requires a fund using certain terms in its name (e.g., “Bond Fund,” “Utilities Fund,” “China Fund”) to invest at least 80% of its assets in investments suggested by its name. The Names Rule Amendments would expand this requirement to apply to any fund name with terms suggesting that the fund focuses on investments that have certain characteristics, such as “growth,” “value,” or “ESG”; the adopting release would add other terms like “global,” “international,” “income,” and industry sectors. Further, the Names Rule Amendments would require a fund, if applicable, to use a derivatives instrument’s notional amount, rather than market value, to determine the fund’s compliance with its 80% investment policy. Additionally, the Names Rule Amendments, among other things, would:
The ESG Amendments are designed to provide investors with clear and comparable information about how a fund considers ESG factors and would require additional disclosure from funds that consider ESG factors in their investment process. The depth of required disclosure would depend on how central ESG factors are to a fund’s strategy and would require an overview in the summary prospectus supplemented by more detailed information in other sections of the statutory prospectus or in other disclosure documents. The ESG Amendments identify and define three types of ESG funds:
Advisers that consider ESG factors in their significant investment strategies or methods of analysis would make generally similar disclosure as funds in their client brochures and report some ESG information in their annual filings.
Additionally, the ESG Amendments would require ESG-Focused Funds that consider environmental factors in their investment strategies to disclose additional information regarding the greenhouse gas (GHG) emissions associated with their investments, including the carbon footprint and weighted average carbon intensity of their portfolio. Integration Funds that consider GHG emissions would be required to disclose additional information about how the fund considers GHG emissions, including the methodology and data sources the fund may use as part of its consideration of GHG emissions. This proposal is designed to furnish investors with consistent and comparable quantitative information so that investors can make investment decisions that align with their own environmental goals.
Request for Comments
Comments on the proposals are due 60 days after their publication in the Federal Register.
The proposing release for the Names Rule Amendments can be found here.
A fact sheet for the Names Rule Amendments can be found here.
The proposing release for the ESG Amendments can be found here.
A fact sheet for the ESG Amendments can be found here.
1 Investment Company Act Rule 35d-1.
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The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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