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:
- Replace the current incurrence test approach to complying with the 80% policy with a maintenance test “with exceptions” approach to compliance (specifying the circumstances under which a fund may depart from the 80% maintenance policy and the time frame for returning to compliance).
- Require disclosure in a fund’s prospectus that defines terms used in the fund’s name, amend Form N-PORT to require additional disclosure surrounding how the fund’s investments match the fund’s investment focus, and impose recordkeeping requirements relating to how funds comply with the Names Rule or why the fund is not subject to it.
- Prohibit a fund that considers non-ESG factors more centrally than ESG factors in its investment decisions from using “ESG” terminology (e.g., “sustainable”) in its name.
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:
- Integration Funds – funds that integrate ESG factors with non-ESG factors in their investment decisions, but do not give the ESG factors greater weight than non-ESG factors. These funds would be required to describe how they incorporate ESG factors into their investment decisions.
- ESG-Focused Funds – funds in which ESG factors are used as a significant or main consideration in investment decisions. These funds would provide more detailed disclosure, including a standardized ESG strategy overview table. Further, ESG-Focused Funds that use proxy voting or engagement with issuers as a significant means of implementing their ESG strategy would be required to provide additional information about their proxy voting or ESG engagements, as applicable.
- Impact Funds – these funds are a specific subset of ESG-Focused Funds that seek to achieve a particular ESG impact. These funds would also disclose how they measure progress towards their stated impact goal.
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.