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SEC’s Proposal to safeguard Investors from misleading Investment company names

A fund’s name is known to communicate a great deal about the fund that investors often rely on while making an investment choice. In the light of several fund names misleading its investors, the Securities and Exchange Commission has decided to make amendments to the existing Names rule as increasing investor protection has always been one of the critical objectives of the SEC. 

The proposal also clarifies the requirement for funds to adopt a policy that enables a fund to invest 80% of its assets following the focus of the fund, as suggested by its name. This proposed amendment updates the rule’s notice and record-keeping requirements.

The proposal also addresses the need for an enhanced prospectus with disclosure requirements for terminology used in fund names and anything under the umbrella of names-related regulatory requirements. 

Section 35(d) of the Investment Company Act, 1940, prohibits any registered investment company from using words that the commission deems deceptive while coining a name for the fund. This section also defines the names and titles that the commission finds deceptive and misleading. This rule was designed to ensure that the investors who determine the investment company’s objective and risks are not misled by tricky names and titles for the funds. 

The section further elucidates that if the Funds name suggests that they focus on a particular type of investment or investments in a certain specific industry or geographic focus, the fund is required to invest 80% of the value of its assets in the type of investment, geographic region or industry or anything else the name suggests. 

Recommendations of the Rules Proposal 

  1. The proposal aims to expand the scope of the rule that states that 80% of the value of its assets needs to be invested in the type of investment, geographic location, or industry suggested by the fund name. This could include the ESG factors that the fund incorporates while making a significant investment decision. 
  2. Change is inevitable. The proposal addresses the departure of a fund from its 80% investment requirement. The proposed amendments list down the circumstances under which the releases can occur, including the specific time frames.

a) Due to market fluctuations or any other circumstance wherein, the departure is not caused by the fund’s purchase or sale of security or entry or exit from an investment. 

b) When the fund addresses an unexpected cash inflow or large redemptions. 

c) While trying to avoid loss in a volatile market due to socio-economic or political agencies. 

d) To liquidate a fund’s assets to reorganize or launch the fund 

e) When the shareholders have been notified of the 80% investment rule change. 

  1. Currently, the funds use their market value to determine their compliance with the 80% investment rule. But the proposed amendment would facilitate the funds to employ a derivatives instrument’s notional amount to determine the fund’s compliance. 
  2. Any unlisted, closed-end fund or BDC should make its 80% investment rule a fundamental policy addressing investor protection. The shareholders don’t have the power to vote or exit the unlisted fund. 
  3. Every term used in the name of the Fund will be required to be defined in its prospectus as per the proposal. 
  4. This will be added to the list of criteria used by the fund to select the investments a term describes. 
  5. Whether it is the investment focus or that the fund is a tax-exempt fund, the proposal discusses the use of plain, standardized English terms to describe any aspect of the name. 
  6. The use of ESG or related terms in the fund’s name where the identified ESG factors do not play a crucial role in its strategy further deceives its investor audience. The names of the integration funds are also deemed to be misleading if it indicates one or more ESG factors drive that fund’s investment decisions. An integration fund is when ESG and non-ESG funds are considered no different from the other in a fund. 
  7. The proposal suggests an update to the names rule’s notice requirement. The update would address funds that provide information to its shareholders using electronic delivery systems. 
  8. A new reporting item concerning the fund’s name rule compliance is proposed. The proposal intends to amend Form N-PORT to clarify how the fund investment selection methods match the investment’s focus as suggested by the fund’s name. The new reporting item would indicate whether a fund in each portfolio is included in the fund’s 80% investment rule. 
  9. The proposal also aims to allow the commission, staff, and the fund’s compliance personnel to evaluate the fund’s compliance with the rules. 

With the proposed amendments to the rule under the Investment Company Act of 1940, the SEC aims to clarify the names of certain investment companies that are likely to mislead their investors. 

Funds will be required to tag new information, as per the proposal, using a structured data language called iXBRL. Inline XBRL tagging allows data aggregators to use automated systems to extract information for analysis which is believed to impact significantly investors and other market participants. It also makes reliable data easily accessible for research.

DataTracks helps you prepare your compliance reports in XBRL and iXBRL formats, which can be filed with the SEC hassle-free. With the outsourced services of DataTracks to help you with your regulatory filing, you can save time, reduce risks and produce error-free, compliant reports.

US EDGAR & iXBRL Reports