SEC revisits ‘names rule' to address growth of ESG, other funds

The Securities and Exchange Commission on Monday asked for input on how it should update rules that guard against misleading fund names, including those billed as ESG.

It is also considering changes to address increased use of derivatives, rapid growth in index funds, and investments with convertible securities resembling debt and equity.

Another question posed is whether funds describing themselves as "global" or "international" should be required to invest a certain percentage of assets in a minimum number of countries or minimum percentage of assets outside of the U.S.

Adopted in 2001, the "names rule" requires a fund that focuses on a particular type of investment such as stocks or bonds to invest at least 80% of its assets in them. Before the rules, SEC staff guidance typically set a 65% threshold. SEC Chairman Jay Clayton said in a statement that the move is part of efforts "to better inform and protect Main Street investors and improve the investor experience."

In the case of investments marketed as ESG or sustainable, the SEC posed numerous questions on how the names rule should apply, and if investors are relying on the terms as indicators of a type of asset, such as carbon-neutral, or strategy.

If investor perceptions are unclear, the SEC wants to know if there should be specific requirements on when a fund can be characterized as ESG or sustainable. For funds with ESG products already subject to the Names Rule, the SEC asks how they should determine whether a particular investment satisfies one or more environmental, social or governance factors, and if it is consistent across similarly named funds.

"Instead of tying terms such as 'ESG' in a fund's name to any particular investments or investment strategies, should we instead require funds using these terms to explain to investors what they mean by the use of these terms?," the SEC asked.

Upon publication in the Federal Register, the request for public comment will be open for 60 days.