The US Securities and Exchange Commission (SEC) has introduced new rules that will require 80% of a sustainable fund’s portfolio to match the asset advertised by its name.
The action, which is the most sweeping overhaul for fund-labelling regulations in more than two decades, is an amendment of its “Names Rule,” first adopted in 2001.
The current version applies mostly to concrete terms such as bond or equity and explicitly excludes thematic investment strategies.
The proposed update, first mooted in May, expanded the reach to cover those focused on environmental, social and governance (ESG) investing.
The amendments are due to the rapid increase in investor interest as well as the proliferation of such funds.
A recent report by PwC predicts that ESG funds will surge to nearly $34trn in assets under management by 2026 as investors look to profit from a transition to green energy.
The aim of the US regulator is to prevent greenwashing or fund names from misrepresenting their inherent investments and risks.
“A fund’s investment portfolio should match a fund’s advertised investment focus,” said SEC chair Gary Gensler. “Such truth in advertising promotes fund integrity on behalf of fund investors.”
The SEC said the use of ESG-related terms such as “sustainable” or “green” present “particular investor protection concerns,” as “funds that consider ESG factors in their investment strategies comprise a thematic area that entails unique considerations!
It added that the new rules cover ” the use of terminology that may be especially powerful in fund names to attract investors.”
Funds would also be required to define the terms they use and explain the criteria for selecting investments in their disclosures.
The changes would mean that 76% of investment funds would be subject to the “Names Rule” up from the current 60%, SEC officials said prior to the vote.
The new rules have been divisive with some industry participants noting they are not needed and will discourage fund managers from giving their products descriptive names.
Trade groups have argued that the requirements would be impracticably subjective, cause confusion among investors, and encourage superficial judgments based solely on names.
“The rule sweeps more than three-quarters of all the funds in the US into its dragnet, going far beyond ESG funds—the supposed root of the rulemaking—with no justification,” Eric Pan, CEO of the Investment Company Institute, a major Washington funds group, said in a statement.
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