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What's in a Name? SEC Seeks Comment on Rules Regarding Investment Company Names, Continues Focus on ESG

The Securities and Exchange Commission ("SEC") considers environmental, social, and governance ("ESG") terms in reviewing the framework for registered investment company names.

On March 2, 2020, the SEC published a request for comment ("Request") on the framework for evaluating requirements for registered investment companies' names.

Section 35(d) of the Investment Company Act of 1940 ("ICA") prohibits a registered investment company from adopting a name that includes words the SEC deems materially deceptive or misleading. The SEC adopted Rule 35d-1 ("Names Rule") under the ICA in 2001 as an investor protection measure designed to help ensure that investors are not misled or deceived by a fund's name. The Names Rule bans certain names such as a name suggesting a guarantee by the United States government. For a registered investment company with a name that suggests a particular type of investment, the Names Rule requires the fund to adopt a policy to invest at least 80% of its assets in the type of investment, industry, country, geographic region, or tax exemption suggested by its name. Although not directly applicable to them, some private fund managers use the Names Rule as an informal guide in connection with naming the private funds they manage.

The SEC published the Request to obtain industry input regarding the effectiveness of the Names Rule in monitoring materially deceptive or misleading names and whether there are more effective alternatives that the SEC should consider. As part of its review of the Names Rule, and in line with SEC commentary regarding advisers' ESG practices, the SEC requested comments on how to treat ESG practices for purposes of the Names Rule or if a different framework is more appropriate for ESG products. 

SEC staff seeks input on, for example, whether the Names Rule should apply specific requirements on when an investment may be characterized as ESG or sustainable and, if so, what those requirements should be. Staff also asks whether registered funds should be limited in characterizing their investments as ESG or sustainable and whether a registered fund using "ESG" in its name must make investments that meet each of the ESG factors. 

Registered funds and their investment advisers should review the Request to get a sense of the questions the staff is considering with respect to the Names Rule. In addition, investment advisers should be aware that the SEC staff is looking closely at how registered investment companies are using ESG nomenclature in their names and considering whether related policies, procedures, and investment criteria are appropriate. Comments are due to the SEC by May 5, 2020.

This SEC Request is consistent with what we have seen from regulators around the world. For Jones Day ESG Insights on these and other topics, please visit our ESG page.

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