Today [September 20], the Commission is considering final rules to update the Names Rule. I am pleased to support this rule adoption because it will help ensure that a fund’s portfolio matches a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.

The Names Rule reflects a basic idea: A fund’s investment portfolio should match a fund’s advertised investment focus. In essence, if a fund’s name suggests an investment focus, the fund in turn needs to invest shareholders’ dollars in a manner consistent with that investment focus. Otherwise, a fund’s portfolio might be inconsistent with what fund investors desired when selecting a fund based upon its name.

In crafting the federal securities laws, Congress understood the importance of how funds describe themselves—including through the names they choose. Thus, in the Investment Company Act of 1940, Congress included fund naming provisions. In 1996, Congress amended these provisions to authorize the Securities and Exchange Commission to define registered investment company names as “materially deceptive or misleading.”[1]

Based on our authority from Congress, the agency adopted the Names Rule in 2001.[2]

Under the current Names Rule, if a registered investment company’s name suggests it has a focus in particular investment types, industries, or geographies, or that it has tax-exempt status, the fund must adopt a policy to invest at least 80 percent of the value of its assets consistent with its name.

As the fund industry has further developed over the last two decades, however, gaps in the current Names Rule may undermine investor protection. In particular, some funds have claimed that the rule does not apply to them—even though their name suggests that investments are selected based on specific criteria or characteristics.

Today’s adoption will modernize the Names Rule in a number of ways for today’s markets. Let me highlight just four of them.

First, among other requirements, the final rules will broaden the scope of applicability of the Names Rule, including its 80 percent requirement. The updated rule will apply not only to funds whose names suggest a focus in particular investments, industries, or geographies—but also to funds whose names suggest a focus in investments with particular characteristics. This includes names suggesting an investment focus on Environment, Social, and Governance (ESG)-related factors, through names such as “sustainable,” “green,” or “socially responsible.” This also includes names suggesting a focus on particular characteristics like “growth” and “value.” Further, the updated rules also will cover thematic names, such as those that reference popular economic themes or investment strategies—like artificial intelligence, big data, or health innovation.

Second, the final rules will require funds that depart or drift from the 80 percent requirement to come back into compliance in a timely manner—in most cases, within 90 days. The time to come back into compliance was extended from the proposal, which would have required funds to do so generally within 30 days.

Third, as proposed, the final rules will enhance transparency regarding how a fund’s investment methods match its name. Specifically, the rules will require a fund to disclose how it defines the terms in its name and selects investments in line with its name. The final rules also will require a fund to indicate on periodic reports which holdings count toward the 80 percent requirement.

Fourth, the final rules will address how funds account for any use of derivatives. Funds will be required to use the notional amount of derivatives, rather than the market value, for determining compliance with the 80 percent requirement.

Comments on one aspect of the May 2022 proposal still are being considered by staff. With respect to ESG, the original proposal sought effectively to prohibit the use of ESG-related terms in funds’ names if those funds consider ESG factors along with, but not more significantly than, other factors. I look forward to staff recommendations regarding this remaining aspect of the proposal.

These final rules will help ensure that a fund’s portfolio aligns with a fund’s name. That benefits investors and issuers alike.

I’d like to thank the members of the SEC staff who worked on this adoption, including:

• William Birdthistle, Sarah ten Siethoff, Brian Johnson, Amanda Hollander Wagner, Brad Gude, Blair Burnett, Mykaila DeLesDernier, Pamela Ellis, Mike Spratt, and Michael Kosoff in the Division of Investment Management;
• Jessica Wachter, Alexander Schiller, Ross Askanazi, Justin Vitanza, Lauren Moore, Charles Woodworth, Robert Girouard, Julie Marlowe, and Parhaum Hamidi in the Division of Economic and Risk Analysis;
• Megan Barbero, Meridith Mitchell, Natalie Shioji, Monica Lilly, Amy Scully, and Alice Wang in the Office of the General Counsel;
• Elizabeth Pflaum and Susan Weiss in the Division of Examinations; and
• Charlotte Buford and Salvatore Massa in the Division of Enforcement.