SEC cracks down on fund greenwashing with name rule change

October 2, 2023|Written by |Securities & Exchange Commission

The US Securities and Exchange Commission adopted a new rule on 20 September to help crack down on greenwashing and other misleading marketing practices by investment funds.

The “names rule” changes mean that investment fund names must match 80% of the fund’s portfolio. This includes fund names that suggest an investment in certain areas, like ESG, or with certain characteristics like growth or value.

“As the fund industry has developed over the last two decades, gaps in the current names rule may undermine investor protection,” SEC chair Gary Gensler said in a press release. “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”

About 76% of investment funds will be subject to the names rules, compared to 60% before the change. The new amendments also require a quarterly fund review. Fund managers will have 90 days to comply if the fund dips below the 80% investment policy. In addition, a fund’s name must be consistent with plain English or established industry use.

Investment lobby groups have spoken out against the names rule change, which was first announced in May 2022, saying it would be subjective and cause confusion among investors.

Eric Pan, CEO of the Investment Company Institute, said in a statement that the adopted rules have nothing to do with ESG.

“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… The only thing that this rule achieves is to insert the SEC deeper into funds’ investment decision-making processes,” he said.

The SEC has been cracking down on ESG misconduct and greenwashing in the past few years. The regulator recently settled with the investment arm of Deutsche Bank for US$19mn over allegations that it overstated how it used ESG factors in its funds.

The SEC is also expected to announce its final rule on climate-related disclosures but has not yet given a timeline. Gensler told the Senate banking committee during a hearing earlier this month that it would be released when SEC staff are ready. The agency is particularly focused on how it will handle scope 3 reporting as “really important issues have been raised”, such as reporting unreliability and the impact on smaller firms, he added.

This page was last updated October 2, 2023

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