June 16, 2024
Volume XIV, Number 168
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SEC Approves "Names" Rule to Combat Greenwashing
Wednesday, September 27, 2023

On September 20, 2023, the SEC approved amendments to the "Names Rule," which were initially proposed in May 2022.  Although the stated "purpose of the Names Rule," according to the accompanying Fact Sheet distributed by the SEC, "is to prevent fund names from misrepresenting the fund's investments and risks," primarily by requiring investment funds to "adopt a policy to invest at least 80 percent of their assets in accordance with the investment focus the fund's name suggests"--a rule with apparently general application--the SEC has made it clear that a key target of this new rule is the recent phenomenon of greenwashing, in which investment funds falsely claim to be environmentally-friendly in their activities (or to a greater degree than justified by the facts). 

The focus on greenwashing--indicated by a reference to "Environmental, Social, or Governance factors" in the SEC's press release--is made clear by the comments by Democratic SEC Commissioner Lizarraga upon the publication of the rule.  Specifically, Commissioner Lizarraga states that "[t]he rise in investor-driven demand for ESG products has been accompanied by a concerning trend in disclosures that fail to accurately support the underlying investment mix--often referred to as 'greenwashing' . . . [and] [o]ur reforms today provide clarity to investors and enhance the investor experience by preventing a fund from calling itself a name that is misleading, deceptive, or inconsistent with its investments."

In essence, the SEC has just followed-through on one of its major ESG-related initiatives--it has now published the "Names Rule," which is intended the combat the phenomenon of greenwashing among investment funds.  This action by the SEC demonstrates its commitment to the Biden Administration's ESG goals, and further indicates that additional ESG-related action is likely to occur soon. 

The Securities and Exchange Commission today adopted amendments to the Investment Company Act “Names Rule,” which addresses fund names that are likely to mislead investors about a fund’s investments and risks. The amendments modernize and enhance the Names Rule and other names-related regulatory requirements to further the Commission’s investor protection goals and to address developments in the fund industry in the approximately 20 years since the rule was adopted.

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