On Wednesday the SEC adopted amendments to the “Names Rule” that are meant to promote “truth in advertising” according to SEC Chair Gary Gensler. Specifically, the amendments require funds with names that reference a thematic investment focus (such as incorporation of Environmental, Social, and Governance (“ESG”) factors), or that suggest an investment portfolio with certain characteristics (such as “growth” or “value”) to invest at least 80% of the value of their assets in those named focus areas.

The SEC “Names Rule” was first adopted in 2001, but since then there are has been huge growth in the fund industry, with more than 100 million individuals now invested in funds and tens of trillions of dollars in assets under management. The amended Names Rule is meant to respond to this industry growth. In particular, there has been a rise in popularity of “ESG” or “sustainable” investment offerings, and the SEC has expressed concern about “greenwashing,” or investors being misled about exactly how sustainable their investments are. The SEC has even established an enforcement Task Force to target ESG-related misconduct. The SEC Names Rule amendments are also part of a wider effort to increase climate risk disclosures – for example, the California legislature recently passed two bills (SB-253 and SB-261) that, if signed by the governor as expected, would require certain companies to disclose their greenhouse gas emissions and climate risks, and the SEC’s own proposals for similar disclosures from companies and investment advisers on that front are still pending.

In order to adhere to the 80% requirement mentioned above, Funds will need to review their portfolio assets on a quarterly basis. If they find they are not in compliance, they have 90 days to remedy the issue (or they can change their name). The amendment also has enhanced prospectus disclose requirements. If a Fund’s name suggests an investment focus, then that focus must comport with the plain English meaning or established industry use of the words in the name. Funds must also define in its prospectus the terms used in a Fund’s name. The rule will become effective 60 days after its publication in the Federal Register, and Funds with net assets of $1 billion or more will have 24 months to comply, while smaller Funds with assets of less than $1 billion will have an extended runway of 30 months to comply.