In November 2013, the Staff of the Division of Investment Management of the SEC published a Guidance Update encouraging investment advisers and fund directors to carefully consider whether a name change is appropriate for any fund name that suggests protection from loss or safety. The Staff believes that when a fund uses a name suggesting protection, such as “guaranteed,” “protected” or similar terms, without some additional qualification, and even with adequate prospectus disclosure regarding the limitations of such protection, investors may conclude the fund offers greater protection from loss than is the case. As a result, the Staff’s heightened scrutiny of fund names has led to requests for existing and new funds to change their names to eliminate or minimize the potential for investor misunderstanding.
The Guidance Update describes two particular types of funds that have raised recent concerns. The first category includes funds that seek to manage volatility by investing a portion of their assets in cash, short-term fixed income instruments, short positions on exchange-traded futures or other investments. The Staff believes funds that have “protected” in their names and invest in this manner may be misleading investors because the degree to which a managed volatility strategy may succeed or fail is uncertain. The Staff suggests replacing the term “protected” with “managed risk” to address this concern. The other category includes funds using “protected” in their names that enter into third party contracts to make up a shortfall in net asset value. The Staff notes that such funds typically remain subject to the credit risk of any third party protection provider and the protection often includes contractual limits on the amount or duration of protection provided. The Staff also notes that it has failed to identify any fund names using the term “protected” under these circumstances that have adequately communicated these limitations to shareholders.
The Guidance Update is available at www.sec.gov/divisions/investment/guidance/im-guidance-2013-12.pdf.