In recent years, the SEC’s Division of Corporate Finance and Office of Capital Market Trends have addressed issues relating to potentially misleading names for structured notes. This issue was particularly relevant to notes with a name that included a phrase such as “principal protected.”
Now, it’s the Division of Investment Management’s turn. The division is addressing funds using names that suggest safety or protection from loss.
In Guidance Update No. 2013-12, the staff stated that fund names suggesting safety or protection from loss may contribute to investor misunderstanding of investment risks. The staff said that it recently requested that some existing and new funds change what it believes were misleading names. The staff encourages funds that expose investors to market, credit or other risks, and whose names suggest safety or protection from loss, to reevaluate their names.
In particular, the staff raised concerns about funds with names that include the terms “protected,” “guaranteed” and the like, when used “without additional qualification.” High on the staff’s watch list are funds that use the term “protected” in their names and seek to manage volatility by investing a portion of their assets in cash, short-term instruments or short positions on exchange-traded futures.
Funds that offer third-party principal protection against NAV shortfall also concern the staff. The staff said that funds that contract with third parties to make up NAV shortfalls should not use the term “protected,” unless the fund’s name adequately communicates the limitations of the “protection.” It is not enough, the staff cautioned, merely to disclose the limitations of third-party protection in the text of the prospectus. Rather, the name itself must reveal those limitations.
In conclusion, the staff encouraged investment advisers and funds’ boards of directors to carefully evaluate any fund name that suggests safety or protection from loss. These funds may consider whether a name change is appropriate to address any potential for investor misunderstanding.