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Financial regulators are cracking down on misleading fund names. The Securities and Exchange Commission (SEC) recently adopted rules to prevent, among other things, misleading or deceptive claims by funds that use ESG factors — short for environmental, social and governance — when making investments. Per the SEC, a "fund’s name is an important marketing tool and can have a significant impact on investors’ decisions when selecting investments."
The rules come amid mounting concerns that some funds have misled shareholders over what’s in their holdings, a practice known as 'greenwashing' in order to cash in on the popularity of ESG investment strategies, a $2.8 trillion asset class now.
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The rules broaden existing requirements governing fund names. Under a 2002 rule, if a fund name suggests a focus on certain asset classes or regions, it must invest at least 80 percent of its holdings in such assets. Since then, the size of assets in funds has grown from $7.2 trillion to $28.2 trillion, and fund names have morphed to reflect so-called thematic strategies.
The new SEC rule extends the 80 percent requirement to descriptive language in many fund names, such as growth, value and ESG, but funds can still come up with their own definition for ESG. So, some critics say the SEC rules will do little to curtail greenwashing by unscrupulous managers.
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