On May 25, 2022, the U.S. Securities and Exchange Commission (“SEC”) issued two ESG related proposals applicable to investment funds. The first proposal pertains to amendments to the Fund “Names Rule”, which adds new requirements for funds that consider ESG factors in their investment practices. The second proposal requires enhanced ESG disclosures by investment Advisers and Investment companies. The proposed changes have been published in the Federal Register and the last date for receipt of comments is August 16,2022.
This article focuses on the first proposal – Amendments to the Fund “Names Rule”. The details about the second proposal can be accessed here.
Background
SEC’s “Names Rule”, which has been around since 2001, was implemented in order to ensure that a fund’s name accurately reflects the fund’s investments and risks. This includes an 80% policy, which requires that under normal circumstances, funds with certain names should adopt a policy to invest at least 80 percent of the assets in a fund’s investments suggested by that name.
Proposed Amendments
Some of the proposed key amendments to the Names Rule related to ESG Funds are as follows.
- Modernization of the 80 percent Investment Policy Requirement
The amendment aims at expanding the “Names Rule” to Funds that use ESG related terms in the fund title. In order to determine a fund’s compliance with the 80 percent investment policy, a fund will be required to use a derivatives instrument’s notional amount, rather than its market value.
- Temporary Departures from a Fund’s 80 percent Investment Policy
Sudden changes in market value of the underlying investments of a fund can lead to situations where the 80 percent investment policy requirements may not be satisfied. The amendment provides the circumstances under which such deviations are allowed.
- Unlisted Closed-End Funds and BDCs
Any changes to the 80 percent investment policy for non-listed funds (registered closed-end fund or Business Development Company-BDC) cannot be changed without a shareholder vote.
- Enhanced Prospectus Disclosure, Reporting, and Recordkeeping
The amendment proposal requires disclosures at two levels – upfront, and recurring. The upfront disclosures are to be included in the Prospectus of the Scheme and the recurring disclosures should appear in the periodic reports of the ESG funds. The performance of a fund vis-à-vis its investment focus should be made available in the periodic reports. Documentation on compliance of the rule or the justification for exemption from the rule should be maintained.
- Materially Deceptive and Misleading Use of ESG Terminology
Funds that consider ESG factors just like non-ESG factors in their investment decisions are not allowed to use ESG or similar terminology in its name. Doing so would be deemed to be materially deceptive or misleading.
The amendments proposed by the SEC rule on the Fund “Names Rule” can be accessed here.
About NordESG
NordESG is an advisory firm helping corporates develop, articulate and execute their ESG and sustainability strategies. Our work includes sustainability performance reporting support under various ESG frameworks, strategy development or conducting materiality assessments. By doing so, we help businesses meet their disclosure compliance requirements like CSRD but also help them proactively communicate their strategy to other stakeholders like investors, customers and local communities in which they operate. Our work is focused mainly on Europe and North America. You can get in touch by e-mail or book a free discovery call by following this link.
