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“Fat-Free” ESG: SEC Proposes Rule Changes Related to Fund Names and Fund and Adviser Disclosure Related to ESG Investment Strategies

June 03, 2022
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On May 25, 2022, the U.S. Securities and Exchange Commission (SEC), in 3-1 votes,1 proposed (1) amendments to Rule 35d-1 (the Names Rule) under the Investment Company Act of 1940 (the Names Rule Proposal)2 and (2) disclosure requirements for registered investment funds and investment advisers related to environmental, social and governance (ESG) investment strategies (the ESG Proposal).3 The Names Rule Proposal would expand the scope of terms subject to the Names Rule to include those that suggest that a fund focuses on investments that have, or investments whose issuers have, particular characteristics, would set limitations on the ability of a fund to depart from its investment policy under the Names Rule, and would modify certain other requirements of the Rule. The ESG Proposal mandates certain prospectus and/or annual report disclosure for investment companies and Form ADV disclosure for investment advisers that consider ESG as a part of their investment process. The SEC generally proposes a one-year transition period to come into compliance with the rules if adopted.4 Public comments on the Names Rule Proposal and the ESG Proposal must be received 60 days after publication of each Proposal in the Federal Register. Full article...

1 Commissioner Peirce dissented from both proposals. With respect to the Names Rule Proposal, Commissioner Peirce stated, among other objections, that the application of the Names Rule to terms such as ESG, growth, or value would be subjective and that the Names Rule as proposed would provide undue constraints on investment companies. Hester M. Peirce, Commissioner, SEC, Statement on Investment Company Names (March 25, 2022). Commissioner Peirce objected to the ESG Proposal, stating, among other objections, that the SEC already has a solution to prevent misleading disclosure, that the ESG Proposal is too inflexible, and that investment companies do not have the data necessary to make certain required disclosures. Hester M. Peirce, Commissioner, SEC, Statement on Environmental, Social, and Governance Disclosures for Investment Advisers and Investment Companies (March 25, 2022) (Statement).

Investment Company Names, Release No. IC-34593 (March 25, 2022).

4 Funds would have 18 months to come into compliance with the shareholder report disclosure requirements of the ESG Proposal.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

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