SEC Asks Whether It Should Eliminate Fund Names Rule
The SEC is soliciting comments on whether it should change or eliminate the mutual fund names rule (35d-1). The rule, which was adopted nearly 20 years ago, requires funds with names suggesting a certain investment or geographic focus to invest 80% of assets consistent with the name. The SEC recognizes that the advent of funds that use derivatives, index funds, and ESG strategies have made the names rule obsolete for a large swath of the fund industry. The SEC asks for input about whether to eliminate the rule altogether or significantly amend it. Section 35(d) generally prohibits the use of misleading fund names.
The names rule is a classic case of over-regulation that should be eliminated in favor of the general, principles-based prohibition on misleading fund names. To the extent that the rule ever made sense, it has certainly outlived its usefulness as fund structures and strategies have proliferated.