On May 25, 2022, the U.S. Securities and Exchange Commission (SEC or Commission), in a 3-1 vote, approved a proposal to expand Rule 35d-1 (the Proposed Names Rule) to cover funds that suggest they invest in assets that have specific characteristics, such as “growth,” “value,” or one or more environmental, social, or governance (ESG) factors. In addition, the rule would curtail adoption of names that suggest ESG investment strategies by ESG “integration funds.” Rule 35d-1 generally requires that a fund invest 80% of its assets in the investments suggested by its name, and the Proposed Names Rule would impose a firm 30-day time limit even on temporary departures from that 80% investment requirement resulting from market volatility, and would require including notional derivatives exposure when determining compliance. The Commission proposes new reporting requirements to demonstrate compliance.
In a separate proposal adopted the same day, the Commission proposed amendments to require specific disclosure of funds’ and investment advisers’ use of ESG factors as part of their investment decisions, which are described in a separate Sidley Update.
The Commission proposes to give funds one year from the date of publication of a final rule in the Federal Register for funds to come into compliance.
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