Today, the SEC issued two supplemental press releases announcing certain proposed rules. First, the SEC announced “proposed amendments to improve and modernize the investment company law ‘name rule'” that “would extend the requirement to any fund name with language suggesting that the fund focuses on investments that have (or whose issuers have) particular characteristics . . . include[ing] fund names with terms . . . indicating that the fund’s investment decisions incorporate one or more environmental, social or governance factors.” In other words, if the name of an investment fund indicates that it is a ” green”, then the investments made by this fund must reflect “green investment”.

Second, the SEC announced “proposed changes to rules and reporting forms to promote consistent, comparable, and reliable disclosure for investors regarding funds’ and advisers’ integration of environmental, social, and governance (ESG) factors. )”. Specifically, these “proposed amendments seek to categorize certain types of ESG strategies broadly and require…more specific disclosures…based on ESG strategies [that funds and advisers] continue.” For example, “[f]Those that focus on environmental factors would generally be required to disclose the greenhouse gas emissions associated with their portfolio investments. In other words, the SEC requires investment funds to provide information demonstrating that these investment funds are indeed following their stated ESG strategy.

Together, these two proposed rules effectively compel ESG investment funds to meet their stated objective. The SEC’s proposed disclosures would ensure that ESG investment funds demonstrate that they are indeed ESG investment funds, and the change to the naming rule would prevent any non-ESG investment fund from adopting an ESG label.

These proposed rules reflect the SEC’s concern over greenwashing, in which companies inappropriately claim they meet certain environmental criteria — when in fact they don’t. To illustrate this enforcement priority, earlier this week the SEC settled a $1.5 million case against an investment adviser who had “represented or implied in various statements that all investments in the funds had subject to an ESG quality review, although this was not always the case.” And that concern about greenwashing is shared by other governments, including the UK, which identified the issue as a regulatory priority last October.

The name rule currently requires registered investment companies whose names suggest a concentration on a particular type of investment (among other things) to adopt a policy of investing at least 80% of the value of their assets in such investments (a “policy of ‘80% investment’). The proposed changes would strengthen the rule’s protections by requiring more funds to adopt an 80% investment policy. Specifically, the proposed amendments would extend the requirement to any fund name with language suggesting that the fund focuses on investments that have (or whose issuers have) particular characteristics. This would include fund names with terms such as “growth” or “value” or terms indicating that the fund’s investment decisions incorporate one or more environmental, social or governance factors.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.National Law Review, Volume XII, Number 146