The U.S. Securities and Exchange Commission (SEC) tightened rules to enforce greater alignment between a fund's name and its portfolio, in a move that could impact 75% of investment funds in the U.S. managing trillions of dollars in assets.

In a 4-1 vote on Wednesday, the SEC broadened the scope of the 2001 Names Rule to include funds with a thematic investment focus, such as growth, value, or ESG investing. It will also include current popular themes such as artificial intelligence, big data, or health innovation. The existing rule required funds to invest at least 80% of their assets in the type of investment or asset class most closely associated with the fund's name.

Why Does This Matter?

When you're looking at funds to invest in, the first piece of information you notice about a fund is its name. While you should delve deeper into the fund 澳洲幸运5官方开奖结果体彩网:prospectus to understand its investment strategy, some fund names, according to the SEC, can "mislead investors about a fund’s investments and risks."

The SEC's new rules could impact roughly three-quarters of U.S. investment funds, which together hold trillions of dollars in combined 澳洲幸运5官方开奖结果体彩网:assets under management (AUM). They would impact not just ESG-oriented funds, but any fund that uses terminology like "growth" or "value" in its name and tailors its investments to a specifiꦬc theme.

By specifically calling out ESG funds, the regulator has also attempted to target 澳洲幸运5官方开奖结果体彩网:greenwashing, or overblown claims about the alignment of a fund's investments with 澳洲幸运5官方开奖结果体彩网:environmenꦚtal, social, and governance (ESG✨) goals.

The amended rule also requires funds to perform a quarterly review of their portfolios to ensure compliance with the 80% rule. Any fund t🦩hat deviates from that threshold under the Names Rule would have 90 days to get back in compliance and report their investments to the SEC.

Funds with net assets of $1 billion or more will have 24 months to comply with the amendments, while those with less than $1 billion will have 30 months to comply.

What Has the Response Been?

Backers of the SEC's new rule say it will help crack down on overblown claims about funds' commitment to ESG, and that updates to fund-naming conventions are necessary due to industry changes over the past two decades.

However, the rule changes have attracted widespread criticism from investment funds, investor advocacy groups, and fund associations like the 澳洲幸运5官方开奖结果体彩网:Investment Company Institute (ICI).

Eric Pan, President and CEO of ICI, said the rule changes "go far beyond ESG funds—the supposed root of the rulemaking—with no justification," and would only serve to "insert the SEC deeper into funds’ investment decision-making processes."

"Portfolio managers won't be able to make routine investments without the SEC second-guessing whether it fits neatly with the subjective terms that make up their fund’s name. This will hurt American retail investors," Pan said.

However, regulators disagree.

"Even though the government regulates the ingredients of peanut butter, the peanut butter aisle at my local supermarket still has chunky, smooth, creamy, and natural options, and I’m sure the same will remain true of investment funds; far from promoting homogeneity, these changes will help investors find a range of different funds by allowing them to be sure that they know what they are buying," said SEC Commissioner Caroline Crenshaw, who voted in favor of the rule change.

Vanguard, one of the nation's biggest funds with $7.2 trillion in assets under management, offered a more conciliatory tone, saying in an email that it "supports disclosure that provides investors with clear and objective standards and facilitates informed investment decision-making."

BlackRock did not respond to a request f🐼or comment.