Opinions vary on the SEC’s choice to expand the scope of its Names Rule — while some industry players feel the new rule will help prevent misleading fund names, others say it will be a disruption to the industry.

According to SEC Chair Gary Gensler, the rule amendments “will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors,” he said in a news release Sept. 20 when the amendments were adopted.

The Names Rule, which the SEC originally adopted in 2001, requires that funds with certain names — such as those specifying a type of security, industry or geographic area — invest 80% of their assets in the investments the name conveys. The new rule expands that requirement to any fund name with “particular characteristics,” such as those with the terms “growth” and “value,” or terms indicating that the fund invests with environmental, social and governance factors in mind.

Some industry groups, especially those with an environmental focus, view the rule as a step in the right direction to prevent greenwashing — when companies falsely claim they’re focused on “green” practices. However, others say it will cause significant issues for the investment industry.

“The only thing that this rule achieves is to insert the SEC deeper into funds’ investment decision-making processes,” said Eric Pan, president and CEO of the Investment Company Institute, a trade association representing regulated investment funds, in a Sept. 20 statement. “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 rule is going to present a real compliance burden for investment funds going forward,” said Abigail P. Hemnes, a partner in K&L Gates’ asset management and investment funds practice group.

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