The SEC Wants to Update the Names Rule, What Does It Mean?

SEC Goes After Fund Names

SEC Goes After Fund Names

“A rose by any other name would smell as sweet,” quoth Juliet to her Romeo. But would she have said the same of a small-cap value fund? The Securities and Exchange Commission (SEC) is not so sure.

Gary Gensler, who was appointed to chair the financial industry’s federal watchdog in February 2021, has come out swinging, with the agency proposing a spate of new rules that are already attracting controversy, particularly for their impact on environmental, social and governance (ESG) investment strategies.

But one of the latest proposals could have far broader implications: A newly stringent “truth in labeling” rule would require all funds to ensure that their portfolio holdings are consistent with what the fund’s name suggests they would be. The change could prompt every fund provider to reevaluate their product names and the underlying strategies or face censure.

If this updated “names rule” goes into effect, fund companies could only use labels like “Global Growth” or “Multi-Asset Income” or “Sustainable” if at least 80% of their assets align with that strategy. That’s a much tougher standard than the current names rule, which includes sectors and regions (e.g., a China bond fund must be 80% invested in that country) but which allows funds much greater leeway to drift from their named strategy.

The intent is to make sure investors always get what they’re paying for and help eliminate the risk of portfolio drift (which occurs when a fund’s managers seek improved performance by gradually widening the types of securities they invest in without changing the fund’s name to match).

The proposal could certainly cause some headaches for fund managers if it is fully implemented as written. In recent years, Fidelity and Vanguard have both launched several “thematic” and “factor” funds, whose broad investment mandates may be especially slippery to bring into compliance.

Fidelity has a suite of 25 such thematic funds and exchange-traded funds (ETFs) in its stable, along with 23 sustainable mutual funds and ETFs, including the Fidelity Healthy Future Fund, which launched last month (in case you were wondering, Fidelity defines “healthy future” companies as those that contribute to wellness, health and life expectancy).

The Boston-based fund giant claims that a majority of its thematic funds already meet the SEC’s labeling guidelines but that they may have to modify some fund names to comply with the rule. Given the proliferation of thematic funds opening to investors industrywide in recent years, Fidelity won’t be alone on that front should the updated rule go into effect.

Chart of the Week: How Low Will Sentiment Sink?

Consumer & Businesses Sour on Road Ahead
Note: Chart shows index levels for the University of Michigan Consumer Sentiment index (12/31/1978 through 6/10/2022) and the National Federation of Independent Business’ (NFIB) Small Business Outlook for General Business Conditions index (12/31/1978 through 6/10/2022). Data is quarterly from 1978 through 1985 and monthly thereafter. Source: Bloomberg.

Director of Research Jeff DeMaso:

It feels like everyone’s got a frown on their face lately.

The University of Michigan has been asking consumers how they feel about the economy for decades. The response this month was the most pessimistic ever recorded. You read that right: Consumers are more concerned today than they have been at any point since the 1970s. And that period includes some episodes of major turmoil, such as the bursting of the tech bubble, the 9/11 attacks, the global financial crisis and the COVID-19 pandemic—to name but a few.

It’s not just consumers, though. Small business owners are also worried about the road ahead. According to the National Federation of Independent Business, which has also been running a survey since the 1970s, business owners are more concerned about the next six months than they’ve ever been!

On the one hand, these negative views could be self-fulfilling, impacting our behavior and resulting in the very recession that people fear is coming.

On the other hand, it means that expectations are really low—it wouldn’t take much in the way of good news to turn sentiment. I’d argue that things don’t necessarily have to improve by much to see public opinion shift for the better.

Sentiment is often a noisy indicator, but at extremes it can signal the economy or the markets may be near a turning point. Businesses and consumers think conditions are worse than they’ve ever been…maybe that’s reason for some optimism?

Podcast: Navigating the Bear Market

The bear is back. Is a recession close behind? Or are we in one already and just don’t know it? And will inflation ever come down? It’s been a bruising ride for investors so far in 2022, and the Federal Reserve’s sought-after soft landing seems ever more unlikely. Portfolio Manager Steve Johnson and Chairman Dan Wiener talk about the reasons behind this broad sell-off and whether there’s any light at the end of this tunnel. Topics include:

  • Can the Fed tame inflation?
  • Will bonds continue to underperform in this environment?
  • Are there areas of the market that look attractive?

Making it through a bear market takes grit and determination. But there’s every reason to believe we can make it through this one. Dan and Steve explain what’s different this time and how investors can keep their eyes on the prize. Click here to listen now!

Adviser Investments’ Today’s Market Takeaways

In our most recent Market Takeaways videos, Portfolio Manager Steve Johnson offered his thoughts on why fear is not an investment strategy, while Senior Research Analyst Liz Laprade discussed crypto crashes and investor trust.

We hope you find these episodes engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to!

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