SECURITIES CORNER

Recently, the SEC adopted new amendments to the two-decade-old regulation known as the “Names Rule,” which will bring more investment funds under the regulation of the SEC. The purpose of the Names Rule is to ensure that registered funds do not use names that are deceptive or inconsistent with their investments. The new amendments will require investment funds to put 80% of their assets toward the cause suggested by their name. For example, the increased regulations are expected to affect the funds with names signifying a particular focus or characteristic, funds that incorporate one or more environmental, social, or governance (“ESG”) factors into their investment decisions, and those that use terms “sustainable,” “green,” or “socially responsible” and alike. 

The amendments aim to promote truth in advertisement and prevent “greenwashing,” the practice of claiming that one’s practices, products, or services are more environmentally friendly or sustainable than they really are. The SEC noted that the amendments will provide investors with clarity. The amendments should also enhance investing experience at a time when the increasing popularity of ESG investment products has been accompanied by a “concerning” trend in disclosures that “fail to accurately support the underlying investment.” The amendments will become effective for all registered funds, including existing funds, 60 days after publication of the final rule in the Federal Register, depending on the fund’s size

The SEC recently issued a risk alert, which outlined the factors the SEC will take into consideration when selecting registered investment advisers (“Advisers”) to examine. These examinations are a part of the SEC’s risk-based approach that is meant to adapt to market changes, industry practices, and investor preferences. 

The alert provided the process for selecting Advisers, how the SEC determines the focus area of the exam, and the documents required from the Adviser. The purpose of this alert is to provide Advisers with the risks and issues the SEC has identified so Advisers can prepare if they are selected for an examination as well as assist firms in their compliance efforts. 

An Adviser may be chosen for an examination based on 1) the firm’s risk characteristics; 2) tips, complaints, or referrals about a firm; and 3) the SEC’s interest in a particular compliance risk area. The SEC outlines which firm-specific risk characteristics they may take into consideration when making their determinations which include, but are not limited to, conflicts of interests, an Adviser’s particular business activities, and regulatory history. 

Prior to their examinations, the SEC will typically send each Adviser a letter notifying them of the examination and provide them with an initial list of requested information, including documents that the SEC intends to review. The initial information requested would likely consist of general inquiries regarding the adviser’s business, compliance risks, and written policies and procedures. 

The purpose of the examinations is to assess an Adviser’s risk, potential conflicts, and overall compliance. Now, with the SEC’s specific parameters regarding examinations, each Adviser can properly prepare itself for such an examination.