On September 20, 2023, the SEC issued a release (the "Release") adopting changes to Rule 35d-1 under the 1940 Act, as amended, (the "Names Rule"), and related form amendments. Largely consistent with the SEC's 2022 proposing release (the "proposing release"), the Release amends several aspects of the Names Rule, which dictates certain naming conventions for U.S. mutual funds.

Notably, the Release:

  • Modifies the Names Rule's 80% investment policy requirements;
  • Updates certain prospectus disclosure items;
  • Lays out mandates for the valuation of derivative instruments for purposes of determining compliance with a fund's 80% investment policy.

For a more detailed examination of those changes, please see the full Ropes & Gray client alert, and for more information on the increased liability risks created by the Final Rule, please see this Ropes & Gray client alert.

Many commentators and industry participants expected that the proposed changes to the Names Rule would have dramatically augmented regulatory guidance on ESG. For example, Bryan McGannon, managing director of The Sustainable Investment Forum, noted that if finalized as proposed, the new Names Rule would do "a lot of the heavy lifting on addressing the greenwashing objective." But were these ESG expectations borne out by the final Names Rule?

Some of these expectations can be credited to the timing of the proposing release. The proposing release was issued at the same time as the not-yet-finalized ESG disclosure proposal, which would require registered investment advisers and funds to disclose detailed information about their ESG investment practices.

Further, both releases proposed specific requirements for "integration funds," or funds that consider one or more ESG factors alongside other non-ESG factors in investment decisions. The proposing release would have prohibited the use of ESG or similar terms in an integration fund's name. While several similarities between the two proposing releases existed, the connection between the two was largely overstated. In actuality, aside from the integration funds issue, the Names Rule proposing release itself would not have had a significant effect on the ESG regulatory landscape.

The changes to the Names Rule confirmed that the Names Rule is not at its core an ESG rule. The SEC declined to formalize the aspect of the proposing release that would have prohibited the use of ESG terms in integration fund names, noting that "[b]ecause the proposed provision in the names rule mirrored the separate proposed definition of an integration fund in the ESG Disclosure Proposal, we are continuing to consider comments and are not adopting the proposed approach to integration fund names at this time."

The Final Rule did technically broaden the scope of Rule 35d-1's current 80% investment policy requirement to apply to fund names with terms suggesting that the fund focuses in investments with particular characteristics including, for example, ESG-related terms. However, this change was not surprising, as the disclosure staff in the SEC's Division of Investment Management have been making comments to this effect on ESG fund launches for the past several years.

In sum, the proposing release would not have been an ESG rule and would not have dramatically changed regulatory guidance on ESG, even at the time it was proposed. The final form of the Names Rule further pared back the rule's most ESG-related item. Despite being conflated with the ESG Disclosure Rule, the proposing release only would have added the prohibition on the use of ESG terms in integration fund names—one change among dozens of other non-ESG related amendments.

Ultimately, the Final Rule merely formalizes a practice that has been building for several years through the SEC disclosure staff comment process. In short, the final Names Rule is the ESG rule that wasn't.

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