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The SEC’s “Name Rule” is a new tool in fighting greenwashing

On Behalf of | Jul 1, 2024 | Investigations & Regulatory Compliance

We’ve discussed “greenwashing” here in the past. The U.S. Securities and Exchange Commission (SEC) defines it as “the act of exaggerating the extent to which products or services take into account environmental and sustainability factors.” 

Some investment funds have been accused of greenwashing to attract people who want to invest in environmentally conscious businesses. They often emphasize their commitment to environmental, social and governance (ESG) goals.

Last fall, the SEC announced a new rule in its efforts to stop greenwashing and penalize those who are guilty of it. The new “Name Rule” mandates that the name of a fund accurately describes at least 80% of its portfolio.

The rule applies to other types of descriptors

This rule applies not just to names reflecting a fund’s commitment to ESG. It also addresses fund names that don’t accurately describe the financial or other characteristics of its investments. For example, words like “growth” can’t be used if at least 80% of a fund’s investments are aimed at providing steady income rather than growth. Artificial intelligence (AI) is a popular investment now, so funds can’t suggest that they focus on AI companies if they don’t.

Of course, the rule isn’t popular with everyone. The head of the Investment Company Institute said, “The only thing that this rule achieves is to insert the SEC deeper into funds’ investment decision-making processes.” 

The SEC did agree to give those who manage funds 90 days to change their names or take other corrective action if they’re determined to be in violation of the rule after pushback from their original 30-day timeframe.

Keeping up with SEC regulations can be essential to avoiding costly and time-consuming legal and regulatory issues. Having regular legal guidance can help companies avoid SEC actions in addition to advocating on their behalf if they are the subject of an investigation or action.