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The SEC’s Potential Thorn for Thematic ETFs, VettaFi

June 13, 2022

The US Securities and Exchange Commission (SEC) recently proposed amendments to enhance and modernize the Investment Company Act of 1940 Names Rule to address and prevent misleading or deceptive fund names. One change calls for the expansion of the so-called “80% rule,” whereby a fund that uses a specific descriptor in its name must have at least 80% of its holdings directly connected to that descriptor. As it currently stands, the rule affects funds named after a specific sector or geography. The proposal would expand the rule to include strategies, factors, and other investing terms with less universally defined meanings.

Speaking with VettaFi about fund compliance under the proposed rules, of counsel Abby Bertumen said that “you’re going to have fund names that are not related at all to the underlying products, that are more generic, more neutral. . . . If text analytics is the only thing they’re relying upon, they’re just going to have to get more creative in terms of how they name their funds.”

Abby noted that it is not entirely clear how the SEC intends to apply any of its proposals to the thousands of exchange-traded funds and mutual funds already trading on US exchanges, and that this lack of clarity could make it more difficult for advisors and investors to understand the inside of an investment portfolio.

Read the full VettaFi article >>