SEC Outlaws Misleading Fund Names

Mike Godfrey, Tax-news.com, New York

22 January 2001

The US Securities and Exchange Commission recently announced that it has adopted a new rule which aims to prevent mutual funds from being named in such a way as to deliberately mislead investors about the investments and degree of risk involved.

Key aspects of the fund names rule include:

1. Funds with names suggesting that they focus on certain types of investment, for example ‘healthcare’, or ‘technology’, must ensure that at least 80% of their assets are invested accordingly. Funds were previously subject only to a 65% investment requirement.

2. Related to the above point, funds wishing to change the 80% investment policy suggested by their name must obtain prior shareholder approval, or notify them of the change at least 60 days in advance.

3. The rule also prohibits fund names that in any way suggest that they are guaranteed or approved by the US government.

The commission hopes that this new rule will reassure investors who select funds for specific investment needs and asset allocation goals that a fund’s main focus will be consistent with its name.

Paul Roye, the director of the Investment Management Division of the SEC, was quoted in a January 17 press release, offering additional advice (unnecessary, one would hope, for anyone other than the terminally stupid):

‘We caution investors, however, that a mutual fund’s name cannot tell the whole story about the fund and that, before investing, investors should consult other sources of information, particularly the fund’s prospectus.’ Now that's a revolutionary idea!

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