US fund managers will have to more closely align investment portfolios with product names under new rules approved by the Securities and Exchange Commission (SEC) last week.
The SEC update bundles entire new classes of product titles including value, growth, thematic and ESG into existing requirements for broadly named funds (fixed income or country-based, for example) to invest at least 80 per cent of their portfolios in line with the label.
In a release, the SEC says the “amendments will also include a new requirement that a fund review its portfolio assets’ treatment under its 80 percent investment policy at least quarterly and will include specific time frames – generally 90 days – for getting back into compliance if a fund departs from its 80 percent investment policy”.
Gary Gensler, SEC chief, said in the statement that the fund naming convention amendments modernise rules that have been in place since 2001.
“As the fund industry has developed over the last two decades, gaps in the current Names Rule may undermine investor protection,” Gensler said. “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”
However, the SEC move has come under fire from US fund industry body, the Investment Company Institute (ICI), which said the new names policy would impose more costs on retail investors.
Eric Pan, ICI chief, said in a release: “The rule sweeps more than three-quarters of all the funds in the U.S. into its dragnet, going far beyond ESG funds — the supposed root of the rulemaking — with no justification,” ICI CEO Eric Pan said in a statement. “… The only thing that this rule achieves is to insert the SEC deeper into funds’ investment decision-making processes. Portfolio managers won’t be able to make routine investments without the SEC second-guessing whether it fits neatly with the subjective terms that make up their fund’s name. This will hurt American retail investors.”
NZ investment managers face less prescriptive product-naming rules but it is understood several funds have been rebranded after regulatory pressure or in anticipation of it – in particular over ESG, or the like, labels.
In a 2015 guidance, however, the Financial Markets Authority (FMA) said fund managers must “exercise care when using terms which will have a particular connotation to investors, and ensure that fund characteristics are consistent with the representations inherent in the fund’s name”.
“We do not propose to mandate specific names for funds or to prescribe requirements on the types of names that funds might use,” the FMA 2015 note says. “… You must ensure your funds’ names are not misleading.”
Meanwhile, the SEC has met with strong government resistance to another proposal for all open-ended managed funds to adopt ‘swing pricing’ mechanisms – essentially, flexible buy-sell spreads aimed at maintaining unit-holder equity during periods of heavy redemptions – and maintain a higher weight of liquid assets.
The SEC swing-pricing plan would also require funds to follow ‘hard close’ procedures where only redemption requests formally received by the manager as at the 4pm unit price strike-time would be honoured: currently, US funds also pay out units at the daily price for withdrawal requests sent to intermediaries before the deadline.
Both Republican and Democrat politicians have urged the SEC to reconsider the fund swing-pricing and liquidity proposals ahead of a vote of the financial regulatory panel later this year.
In a 2021 report, the FMA found the NZ licensed managed investment scheme (MIS) sector also needed to upgrade liquidity processes. Just more than half of MIS managers at the time had defined their liquidity management tools (LMTs), the FMA report noted.
Among a number of fund liquidity improvement recommendations, the FMA report says MIS managers as a high-priority “should review and expand their suite of available LMTs beyond those they currently use, with a particular focus on LMTs suited to the ‘pending’ phase in an emerging liquidity crisis, which could help avoid suspending redemptions in future”.