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Securities and Exchange Commission (SEC) Staff Issues Guidance on Fund Names Suggesting Protection From Loss

The SEC’s Division of Investment Management issued guidance encouraging investment companies that expose investors to market, credit, or other risks and whose names suggest safety or protection from loss to consider changing their names to eliminate the potential for investor misunderstanding of the risks associated with an investment in the fund and to avoid being misleading. The SEC has heightened its scrutiny of fund names suggesting safety or protection from loss and it will object to names that may create an impression of safety or absence of risk of loss, where the name does not include qualifying language that defines the scope and limits of such protection.

The guidance provides examples of names the SEC considered problematic. Some funds that seek to manage volatility by investing a portion of the fund’s assets in cash, short-term fixed income instruments or short positions on exchange-traded futures included the term “protected” in their name. The SEC is concerned that these names could convey to investors a level of protection that was not present because the degree to which a managed volatility strategy may succeed or fail is uncertain. The SEC is also concerned with funds that enter into contracts with a third party to make up a shortfall in the net asset value of the fund using the term “protected” in their names. Such protection may be limited by a number of factors such as the credit risk of the third party and the time during which the third party is obligated to make up any shortfall in the fund’s net asset value. Such funds should have names that explain the limitations on the scope of the protection provided by the third party.

Source: Investment Management Guidance Update No. 2013-12, Fund Names Suggesting Protection from Loss (November 2013). 

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 43


About this Author

Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm

Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

Chris Cahlamer Investment Management Attorney

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he received the Corporate Practice Institute Award and served as senior articles editor on the Marquette Law Review. He completed his undergraduate education at St. Norbert College, graduating as a member of the honors program and earning his bachelor’s degree, summa cum laude, in international economics and political science.

Chris is a member of the State Bar of Wisconsin and the American Bar Association.

Carol A. Gehl, Securities Law Attorney, Godfrey and Kahn law firm

Carol Gehl is a shareholder and the team leader of the Securities Practice Group in the Milwaukee office.

Carol’s practice is focused on investment management entities, including mutual funds, hedge funds, investment advisers and broker-dealers throughout the nation. During the last number of years, Carol has facilitated the organization of numerous mutual funds, hedge funds and investment advisers; assisted in SEC and FINRA examinations of regulated entities; provided ongoing advice to mutual fund Boards of Directors; and assisted with several mergers of investment advisers and...