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).