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“Guaranteed!” “Protected!” Blog Entry on Fund Names

Posted in Fund Regulation, SEC Enforcement

The SEC’s Division of Investment Management is cracking down on funds that use names that suggest safety or protection from loss.

In Guidance Update No. 2013-12, the staff stated that fund names suggesting safety or protection from loss may contribute to investor misunderstanding of investment risks.  The staff said that it recently requested that some existing and new funds to change what it believes were misleading names, and it “encourages” funds that expose investors to market, credit or other risks, and whose names suggest safety or protection from loss, to reevaluate their names.

In particular, the staff raised concerns about funds with names that include the terms “protected,” “guaranteed” and the like, when used “without additional qualification.”  High on the staff’s watch list are funds that use the term “protected” in their names and seek to manage volatility by investing a portion of their assets in cash, short-term instruments, or short positions on exchange-traded futures.

Funds that offer third-party principal protection against NAV shortfall also concern the staff.  The staff said that funds that contract with third parties to make up NAV shortfalls should not use the term “protected” unless the fund’s name adequately communicates the limitations of the “protection.”  It is not enough, the staff cautioned, merely to disclose the limitations of third-party protection in the text of the prospectus.  Rather, the name itself must reveal those limitations.

In conclusion, the staff encouraged:

investment advisers and funds’ boards of directors to carefully evaluate any fund name that suggests safety or protection from loss and to consider whether a name change is appropriate to address any potential for investor misunderstanding.

Can an enforcement action against a fund with an allegedly misleading name be far behind?