It is no secret that the Federal securities laws and the SEC’s rules implementing them can be, at times, a little technical. We oversee a complex industry and this sometimes requires us to prescribe specific formulas or multifactor tests in service of our mission. But at their core, many of our regulations are designed to promote a simple idea that should be familiar to followers of the 20th-century philosopher Theodor Geisel: one is required to say what they mean, and to mean what they say.[1]

The Names Rule, which the Commission first adopted in 2001, is good example of how Mr. Geisel’s philosophy is put into practice. Like many of our rules, there is a little math (in this case, just some simple arithmetic). Otherwise, all that it really requires is for funds to say what they mean, and mean what they say. If a fund’s name implies to investors that the fund will focus on a particular type of investment, the fund must mean what it says (make investments consistent with its name) and say what it means (explain the meaning of terms when it could be unclear). Specifically, if a fund’s name implies that it makes a particular type of investment, the Names Rule requires that at least 80% of the investments in the fund need to be consistent with the name.

Investment company names are far from the only area where Congress has recognized the special importance of the name of a product, and we are far from the only agency that prescribes standards for firms that want to use particular names. For example, in order for a substance to be marketed as “peanut butter,” the substance must be at least 90% peanuts.[2] In order for a fish to be sold as “catfish,” the law requires that it be from the Ictaluridae family.[3] And in order for a company to describe jewelry as “gold” or “silver,” it must ensure its product is nearly entirely made of that metal.[4]

Just like consumers are guided by the term “peanut butter,” but sometimes need to look at the ingredients in order to get specific details about what else is in the jar, we know the name on the “packaging” of a fund is only one component of its disclosures. Even though consumers need to look at the ingredients to know what a jar of peanut butter contains besides peanuts, the name on the front is an important signal about what it contains, and for this reason it is especially important that the name means what it says. Likewise, we know the name of a fund is the first thing an investor will see, and so the name deserves a special focus even if we still expect investors to review the “ingredients” elsewhere. I hope investors continue to review other disclosures like fund prospectuses and shareholder reports, but the premise of the Names Rule is that investors should be able to get a general idea from the fund’s name itself.[5]

In the decades since the Names Rule was first adopted, we have seen a renaissance of investment funds. There are now more investment funds registered in the U.S. than there are public companies that are listed on U.S. exchanges. Investors frequently turn to funds allowing them to invest in particular “themes” rather than individual stocks, and an investor seeking a fund that provides exposure to a particular theme will likely first look at – you guessed it – the fund’s name.

The amendments we are considering today respond to these developments and reflect our staff’s 20 years of experience applying the Names Rule. Many funds now clearly indicate their investment strategy in their name – for example, conveying a focus on investments that have particular characteristics, like a “green energy” fund – and the rule we are considering today requires a fund that uses this terminology to have a policy to concentrate on that type of investment. The release also provides new safeguards, including guidance on the circumstances in which a fund may temporarily depart from its normal investment policy and a requirement to keep records related to that departure when it does so. It also makes clear the Commission’s longstanding position that technical compliance with the Names Rule does not exempt a fund from its overarching obligation not to mislead investors with its name. And for terms in a fund’s name that require some explanation, the release permits a fund to describe in its prospectus what the terms mean.

These are common sense changes that protect investors by ensuring that a fund says what it means, and means what it says. Even though the government regulates the ingredients of peanut butter, the peanut butter aisle at my local supermarket still has chunky, smooth, creamy, and natural options, and I’m sure the same will remain true of investment funds; far from promoting homogeneity, these changes will help investors find a range of different funds by allowing them to be sure that they know what they are buying. They also provide clear standards for our staff to apply when reviewing fund filings, promoting efficiency and capital formation by allowing funds to better understand when a particular name may draw comments from our staff.

Thank you to the teams in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel, as well as to the other staff who drafted this rule. I also want to extend a special thank you to the Disclosure Review and Accounting Office within IM. I know that your day-in, day-out experience applying the Names Rule has been invaluable throughout the process.

This was a well-drafted release making important improvements to the Names Rule. I am happy to support it.