May 1, 2020
I support the names rule and believe it is necessary and appropriate to protect investors. If anything, it needs to be given more teeth. Below are my thoughts:
60 days notice is not sufficient to change a funds primary investment. Significant changes should require more such as a shareholder vote.
An 80% standard seems right, but should be greater for index funds, such as 95%.
The Names Rule should apply to ESG and strategies such as growth, income, etc.
I believe some accommodations should be made for derivatives (and similar investments), but the devil is in the details. Consider:
o A fund that is 85% long equities and 10% short equities, can it call itself the ACME Equity Fund? Is it 95% in equities or 75% in equities?
o Supposed a fund is 20% in equity futures and 80% in corporate bonds. The exposure is as though the fund was invested 80% in equities. Can the fund call itself the ACME Equity Fund? Can it call Itself the ACME Debt Fund? Can it call itself the ACME Balanced Fund? If you allow an exposure/notional test, what is the divisor? (e.g., 100% or 160% (80% + 80%). What if it were 20% in U.S. equity futures and 80% in emerging market equities?
o What about collared positions where the fund has some of the upside and some of the downside, how should that count?
I think funds need to show more restraint in what they squeeze into the 80% test. For example, a Widget Fund may try to include anyone who has ever used widget. That is not right. It should anyone whose fortunes are ties to Widgets.
I do not think affinity groups should put their names on funds unless they are also taking on liability for the funds actions and acts consistent with the groups principles. If an affinity wants to put their name on the fund, it should be on the hook for how the fund invests.
Bring more enforcement actions on the basis of the names rule. Do not let funds bait and switch investors.
Prospectus disclosure cannot resolve the case of a misleading name because, as a practical matter, investors dont look at prospectuses prior to investment (and frankly, for some absurd reason, you do not require it to be delivered or made readily available prior to investment). We often do not get past the fund name, fees and performance. And why not? Isnt it enough to know it is a low cost SP 500 fund with good performance?