The Securities and Exchange Commission (SEC) has updated its regulations to require investment fund managers to clarify the relationship between their funds' names and their investment strategies. The new rule, passed on Wednesday, mandates that a fund should invest at least 80% of its assets in alignment with its name. This regulation is an enhancement from previous rules established in 2001 and aims to adapt to changes within the fund industry.

SEC Chairman, Gary Gensler, who proposed the rule change, believes this requirement will assist investors in understanding what fund marketers imply when they use terms like "big data" or "artificial intelligence" in their fund names. The rule will obligate fund prospectuses to clarify the terminology used in a fund's name and explain the criteria employed by managers to select investments that align with the name. These criteria will be incorporated into the fund's official investment policy.

The new regulation met resistance from Mark Uyeda, one of the two Republican members of the commission, who voted against it, citing it as too demanding. However, Hester Peirce, the other Republican member, supported the rule change.

The updated rule comes as a response to changes in the fund industry which include an increase in managed funds and a rise in themed funds that pursue specialized strategies. Funds focusing on environmental, social, or governance objectives are recent examples.

The regulations will take effect 60 days after publication in the Federal Register. Fund groups managing at least $1 billion will have a 12-month period to comply, while smaller fund groups will be given 18 months. Approximately 75% of funds, totaling around 10,000, will fall under these new name rules.

The rule allows for some flexibility regarding the requirement that 80% of assets align with the fund's theme. This condition applies when managers initially invest the fund's assets. However, due to fluctuations in holdings and securities prices, the SEC requires managers to review their compliance quarterly. If a fund's holdings drop below the 80% threshold, it has roughly 90 days to regain compliance. Derivatives such as swaps, options, and futures will also count towards this 80%.

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