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IM Staff Expresses Concern About Fund Names

The SEC’s Division of Investment Management recently issued guidance expressing the staff’s concern that “when a mutual fund or other investment company (“fund”) uses a name that suggests safety or protection from loss, the name may contribute to investor misunderstanding of the risks associated with an investment in the fund and, in some circumstances, could be misleading.”  The staff issued the guidance in light of a recent increase in the number of funds using “protected” in their names.  The guidance encourages advisers and fund boards “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.”

The staff guidance encourages fund groups to consider changing the name of any fund that implies safety or protection from loss when the fund actually exposes investors to risks.  The guidance notes that in certain cases, funds have eliminated the term “protected” in their names in favor of terms like “managed risk” for funds that seek to manage volatility through investments in cash and other short-term investments.  In addition, the staff addresses funds that rely on third party contracts to make up a shortfall in a fund’s net asset value.  In such cases, the staff believes that “protected” in a fund name should be accompanied by a description of any limitations on the protection provided by the third party.  The guidance states that the staff has not identified any names that “adequately communicate the limitations of the third party protection."

The staff guidance acknowledges that fund disclosure documents do accurately explain the limitations on the protection offered to investors in such funds.  However, the disclosure was not sufficient to alleviate the staff’s concern that using “protected” in a fund name was misleading due to concern that investors may rely on the name to determine a “fund’s investments and risks.”