SEC Names Rule (80% Requirement)

yogibearbull

Under the NAMES RULE, the SEC will require that the names of funds reflect 80% of the fund portfolios to avoid drifting and playing games by funds. If a fund doesn't satisfy this requirement, it will have 30 days to correct this.

This rule sort of exists now for very broad things such as "equity", "bonds" in funds' names, but the new rules will also apply to more specific things like "growth", "value", "dividend", "small/mid/large-caps", "foreign", "global", "investment-grade", "high yield", etc in the fund names.

I don't know what will happen to M* Fund Category Definitions (2023) or similar published by others.

Critics say that many funds may move to more generic names or the rule may limit fund managers' flexibility.

SEC
Press Release Names Rule https://www.sec.gov/news/press-release/2023-188
Fact Sheet https://www.sec.gov/files/33-11238-fact-sheet.pdf
Final Rule (283 pages) https://www.sec.gov/files/rules/final/2023/33-11238.pdf

M* Fund Categories https://pdfhost.io/v/K3mzSxMmx_MStar_Categories_Funds_April2023_091423

msf

Critics say that many funds may move to more generic names or the rule may limit fund managers' flexibility.

To the extent that this rule change has any effect, I would tend to agree with the critics on the former (move toward generic names). But upon cursory examination (I haven't looked at the full rule yet), it doesn't look like the rule has teeth.

The PR says that "The [new rule] will include enhanced prospectus disclosure requirements for terminology used in fund names, including a requirement that any terms used in the fund’s name that suggest an investment focus must be consistent with those terms’ plain English meaning or established industry use."

Consider Bill Miller's Legg Mason Value Trust. For much of its existence, it was classified as a growth fund, e.g.

The fund's name and Miller's stated goal strongly indicate that LMVTX is a value fund, although Morningstar classifies it as a large-cap growth fund. In fact, one of its top holdings is Google .

Fortune, Jan 27,2006.

Bill Miller argued that he was a value investor, and the Legg Mason prospectus described this:

The fund invests primarily in equity securities that, in the adviser's opinion, offer the potential for capital growth. The adviser follows a value discipline in selecting securities, and therefore seeks to purchase securities at large discounts to the adviser's assessment of their intrinsic value. Intrinsic value, according to the adviser, is the value of the company measured, to different extents depending on the type of company, on factors such as, but not limited to, the discounted value of its projected future free cash flows, the company's ability to earn returns on capital in excess of its cost of capital, private market values of similar companies and the costs to replicate the business. Qualitative factors, such as an assessment of the company's products, competitive positioning, strategy, industry economics and dynamics, regulatory frameworks and more, may also be considered. Securities may be undervalued due to, among other things, uncertainty arising from the limited availability of accurate information, economic growth and change, changes in competitive conditions, technological change, investor overreaction to negative news or events, and changes in government policy or geopolitical dynamics.

Prospectus, July 2006

More succinctly, from The Street (2001):

Unlike most value managers who tend to ignore pricey stocks in the technology and telecom sectors, Miller has a broader and less rigid view. Instead of relying on traditional metrics like a stock's price to earnings multiple, he looks at a company's free cash flow.

Miller was a relative value investor, though with a distinctive way of valuing companies. As such, and especially with the detailed definition of intrinsic value in the prospectus, I suspect that his fund would have passed the new SEC rule. IOW, a pretty toothless rule.

hank

LOL

Will PRWCX have to change its name? “Capital Appreciation” sounds a bit broad. You could load up on old comic books with a name like that.

HSGFX = “Capital Depreciation” ?

yogibearbull

Fund industry, including its trade association ICI, opposed the Names Rule. ICI press release doesn't indicate that entirely - it claims to have softened compliance a bit
https://www.ici.org/news-release/23-news-names-rule-vote-statement

It all started out with the SEC looking to eliminate abuses of the ESG designations and the fund industry supported this. But then, the SEC proceeded on a grander scale of looking at all funds that were using fund "styles" quite loosely. Irony was that at the end, the SEC pulled out all the ESG related stuff out into another ESG focused rule, and the fund industry got stuck with this Names Rule.

Be careful with what you wish - you may get that or something entirely different!