Dear Ms. Countryman:

My name is Jennifer Schulp, and I am the director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives. I appreciate the opportunity to comment on the Securities and Exchange Commission’s proposed amendments to the “Names Rule” under the Investment Company Act of 1940, which addresses “certain broad categories of investment company names that are likely to mislead investors about an investment company’s investments and risks.” The Cato Institute is a public policy research organization dedicated to the principles of individual liberty, limited government, free markets, and peace, and the Center for Monetary and Financial Alternatives focuses on identifying, studying, and promoting alternatives to centralized, bureaucratic, and discretionary financial regulatory systems. The opinions I express here are my own.

Section 35(d) of the Investment Company Act provides that “[i]t shall be unlawful for any registered investment company to adopt as part of the name or title of such company, or of any securities of which it is the issuer, any word or words that the Commission finds are materially deceptive or misleading.” The provision also authorizes the Commission “to define such names or titles as are materially deceptive or misleading,” which the Commission did in 2001 by promulgating what the Names Rule. Under this rule as it currently stands, the Commission considers the name of a fund to be “materially deceptive and misleading” if it— most relevantly to the proposed amendments—suggests that the fund invests in certain investments or industries, certain countries or geographic regions, or is tax-exempt, unless the fund invests at least 80% of the value of its assets as suggested by the fund’s name. This proposal, among other things, seeks to expand the scope of the Names Rule to require that where a fund’s name suggests an “investment focus,” the fund must invest 80% of its assets in accordance with that “focus.”

The Commission justifies the proposal as “modernizing” the existing Names Rule and increasing investor protection. In addition, though it is only mentioned in passing in the Notice, these proposed amendments are intended to rein in “greenwashing” in the investment management industry, particularly where the amendments seek to impose additional requirements on funds claiming some connection to “environmental, social, and governance,” or ESG, investing.

Greenwashing generally is when an investment presents itself as being more environmentally friendly or socially responsible than it actually is. Pinpointing when an investment is greenwashed is difficult—if not impossible—due to the many different understandings of what it means for an investment to be considered green or sustainable. Indeed, in many respects, whether an investment is environmentally friendly or socially responsible is in the eye of the beholder.

This inherent subjectivity and lack of consensus calls into question whether combatting greenwashing is a realistic goal. But, regardless of what greenwashing specifically means, the Commission has long been tasked with ensuring that investors receive the investment that they are promised, and the Commission already has rules to prevent investors from being misled. As the Commission already has pointed out—and proposes to do even more clearly with these proposed amendments—the Names Rule is not “intended to be a safe harbor for materially deceptive or misleading names.” In other words, the Commission can bring an action against a fund for materially deceptive or misleading names, regardless of whether the fund meets the standards set out in the Names Rule. In addition to this Section 35(d) authority, the Commission has other authorities that govern how investment funds and their advisers communicate with their investors, including anti-fraud rules. The Commission has recently used these tools to address similar issues in the ESG investment context.

There is little about this proposal that will enhance the Commission’s exercise of its existing authority under existing rules. Instead, as explained below, these amendments fail to create a workable framework for fund naming and have the potential to harm, rather than protect, investors. The Commission should not proceed with the proposed amendments in their current form.