Last week, the SEC’s Division of Investment Management released a guidance update that focuses on funds that use a name that “suggests safety or protection from loss.” The IM Guidance Update is a shot across the bow, warning a fund to considering changing its name if it exposes investors to “market, credit, or other risks.”
Every investment fund has exposures to “market, credit or other risks”, so the Guidance presumably applies to every fund. That means your fund name should not suggest “safety or protection from loss.”
The Guidance points to two bad words: “protected” and “guaranteed.”
The Guidance states that the agency has recently asked some managers to change the names of their funds.
We have made these requests because we believe that, in practice, investors sometimes focus on a fund’s name to determine the fund’s investments and risks, either because the name sometimes appears without the clarifying prospectus disclosures (e.g. , in advertisements) or because of the prominence of a fund’s name or for other reasons.
Funds that managed volatility by investing a portion of the fund’s assets in cash, short-term fixed income instruments, short positions on exchange-traded futures, or other investments had included the term “protected” in their name. The SEC was rightly concerned that “protected” only meant partly protected. Similarly, some funds had entered into shortfall guarantees to protect a fund’s downside. That protection may not have covered a 100% of the loss. Of course the protection is only as good as the credit of the company providing the coverage.
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