SEC puts misleading fund names in its crosshairs


The Securities and Exchange Commission is seeking input from the public to help eliminate potentially misleading fund names that can ultimately harm investors.

The SEC, which is responsible for approving the names, offered the issue out for public comment on Monday to determine if its current methods are effective or if viable alternatives are available for the agency to consider.

When it comes to fund names that don’t quite jibe with the underlying portfolio management strategy, everyone seems to have an example. Proposed solutions, however, are less certain.

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, cites the $1.2 billion First Trust Utilities AlphaDEX ETF (FXU) as an example of a fund that might surprise some investors.

“The fund has a nearly 30% allocation to telecom companies, including AT&T, Verizon, and T-Mobile that are not utilities,” he said. “An investor buying this fund would likely be surprised to find AT&T is one of the larger holdings.”

But souping up a utilities fund with some telecom holdings is child’s play compared to the infamous collapse of the LJM Preservation and Growth Fund, which suffered a two-day decline of 80% in February 2018.

“Beyond the oxymoron of the fund’s name, it sold naked put options of the S&P 500, which is not exactly a capital preservation strategy,” said Kirk Hackbarth, an adviser at Strategy Wealth Partners.

The LJM fund, which is now defunct, is what Mr. Hackbarth views as a poster child of misleading fund names.

“I would say most fund names say what they’re trying to accomplish,” he said. “And anyone can jump on Morningstar and see what the fund is trying to do.”

The SEC, which did not respond to a request for comment for this story, is specifically seeking comment on an Investment Company Act rule governing the names of SEC-registered investment companies.

The current rule related to fund names prohibits the use of names that are likely to mislead investors.

The irony of the SEC’s comment period on fund names is that the SEC is essentially questioning its own ability to police the naming of funds, according to Mr. Rosenbluth.

“In order for a fund to launch, the SEC has to approve it, and the name is listed in the filings,” he said. “If the SEC wasn’t comfortable with the name of a fund, they could just provide feedback to the asset manager.”

The current naming rule, for example, requires a fund to invest at least 80% of portfolio assets in any asset that is part of the fund’s name.

But some of the challenges the SEC is struggling with include accurate naming of funds using derivative investments or less-common hybrid instruments.

The SEC is also seeking input on indexes that are not currently subject to the naming rule, as well as ways to deal with the liberal use of phrases associated with environmental, social and governance investing strategies.

But while the regulators try to push fund companies toward more standard naming practices, there’s also a case to be made for creating names that are as broad as possible.

“I think they should make the fund names so generic that it forces investors to do some research into what they’re buying,” said Dan Wiener, editor of the Independent Adviser for Vanguard Investors.

“If every company just had a growth fund it would force people to make a little effort to find out what these things are,” he added. “The names don’t tell you anything so why not force them to become even more generic, so it behooves the investor to at a minimum look at the summary prospectus.”

Written by Investors Wallets

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