SEC’s regulatory spree: Enhanced oversight of the private fund sector and a revised privacy act

On 20 September 2023, the US Securities and Exchange Commission (SEC) announced changes to the Investment Company Act “Names Rule”. This is key investor protection regulation which requests that labels attached to funds do not mislead investors.

The amendments, which “modernize and enhance” the two-decade-old Names Rule, aim to mitigate the risks of misleading or dishonest investment fund names.

Under SEC Chair Gary Gensler’s leadership, the US financial services regulatory landscape has been drastically redrawn, and the continuation of private fund rule changes further emphasises Gensler’s consumer protection-driven approach. The Committee on Capital Markets Regulation (CCMR) recently revealed that Gensler has introduced more rule changes and proposals than any of his predecessors following the 2008 financial crash.

Addressing the regulatory “gaps in the current Names Rule” which could “undermine investor protection”, Gensler said the “final rules will help ensure that a fund’s portfolio aligns with a fund’s name”. “Such truth in advertising promotes fund integrity on behalf of fund investors,” he said.

Stephen Hall, legal director of Better Markets told the Financial Times that “investors often rely on a fund’s name when making investment decisions” and the Names Rule is long “overdue for an update.”

Some industry observers believe that these changes were not warranted and could even prevent fund managers from labelling their products with descriptions to avoid non-compliance.

Stephen Bradford, part of the lobbying group at the Investment Company Institute, advised the SEC that the rule changes could undermine fund managers’ freedom of speech, depicting the proposal as “very blunt” and warning that “the result is going to be very short names that don’t say anything.”

SEC’s overhaul of the private fund sector

When selecting which funds to invest in, the fund name is the first bit of information investors will see, quickly providing insight into the fund’s focus and purpose.

Currently, the Names Rule mandates investment firms to comply with the “80% investment policy”. This regulation requires funds with a specific investment focus in their names to have 80% of their asset value invested in those types of investments.

The updated Names Rule intends to equip investors with improved knowledge to make better informed financial decisions.

Key changes to the Names Rule

• More funds will be required to comply with the 80 percent rule. This includes funds with names with specific interests including “growth”, “value” and “ESG”.
• Under the 80 percent investment policy, fund managers must review their portfolio’s assets treatment over a specified period, most likely 90 days.
• Fund names that use keywords with a particular investment focus must follow the plain English meaning.
• There will be further reporting and recordkeeping obligations for fund managers in relation to name-related requirements.

The Names Rule amendments are set to be in force 60 days after being published in the Federal Register. Fund firms with net assets of $1 billion or more will have two years to ensure compliance, and those with less than $1 billion will have two years and a half to comply.

SEC revamps the Privacy Act Rule

The SEC has approved another rule also on 20 September 2023, to revise the Privacy Act Rule, which is a regulation that covers the management of personal information by the federal government.

The final rule will completely replace the existing Privacy Act regulations. The rule was last updated in 2011 and needed a facelift, it covers the following changes:

• Improves the procedural and fee provisions
• Removes unnecessary provisions  
• Allows electronic methods to verify identities and submit Privacy Act requests
• Ensures easier and clearer processes on how people can access information about themselves
• The final rule will be effective 30 days after being published in the Federal Register

SEC Chair Gensler believes “these amendments will provide more clarity on how the public can access their records maintained by the Commission and request amendments.”

CUBE comment

The SEC’s proposed rules could help investors gain a better understanding of what they are investing in, or they could lead to vague fund names that do not provide enough information. The impact of the Names Rule in the coming months will tell us more and inform whether the regulatory changes have had a beneficial effect.

The SEC’s proposed changes to the Privacy Act Rule aim to provide greater clarity around how the US public can access the data stored about themselves, ensuring greater transparency.

It is clear that the SEC is on a path to a flood of regulatory change, transforming the way financial services are currently operating. Firms should take proactive steps to ensure their house is in order to navigate the onslaught of compliance obligations. As the saying goes, fail to plan – plan to fail.

For compliance teams worried about regulatory shifts, keeping on top of new rules and legislation can be demanding on resources. Leverage regulatory change management software like CUBE to automate the entire change management process seamlessly. As a result, firms can free up valuable time for compliance teams that was previously spent manually trawling the internet and focus on higher-value tasks.

To ensure your firm complies with private fund and privacy regulations, speak to CUBE.