SEC Staff Scrutinizing Registered Fund Names That Suggest Loss Protection

The Staff of the SEC’s Division of Investment Management issued IM Guidance Update 2013-12 in which the Staff “encourages investment advisers and funds’ boards of directors to carefully evaluate any fund name that suggests safety or protection from loss and to consider whether a name change is appropriate to address any potential for investor misunderstanding.”  The IM Guidance Update reflects the Staff’s determination to “object to names that may create an impression of protection or safety or absence of risk of loss, where the name does not include qualifying language that defines the scope and limits of such protection.”  As a consequence, during the disclosure review process, the Staff has requested that some existing and new funds change their names.  The Staff’s concerns articulated in the IM Guidance Update focus on two particular types of funds that include “protected” in their names:

  • managed volatility funds – these funds seek to manage volatility by investing a portion of their assets in cash, short-term fixed income instruments, short positions on exchange-traded futures, or other investments.  The Staff’s concern is that the funds’ names may be misleading because “the degree to which a managed volatility strategy may succeed or fail is uncertain.”   Some managed volatility funds have addressed the Staff’s concern by replacing the term “protected” in their names with terms such as “managed risk.”
  • funds with third party contractual protections for NAV – these funds enter into contracts with a third party to make up a shortfall in fund net asset value.   The Staff’s concern is focused on (a) ways in which contractual protections may be limited, such as through provisions that (i) cap the amount of protection, (ii) limit the time period during which third party’s obligation exists, or (iii) terminate the third party’s obligation under certain circumstances in certain scenarios, and (b) the credit risk associated with a third party provider.  To date, the Staff has not identified any fund names using the term “protected” in these circumstances that adequately communicate the limitations of the third party protection.

The IM Guidance notes that the Staff has requested name changes in situations where a fund’s prospectus explains limitations on loss protection not reflected in the fund’s name because the Staff believes 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.”

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Topics:  Board of Directors, Compliance, Loss Coverage, Private Funds, SEC

Published In: Consumer Protection Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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