SEC Acts Against Misleading Names

January 18, 2001 ( - Federal securities regulators announced Wednesday they have adopted a new rule aimed at preventing investors from being misled by deceptive names of mutual funds.
The rule, adopted by the Securities and Exchange Commission requires, for example, that funds with the words¬† “health care” in their names invest at least 80 percent of their assets in health-care company stocks, up from the current 65 percent.

A mutual fund will not be allowed to change the investment strategy suggested by its name unless it gets prior approval from shareholders or notifies them at least 60 days in advance.

In addition, funds are prohibited from using any name suggesting that its investments are guaranteed or approved by the US government.

Paul Roye, director of the SEC’s Division of Investment Management, said the new rule “will contribute greatly to ‘truth in labeling’ of mutual funds” and benefit investors. He cautioned, however, that a fund’s name cannot tell its whole story and that people should read a fund’s prospectus before investing in it.

Some 88 million Americans invest in mutual funds, whose total assets are estimated at $6.8 trillion, up from around $1 trillion in 1990.