The Securities and Exchange Commission (SEC) adopted amendments to its rule covering fund names to ensure the regulation is appropriate to address new investment drivers, namely environmental, social, and governance (ESG) matters.

The changes to the “Names Rule,” finalized by the agency Wednesday, broaden the scope of the regulation and establish new disclosure and recordkeeping requirements related to the rule. The goal of the amendments is to provide better truth in advertising, as the name of a fund is typically the first piece of information an investor receives.

“The Names Rule reflects a basic idea: A fund’s investment portfolio should match a fund’s advertised investment focus,” said SEC Chair Gary Gensler in a statement. “… Otherwise, a fund’s portfolio might be inconsistent with what fund investors desired when selecting a fund based upon its name.”

The amendments take effect 60 days after publication in the Federal Register. Fund groups with net assets of $1 billion or more must comply within 24 months, while those with net assets of less than $1 billion have 30 months to comply.

The final rule includes tweaked language so that its 80 percent requirement—mandating firms with names suggesting a focus in a particular type of investment to adopt a policy to invest at least 80 percent of the value of their assets in those investments—now applies to funds whose names suggest a focus in investments with particular characteristics. Regarding ESG, that would include words like “sustainable,” “green,” or “socially responsible,” said Gensler. Other terms covered include “growth” and “value,” along with thematic names that relate to topics like artificial intelligence and data.

Funds that drift from the 80 percent policy—which must be reviewed quarterly—will now generally have 90 days to get back into compliance. The rule further requires funds to disclose how they define the terms in their name and select relevant investments.

One aspect of the rule proposed back in May 2022 would prohibit the use of ESG-related terms in fund names if those funds consider ESG factors along with, but not more significantly than, other factors. That requirement is still being reviewed, said Gensler.

The rule earned the rare support of Commissioner Hester Peirce, while her Republican counterpart Mark Uyeda expressed his concerns regarding compliance costs and transparency in how the SEC will administer the new requirements in not backing the rule.