The US Securities and Exchange Commission (SEC) is once more flexing its regulatory might, this time by warning fund providers offering so-called blockchain exchange-traded funds (ETFs) to lose their “blockchain” tags in their names.
The move is seen as a preventive measure to avoid misleading investors keen on gaining asset exposure to cryptocurrencies and their underlying blockchain technology. Bloomberg reports that the SEC is raising more questions as blockchain-themed fund names are proliferating. Due to the increased scrutiny, there is a growing number of ETFs who are changing their names before their funds even begin trading. In 2018 alone, every third fund changed their names during the SEC approval process, with one fund removing “blockchain” and replacing it with “transformational data sharing”.
CEO of fund provider Exchange Traded Concepts, J Garrett Stevens, said that the SEC enquiries are obviously on the rise:
“We get questions more than we used to where we have to be able to defend our name. Now almost all names, they’ll come back and say ‘Can you justify, give us your explanation on why this name is OK?'”
With more than 2,000 competing funds, thematic names have been an area for providers to differentiate in the USD 3.9 million ETF market that is already showing some signs of stress, according to Bloomberg.
Under the 80-year old Investment Company Act of 1940, issuers are forbidden to use names that are “materially deceptive or misleading”. The SEC adopted Rule 35d-1 in 2001, the Names Rule, to further define this. Funds must also ensure that 80% of their assets are in the same category of investments represented by their names.
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