(Bloomberg) -- The world’s biggest investment firms are getting much tougher rules for naming funds, as the US Securities and Exchange Commission clamps down on labels it says can be misleading.

The SEC voted on Wednesday to impose the most sweeping overhaul for fund-labeling regulations in more than two decades. Backers say the measures in particular will help rein in overblown claims about environmental, social or governance investments. 

During the Biden administration, the regulator has grown increasingly concerned that funds billboard certain buzzwords to attract investors, even if they don’t accurately reflect their actual strategies. One focus has been on a lack of consistent standards for investments that claim to be sustainable, with the ESG label slapped on everything from exchange-traded funds to complex derivatives. 

“These final rules will help ensure that a fund’s portfolio aligns with a fund’s name,” SEC Chair Gary Gensler said in a statement. “That benefits investors and issuers alike.”

Gensler was joined by the SEC’s other two Democrats and Republican commissioner Hester Peirce in supporting the new rules. Mark Uyeda, the agency’s other Republican voted against the plan, citing significant compliance costs and other issues.

“Practically any term can be subject to the names rule,” Uyeda said during a meeting in the SEC’s headquarters in Washington on Wednesday. “If we wanted all funds to be subject to the names rule, we should have said so.”

The new SEC rules would apply to funds with trillions of dollars in assets combined. In addition to ESG, they would impact thematic investment strategies with labels like “growth” or “value.” The agency also would bolster its long-existing requirements that a fund generally invest 80% of its assets in line with the stated focus.

The fund industry has for more than two decades had to comply with that SEC regulation known as the Names Rule, and has argued the changes the agency proposed last year go too far. 

On Wednesday, the Investment Company Institute again raised those concerns. 

“The rule sweeps more than three-quarters of all the funds in the US into its dragnet, going far beyond ESG funds — the supposed root of the rulemaking — with no justification,” said Eric Pan, ICI’s chief executive officer. “This will hurt American retail investors.”

Read More: SEC to Crack Down on Misleading ESG Claims With Fund Rules

The new regulations would require funds to review portfolios relative to the 80% threshold each quarter, and generally get 90 days to come back in compliance if they temporarily deviate. The SEC rule also will require that names suggesting an investment focus be clearly understandable.

Gail Bernstein, general counsel at the Washington-based Investment Adviser Association, said she was pleased that the SEC would allow 90 days for funds to return to compliance, rather than 30 days as proposed. “Our members have been concerned that a very short compliance window could have forced them to make investment decisions not in the fund’s best interest,” she said in a statement. 

Additionally, funds with an 80% investment strategy will have to define for investors the terms used in its name, and spell out the strategy they entail. Funds also will have additional record-keeping requirements. 

Read More: SEC Planned Crackdown on ‘Misleading’ Funds Goes Far Beyond ESG

Jessye Waxman, senior strategist for the Sierra Club’s Fossil-Free Finance campaign, lauded the new rules and said they would help address green-washing, or the misrepresentation of climate credentials. “There is enormous growing interest in true sustainable investing that minimizes risks both to portfolio returns and to society,” she said. 

Last year, the SEC brought cases against some of Wall Street’s best-known firms last year related to their fund labeling. 

Goldman Sachs Group Inc. agreed to pay $4 million to settle claims that its asset-management unit didn’t properly weigh ESG factors in some of its investment products. A Bank of New York Mellon Corp. unit agreed to pay $1.5 million to settle allegations that it falsely implied some mutual funds had undergone an ESG quality review.

Investment funds will have to comply with the new rules, following a phase-in period. 

--With assistance from Silla Brush.

(Updates with Sierra Club comment in 14th paragraph.)

©2023 Bloomberg L.P.