Who may be interested: Registered Investment Companies, Investment Advisers, Boards of Directors
Quick Take: The SEC recently adopted1 amendments (Amendments) to Investment Company Act Rule 35d-1, the fund “Names Rule.” The Amendments broaden the scope of the Names Rule’s applicability and impose additional compliance and reporting obligations on funds subject to the Names Rule.
Currently, the Names Rule requires a fund whose name suggests a focus in a particular type of investment to adopt a policy to invest at least 80% of the value of its assets in those investments. The Amendments broaden the scope of the Names Rule by requiring a wider range of funds to adopt an 80% investment policy, including those with names suggesting a focus on investments that have particular characteristics (e.g., “growth” or “value” or terms that reference a thematic investment focus, such as ESG factors).
Funds are given discretion under the Amendments to reasonably define the terms used in a fund name and the criteria for selecting investments to align with those terms. The Amendments require, however, that such terms are consistent with their plain-English meaning or established industry use, and are defined in a fund’s prospectus.
While many provisions of the Amendments are consistent with the SEC’s initial proposal,2 there are several key differences. Notably, the Amendments:
- retain the current requirement that a fund invest in accordance with its 80% policy at the time a fund invests its assets and “under normal circumstances,” allowing a fund latitude to determine what constitutes other than normal circumstances rather than the proposed enumerated circumstances under which a fund could depart from its 80% policy;
- require a fund to review its investments that are invested in accordance with the investment focus that the fund’s name suggests (the “80% basket”) at least quarterly, and maintain certain written records documenting compliance with the Names Rule;
- allow a fund 90 days—rather than the proposed 30—to achieve compliance with its 80% policy if the fund departs from that 80% policy (if identified, for example, during the quarterly review process);
- require a fund to report on Form N-PORT the value of the fund’s 80% basket and whether a certain investment is included in the 80% basket as of the end of each fiscal quarter, rather than monthly as proposed; and
- do not require a fund that does not adopt an 80% policy to maintain a record of its analysis that such policy is not required, as was proposed.
The SEC did not adopt a proposed provision that would have prohibited funds from using ESG-related terms in their names if ESG factors are considered along with other investment selection criteria, rather than being a decisive variable. SEC Chairman Gensler indicated in his statement on the Amendments that comments on that aspect of the initial proposal are still being considered by SEC staff.
The Amendments will become effective 60 days after publication in the Federal Register. Once effective, fund groups with net assets of $1 billion or more will have 24 months to comply and fund groups with net assets of $1 billion or less will have 30 months to comply.
The adopting release can be found here.
1 Commissioner Uyeda voted against the Amendments. His statement can be found here.
2 Seward & Kissel’s 40 Act Blog post regarding the proposed amendments can be found here.