Fund Names Rule

Overview

In 1996, Congress enacted the National Securities Markets Improvement Act (“NSMIA”) which gave the SEC the authority to adopt rules to protect against “materially deceptive or misleading” fund names. Four years later, on January 17, 2001, the SEC adopted Rule 35d-1 under the Investment Company Act. Following that, the SEC staff FAQs to assist the industry’s understanding of, and compliance with, the Rule.

Nearly two decades later, on March 2, 2020, the SEC issued a request for comment on the Names Rule. Two years later, on May 25, 2022, the SEC proposed amendments to that Rule. The ICI commented on both the proposed amendments and the request for comment that preceded it. On September 20, 2023, the Commission adopted amendments to the Names Rule. The Commission also amended the associated forms (e.g. Form N-PORT).

The Division of Investment Management staff is reviewing its no-action letters and other statements addressing compliance with the Names Rule to determine which letters and other staff statements should be withdrawn in connection with the amendments. The adopting release for the Names Rule notes that some of these letters and other staff statements, or portions thereof, may be moot, superseded, or otherwise inconsistent with the Rule and, therefore, may be withdrawn by the staff. It further notes that the staff’s review includes, but is not necessarily be limited to:

Frequently Asked Questions about Rule 35d-1
Disclosure by Funds Investing in Government Sponsored Enterprises (staff letter to the ICI, Oct. 17, 2003)
IM Guidance Update, No. 2013-12, Fund Names Suggesting Protection from Loss (Nov. 2013)

In summary, the September 2023 amendments make the following changes to the Names Rule:

Scope: Expands the scope of the Names Rule to apply to any fund name with terms suggesting that the fund focuses on investments that have, or whose issuers have, particular characteristics (e.g. growth, value).
Enhanced prospectus disclosure: Requires funds to define terms used in their names and the criteria used to select investments in their prospectuses. A fund will have the flexibility to reasonably define the terms used in its name, but such definitions must be consistent with the terms’ plain English meaning or established industry use.
Temporary Departures from Compliance: Retains the current “time of investment” test for compliance and “under normal circumstances” standard. For the first time, the amended Rule will now require funds to, at least quarterly, review their portfolio investments to determine whether the fund’s investments continue to be consistent with the fund’s 80% investment policy. If a fund is out of compliance with its 80% investment policy, it will generally have 90 days to return to compliance.
Derivatives: Requires funds to use a derivative instrument’s notional amount, with certain required or permitted adjustments, for the purpose of determining compliance with funds’ 80% investment policies.
Unlisted closed-end funds and business development companies: Requires unlisted closed-end funds and BDCs to make their 80% investment policies fundamental. The amended Rule includes an exception which will permit such a fund to change its 80% investment policy without a shareholder vote if the fund conducts a tender or repurchase offer in advance of the change, subject to certain conditions.
Form N-PORT: Require funds to report information to the SEC regarding Names Rule compliance on a quarterly basis, including whether or not each portfolio holding is included in a fund’s 80% basket.

Committees & Working Groups

ICI Contacts

Legal Issues

Operational Questions

SEC and Legislative Materials

For a complete understanding of the Names Rule, members should consult the SEC’s Names Rule and the accompanying adopting release. We provide this and other related information below.