Memo #
35318

Comments Requested by COB May 18th – Supplemental SEC Names Rule Letter on Tax Issues
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[35318]

May 16, 2023

TO: Tax Committee RE: Comments Requested by COB May 18th – Supplemental SEC Names Rule Letter on Tax Issues

 

At the March 9th Tax Committee meeting, members and ICI staff discussed the SEC's proposed changes to the Names Rule and tax concerns with the proposal's approach to tax-exempt fund.[1]  The proposed rule would impose an 80% investment policy requirement on names that include terms suggesting that a fund focuses on investments that have, or whose issuers have, particular characteristics (see pages 19-28 of the release). The "80% basket" means "investments that are invested in accordance with the investment focus that the fund's name suggests." The name "tax-exempt fund," for example, is addressed expressly (see page 199 of the release). Temporary departures from the 80% requirement would be permitted only in certain specified circumstances (see pages 33-42 of the release); funds would be required to return to compliance with their 80% investment policies, in most circumstances, within 30 days.  More information can be found in the linked ICI memos on the proposed rule and the ICI's initial response.[2]

The attached draft supplemental letter focuses on certain aspects of the Proposal's approach to tax-exempt funds. Specifically, the proposed temporary departures standard is especially unworkable for tax-exempt funds using an 80% investment policy based on the tax character of income distributed ("income test").  Instead, the letter recommends that the Commission permit any tax-exempt fund using an income test to:

  • monitor compliance with its 80% investment policy by looking only at income distributed, rather than income that has been accrued and/or declared, but not yet distributed;
  • satisfy its 80% investment policy as of the fund's fiscal year end;
  • count taxable market discount and derivatives that provide exposure to market risk factors toward its 80% basket; and
  • not report on Form N-PORT the number of days that it did not comply with its 80% investment policy.

Please review the attached draft letter and submit any comments by close of business Thursday, May 18th to Keith Lawson at lawson@ici.org or the undersigned at katie.sunderland@ici.org.

 

Katie Sunderland
Associate General Counsel
 

Notes

[1] See ICI Memorandum No. 35171, dated March 23, 2023.

[2] See ICI Memorandum No. 34260, dated August 18, 2022.

    Attachments

    35318a.pdf