The U.S. Securities and Exchange Commission (SEC) adopted amendments on Sept. 20 (the Release) to Rule 35d-1 (the Names Rule or Rule) under the Investment Company Act of 1940 (the 1940 Act).1 The Rule addresses the names of registered investment companies and business development companies (collectively, funds)2 that the SEC considers to be materially misleading or deceptive unless used in accordance with provisions of the Rule. As described by SEC Commissioner Hester Peirce, when someone walks into a pizza shop, there is a general expectation that they are not going to get sushi. The revised Names Rule is designed to provide the same experience to investors.
With the expansion of the Names Rule’s scope, it is estimated that approximately 75% of all funds will be affected by the Release in some manner. The final amendments to the Names Rule include:
- Expanding the scope of the Names Rule to include terms suggesting an investment focus in investments that have, or whose issuers have, “particular characteristics” (e.g., growth, value or terms indicating that a fund’s investment decisions incorporate one or more environmental, social or governance (ESG) factors, and/or terms that reference a thematic investment focus).
- Requiring ongoing (i.e., at least quarterly) testing of portfolio investments for purposes of determining compliance with a fund’s 80% investment policy.
- Specifying time periods (generally 90 days) for funds to come back into compliance in connection with temporary departures.
- Incorporating requirements for purposes of valuing and including derivatives in a fund’s 80% investment policy.
- Requiring impacted funds to incorporate prospectus disclosure defining the terms used in a fund’s name, including specific criteria used to choose the investments described by the terms.
Expanded Scope of the Names Rule
The Release expands the scope of the Names Rule to require a fund to adopt a policy to invest at least 80% of its assets in accordance with any fund name that suggests an “investment focus.” The definition of “investment focus” includes investments in “a particular type of investment or investments, a particular industry or group of industries or particular countries or geographic regions” – all terms that were previously subject to the Names Rule. The definition, however, was expanded to include terms that suggest that a fund is focused on “investments that have, or investments whose issuers have, particular characteristics.” The SEC noted the expansion does not distinguish between a type of investment and an investment strategy because a fund name might connote a particular investment focus and result in reasonable investor expectations regardless of whether the fund’s name describes a strategy (e.g., growth or value) as opposed to a type of investment (e.g., equity or fixed income).
The SEC declined to provide an enumerated list of terms that would be included in the expanded scope in an attempt to make the Names Rule evergreen. The SEC did, however, note that the primary terms it anticipated that would be brought within the scope of the expanded Names Rule would include terms such as “growth” and “value,” terms with ESG- or sustainability-related characteristics and terms that reference a thematic investment focus.
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1 Investment Company Names, Investment Company Act Release No. 35000 (Sept. 20, 2023).
2 The Names Rule was also modified to require that the 80% investment policy and recordkeeping requirements will only apply to unit investment trusts at the time of initial deposit.
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