On Sept. 20, the Securities and Exchange Commission (SEC) adopted amendments to Rule 35d-1, more commonly known as the "Names Rule," under the Investment Company Act of 1940 (Investment Company Act). These amendments are designed to broaden the scope of the Names Rule's applicability and include updated disclosure and record-keeping requirements.
Currently, the Names Rule requires that a registered investment company whose name suggests a focus in a particular type of investment adopt a policy to invest at least 80% of the value of its assets in those investments. The amendments expand the Names Rule to require a broader scope of funds to adopt an 80% investment policy, including funds with names suggesting a focus in investments with "particular characteristics" — for example, terms such as "growth" or "value" or certain terms that reference a thematic investment focus, such as the incorporation of one or more environmental, social or governance factors. These amendments apply in addition to the existing 80% investment policy requirement for funds whose name suggests a focus in a particular type of investment, industry, country or geographic region or a certain tax treatment.
The term "particular characteristics" is not defined in the Names Rule, and the SEC notes that the amendments provide flexibility for fund managers to "ascribe reasonable definitions for the terms used in a fund's name" and to determine the criteria used to select the investments that the term describes. These definitions may not be inconsistent with the plain-English meaning or established industry use of the terms in the fund's name. Each fund that is required to adopt and implement an 80% investment policy must include a disclosure in its prospectus that defines the term(s) used in its name and the specific criteria by which the fund selects investments that the term describes.
The amendments also include a new requirement that a fund review its portfolio assets' treatment under its 80% investment policy at least quarterly. Funds are required to comply with the 80% investment requirement "under normal circumstances." Should a fund depart from compliance with its 80% policy, either due to portfolio drift or intentional departure, it will now have 90 days to return to compliance from when the departure is discovered, as opposed to the 30-day period initially proposed by the SEC.
The SEC further adopted amendments to Form N-PORT (filed quarterly) to require funds that are subject to an 80% investment policy to report whether, as of the end of the fiscal quarter, each investment in the fund's portfolio is in that fund's 80% basket and to report the value of the fund's 80% basket as a percentage of the value of the fund's net assets. The amended Names Rule also requires funds that are subject to the 80% policy requirement to maintain certain written records documenting compliance with the rule, including, at the time of investment, the basis for including an investment in the fund's 80% basket, documentation of the required quarterly review and documentation of any departure from the fund's 80% policy.
The amendments to the Names Rule will become effective 60 days after publication in the Federal Register. Fund groups with net assets of $1 billion or more have 24 months to comply with the updated rule, and fund groups with net assets of less than $1 billion have 30 months to comply. The full text of the amended Names Rule, along with the SEC's adopting release, can be found here.
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