SEC Adopts Amendments to “Name Rule”

September 21, 2023

What happened?

On September 20, 2023, the SEC adopted enhancements to the Investment Company Act “Names Rule,” aiming to address names for a registered investment company or business development company (“BDC”) that could be misleading or deceptive. “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors,” said SEC Chair Gary Gensler, according to the Commission’s press release. The amendments to the Names Rule will enhance the rule’s current requirement for registered investment companies whose names suggest a focus in a particular type of investment to adopt a policy to invest at least 80 percent of the value of their assets in those investments.  Now, the enhanced rule will require more funds to adopt this 80 percent investment policy. The requirements of the new rule include:

• Modernization of the 80 Percent Investment Policy Requirement – The rule’s current 80 percent investment rule will expand to apply to fund names which indicate a focus in investments which have particular characteristics. According to the release, funds with terms such as “growth” or “value” as well as terms that reference thematic investments, such as Environmental, Social or Governance (ESG) investments, will be covered by the new rule.
• Enhanced Prospectus Disclosure, Form N-PORT Reporting, and Recordkeeping – Funds with an 80 percent investment policy are required to define in their prospectus the terms used in its name as well as the criteria used to select investments according to the terms used. Terms that suggest an investment focus, or that a fund’s distributions are tax-exempt, must be consistent with he plain English meaning or stablished industry use of such terms. Additionally, the rule amends Form N-PORT to better reflect funds’ investment focuses and includes new recordkeeping provisions for compliance with the rule.
• Temporary Departures from a Fund’s 80 Percent Investment Policy – Funds with an 80 percent investment policy will now be required to review their portfolio assets at least quarterly. The amendment provides a 90 day timeline for funds to come back into compliance with their 80 percent investment policy in most circumstances. This is a welcome increase from the 30 day period the proposed rule required for reversion to the 80% threshold.
• Unlisted Closed-End Funds and BDCs – The amendments generally prohibit a registered closed-end fund or BDC whose shares are not listed on a national securities exchange from changing its 80 percent investment policy without a shareholder vote. The aim is to give more protections to investors in these funds given the limited options for exiting such investments. This new requirement is waived if a tender or repurchase offer is conducted by the fund in accordance with the new rule and in advance of the change.
• Modernization of Notice Requirement – The amendment leaves unchanged the requirement of funds to provide 60 days’ notice to shareholders of any change to the fund’s 80 percent investment policy. The rule includes specific requirements on content and delivery for use of electronic delivery methods to provide this notice information to shareholders.

What does this mean for me?

Once published in the Federal Register fund groups with net assets of $1 billion or more will have 24 months to comply with the new rule, and fund groups with net assets less than $1 billion will have 30 months to comply.  Now is the time to review current fund strategies to determine what funds you manage are within scope of the rule.

Contact us if you have any questions or would like additional information about maintaining your compliance program.