November 21, 2023
On October 27, 2023, the final amendments to rule 35d-1 under the Investment Company Act of 1940, also known as the “Names Rule” were published to the Federal Register. These amendments aim to increase shareholder protection by increasing the scope of funds required to adopt a policy to invest at least 80% of its assets based on the investment approach suggested by the fund name, as well as notice and recordkeeping requirements relating to these policies.
Affected Forms Include
Comparison of Current Rule, Proposal, and Final Amendments
|Current Rule||Proposed Amendments||Final Amendments|
|If fund name suggests a focus in a type of investment, geographic region, or industry, the fund must adopt a policy to invest at least 80% of its assets with that same focus.||Expands the rule to cover any funds with names that suggest a focus in investments that have, or whose issuers have, particular characteristics.
This includes names containing terms like “growth” or “value” and terms that reference one or more ESG factors.
|Adopting as proposed.|
|Fund can either make the 80% investment policy fundamental (requires shareholder approval to make changes) or provide shareholders a 60 day notice prior to changing it||Maintains current rule’s requirements and updates to account for funds that utilize electronic delivery methods.||Adopting as proposed.|
|Fund required to invest in accordance with 80% policy “under normal circumstances”||Funds permitted to intentionally depart from the 80% requirement only under specified circumstances||Retains “under normal circumstances” provision.
Funds permitted to intentionally depart from the 80% requirement under “other-than-normal” circumstances, with that definition left up to the fund’s discretion.
|Fund required to determine at the time it invests whether the security is appropriately included in the fund’s 80% basket||Removes time-of-investment test.
Reassess portfolio to determine if in compliance with 80% requirement continuously.
|Retains time-of-investment test per current rule.
Reassess portfolio to determine if in compliance with 80% requirement at least quarterly.
|If fund becomes out of compliance with policy, future investments must bring it back into compliance.||Specifies time frame of 30 days to come back into compliance.||Specifies time frame of 90 days to come back into compliance, with certain exceptions.|
|New subjects addressed|
|Derivatives||Requires use of derivatives instrument’s notional amount to determine compliance with 80% investment policy.||Adopting as proposed with limited modification excluding certain currency hedges from calculation of compliance with the 80% requirement.|
|Unlisted Registered Closed-End Funds and BDCs||Prohibits from changing 80% investment policy without shareholder vote||Permits changing 80% investment policy without a vote if:
|Prospectus Disclosure||Requires a fund to disclose 80% investment policy as one of its principal investment strategies.||Adopting definition as proposed within statutory prospectus and summarized in summary sections.|
|Requires fund to define the terms used in its name and criteria used to choose investments that the term describes in its summary section.||Adopting as proposed.|
|Requires new information to be tagged with inline XBRL.||Adopting as proposed.|
|Plain English / Established Industry Use Requirement||Terms used in fund name suggesting investment focus or tax-exempt status must be consistent with those terms’ plain English meaning or established industry use.||Adopting as proposed.|
|Form N-PORT||Requires fund to report value of its 80% basket.||Adopting proposed data only for third month of each quarter.|
|Requires fund to report whether an investment is included in the 80% basket.||Adopting proposed data only for third month of each quarter.|
|New monthly reporting item to include definition(s) of terms used in fund’s name||Adopting proposed definition(s) only for third month of each quarter.|
|Requires fund to report the number of days the value of its 80% basket fell below 80% of the value of the fund’s total assets during reporting period.||Not adopting.|
Required records to be kept for funds adopting 80% investment policy:
|Record of investments included in 80% basket and basis for inclusion.||Adopting as proposed.|
|Value of 80% basket (as a percentage of the value of assets).||Adopting as proposed.|
|Reasons for departure from 80% investment policy.||Quarterly review of portfolio investments’ inclusion in 80% basket and basis for inclusion.|
|Dates of departure from 80% investment policy.||Dates and reasoning of any identified drift from compliance with 80% requirement.|
|Any notice sent to shareholders pursuant to names rule.||Adopting as proposed.|
|Requires funds that don’t adopt an 80% policy to maintain a record of their analysis that such policy is not required.||Not adopting.|
|ESG “integration funds”||Includes regulations to protect from fund name misleading shareholder that an ESG factor is more relevant to fund’s investment strategy than it really is.||Not adopting.|
What does this mean for me?
Firms should review and identify which funds will be subject to the rule, and evaluate what changes they will need to make in order to comply with the new rule by the compliance dates. If you have any questions or need assistance, our team of regulatory experts can help. Contact us today to learn more.