SEC Proposes Amendments to Modernize the Investment Company “Names Rule”

The proposal seeks to limit misleading or deceptive fund names  

On May 25th, the U.S. Securities and Exchange Commission (SEC) released proposed rule amendments to the Investment Company Act “Names Rule” (rule 35d-1) related to the naming of funds. These amendments affect investment companies and business development companies (BDC).  

Driven by the important role that the name of a fund plays in marketing and signaling to investors the nature of a fund’s investment strategy, the proposed amendments, if adopted, would modernize six elements of the “Names Rule”.  The goal of these amendments is to provide investors with accurate information about the risks and nature of their investments and prevent firms from deceptively naming funds.  

Proposed amendments include: 

• Expansion of the 80% Investment Policy Requirement – The current policy that requires funds to invest 80% of their assets associated with the fund’s name would be expanded to include fund names that suggest the fund’s investments have certain characteristics. This can include terms like “growth” or “value”, as well as fund names that reference aspects of environmental, social, or governance (ESG) in their names. 
• Departures from a Fund’s 80% Investment Policy – The proposal clarifies when funds can temporarily deviate from the 80% rule and establishes that in most cases, funds must return to compliance within 30 consecutive days. 
• Deceptive Use of ESG Terminology – Funds that consider ESG factors as equally important as non-ESG factors (i.e., ESG Integration Funds) would be prohibited from using ESG or similar terminology in the name of the fund.  
• Unlisted and Closed-End Funds and BDCs – Registered closed-end funds or BDCs that are not listed on a national securities exchange would be prohibited from changing its 80% investment policy without a shareholder vote. 
• Prospectus Disclosure to Define Terms in Fund Name – Funds would be required to disclose in its prospectus, definitions of terms used in the fund’s name, and the criteria used to select investments associated with the fund’s name. 
• Modernization of Notice Requirements – The proposal maintains the current rule’s requirement that "unless the 80% investment policy is a fundamental policy of the fund, notice must be provided to fund shareholders of any change in the fund’s 80% investment policy.” However, the proposal clarifies how notifications must be made to shareholders when they are being notified through electronic communications, instead of traditional mail.    

Next steps  

The proposal will be open for public comment for the next 60 days. Comments may be submitted to the SEC by emailing rule-comments@sec.gov in reference to File Number S7-16-22.  

How we help

Our ESG Advisory Practice will continue to monitor the SEC’s ESG actions and offer additional guidance as more information becomes available. We can also help the affected advisers prepare for these proposed amendments with:

• Policy and procedure development and review
• Disclosure verification
• Marketing disclosures and review
• Portfolio performance assessment

To discuss the SEC’s proposed rules, or to hear our team’s perspective on this and other ESG issues, please contact our ESG Advisory Practice.

To subscribe to our ESG mailing list, please click here.