SEC Staff Issues New Names Rule FAQs

Who may be interested: Registered Investment Companies; Compliance Officers

Quick Take: The staff of the Division of Investment Management (Staff) of the SEC recently issued responses to frequently asked questions (FAQs) covering the SEC’s 2023 adoption of amendments to Rule 35d-1 under the 1940 Act (the Names Rule). The original 2001 Names Rule required a fund to adopt a policy to invest at least 80% of its assets in accordance with the investment focus the fund’s name suggests. The amendments extend the Names Rule’s coverage to include any fund name with terms suggesting that the fund focuses on investments that have, or investments whose issuers have, particular characteristics (e.g. growth, value, or environmental, social and governance). The FAQs are organized in the following categories: (1) adoption of 80% investment policy; (2) tax-exempt funds; and (3) specific terms commonly used in fund names.

Under the Names Rule, a fund may elect to make its 80% investment policy a fundamental policy (i.e., a policy that may not be changed without shareholder approval) or instead provide shareholders notice at least 60 days prior to any change in the 80% investment policy.

According to the FAQs, if a fund “deviates” from an existing fundamental policy (including a fundamental 80% investment policy), the fund must obtain shareholder approval. However, a fund does not need shareholder approval to adopt a new or amended policy that is consistent with the existing fundamental policy.

For example, a fund with an 80% fundamental investment policy requiring it to invest in equity securities would not deviate from that policy if it were to revise the policy to focus on equity securities with growth characteristics. A fund will need to determine, based on its individual circumstances, whether it would be necessary to seek shareholder approval to adopt a new fundamental investment policy (or revise an existing fundamental policy) in light of the amended Names Rule. A fund also will need to consider whether factors other than the 1940 Act, such as state law or the fund’s charter or by-laws, would require shareholder approval in order to adopt or revise a fundamental 80% investment policy.

Under the Names Rule, a fund with a name implying that its distributions are exempt from state and/or federal income tax must adopt an 80% investment policy to that effect. The FAQs clarify that the 80% policy can be based on (a) the percentage of the fund’s distributable income that will be tax-exempt (an income test) or (b) the percentage of the fund’s assets that will be invested in particular securities (an asset test).

A single-state tax-exempt fund must adopt a fundamental 80% investment policy focusing on securities that are exempt from both federal and state income tax. A fund that has the term “municipal” in its name is subject to the same 80% investment policy requirements as tax-exempt funds, but can count securities that generate income subject to the alternative minimum tax towards its 80% investment requirement. A fund with a name that includes the term “tax-exempt” cannot do so.

The FAQs also contain guidance for funds with the terms “income,” “high-yield,” “tax-sensitive,” and “money market” in their names.

A fund with the term “income” in its name is not necessarily required to adopt an 80% investment policy. The Staff states that when the term “income” does not refer to “fixed-income” securities, such term in a fund’s name generally indicate that the fund “emphasizes the achievement of current income on a portfolio-wide” basis.

According to the FAQs, the term “high-yield” usually describes below investment grade corporate bonds. Because these are investments with particular characteristics, most funds with names that include the term “high-yield” will be required to adopt an 80% investment policy under the Names Rule. However, in keeping with historical SEC practice, the FAQs state that funds with names that use the term “high-yield” in conjunction with the term “municipal” or “tax-exempt” will be able to continue to invest less than 80% of their assets in high-yield bonds. These funds will, however, be required to adopt fundamental 80% policies to invest in “municipal” or “tax-exempt” securities.

The FAQs clarify that a fund with a name that includes the term “tax-sensitive,” “tax-managed,” “tax-advantaged,” or similar terms will not be required to adopt an 80% investment policy. The Staff views these terms as referencing the overall characteristics of a fund’s portfolio.

Per the FAQs, a money market fund with a name including the term “money market” is not per se required to adopt an 80% investment policy, in light of Rule 2a-7 requirements that money market funds invest solely in eligible securities. However, if the name includes terms that are specific to the asset class in which the fund expects to invest, the Names Rule will require an 80% investment policy. For example, a fund with a name containing the term “US Treasury Money Market Fund” would be required to adopt a policy of investing 80% of its assets in US Treasury securities.

Names with terms that do not communicate the particular characteristics of investments composing the fund’s portfolio will continue to be subject to the prohibition in Section 35(d) of the 1940 Act, which prohibits materially misleading or deceptive names, as well as the anti-fraud provisions of the Federal securities laws regarding disclosures to investors.

The Staff’s responses to the FAQs can be found here. Our previous coverage of the adoption of the Names Rule amendments can be found here. As a reminder, the compliance date for the Names Rule amendments is December 10, 2025 for larger entities and June 10, 2026 for smaller entities.