Warshaw Burstein LLP | WHAT’S IN A NAME? SEC Announces Rule Proposal to Address Fund Names
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WHAT’S IN A NAME? SEC Announces Rule Proposal to Address Fund Names

On May 25, 2022, the U.S. Securities and Exchange Commission (“SEC”) released proposed amendments to Rule 35d-1 (the “Names Rule”), under the Investment Company Act of 1940. The proposal will affect registered investment companies and business development companies (together referred to as “fund(s)”). According to the SEC release, the amendments are designed to increase investor protection and modernize the Names Rule, bringing it in line with contemporary industry requirements and practices. The SEC believes that the amendments would enhance transparency in the asset management market and ensure that a fund’s name does not misrepresent the fund’s investments and risks.
If the Names Rule is adopted, funds would be subject to the following changes:
  • The amendments would expand the scope of the 80% investment policy to apply to any fund with a name that suggests the fund focuses on investing in issuers with specific characteristics, including, for example, Environmental, Social, and Governance-related (“ESG”) fund names.
  • The amendments would limit the circumstances under which a fund may depart from the 80% requirement (e.g., market changes), further specifying time frames for bringing a fund back into compliance if it “drifts” below the 80% requirement — typically within 30 days.
  • Registered closed-end funds and BDCs would be required to hold a shareholder vote in order to change their 80% investment policies.
  • Integration funds that consider ESG factors alongside, but no more prominently than, non-ESG factors will not be allowed to use ESG terminology in its name.
  • Funds would be required to define in their prospectus the terms used in their names and explain how their investment selection strategy advances those definitions. Funds also will be required to keep accurate records of compliance with the requirement. Funds that do not believe they are subject to the 80% requirement will need to maintain a record of their analysis as to why.
  • The proposed amendments seek to modernize the notice requirement so that shareholders may receive notice of changes in the 80% requirement from funds electronically.
The comment period for the proposed amendments will remain open for 60 days following official publication.  If adopted, the final rule would allow funds a one-year transition period to come into compliance with the new amendments. To view the published proposal, please visit: Federal Register, SEC Proposed Rule - Investment Company Names.