On September 20, 2023, the SEC adopted amendments to the Investment Company Act “Names Rule,” as well as related disclosure and reporting requirements.
- The rule’s 80% investment policy requirement will be expanded beyond its current scope, to apply to any fund name with terms suggesting that the fund focuses on investments that have, or investments whose issuers have, particular characteristics.
- This coverage will include, for example, fund names with terms such as “growth” or “value,” or terms indicating that the fund’s investment decisions incorporate one or more ESG factors.
Temporary Departures from the 80% Investment Requirement
- The amendments retain the names rule’s current requirements for a fund to invest in accordance with its 80% investment policy “under normal circumstances” (the “80% investment requirement”), and for the 80% investment requirement to apply at the time a fund invests its assets.
- The amendments add a new provision that requires a fund to review its portfolio assets’ inclusion in its “80% basket” at least quarterly.
- The amendments include specific time frames—generally 90 days—for getting back into compliance if a fund departs from the 80% requirement as a result of drift or in other-than-normal circumstances.
- The amendments generally require funds to use a derivatives instrument’s notional amount to determine the fund’s compliance with its 80% investment policy, with certain adjustments.
- The amendments include a limited modification to this approach that would exclude certain currency hedges from the names rule compliance calculation.
Unlisted Registered Closed-End Funds and BDCs
- The amendments generally prohibit an unlisted registered closed-end fund or BDC that is required to adopt an 80% investment policy from changing that policy without a shareholder vote.
- The amendments permit these funds to change their 80% investment policies without such a vote if:
- the fund conducts a tender or repurchase offer with at least 60 days’ prior notice of the policy change,
- that offer is not oversubscribed, and
- the fund purchases shares at their net asset value.
Enhanced Prospectus Disclosure
- The amendments to funds’ prospectus disclosure requirements that will require a fund to define the terms used in its name, including the criteria the fund uses to select the investments that the term describes.
Plain English Requirements for Terms Used in Fund Names
- The amendments to the names rule effectively require that any terms used in the fund’s name that suggest either an investment focus, or that the fund’s distributions are tax-exempt, must be consistent with those terms’ plain English meaning or established industry use.
Form N-PORT Reporting Requirements
- The amendments to Form N-PORT for funds will require funds to report the value of the fund’s 80% basket, and whether an investment is included in the fund’s 80% basket.
- The amendments also include a new reporting item to include the definition(s) of terms used in the fund’s name. Funds will have to report this information for the third month of every quarter, instead of for each month as proposed.
- The final rules include recordkeeping provisions related to a fund’s compliance with the rule’s requirements.
Tiered Compliance Period
- The compliance date for the final amendments is December 10, 2025 for larger entities, and June 10, 2026 for smaller entities.
- Larger entities are funds that, together with other investment companies in the same “group of related investment companies” (as such term is defined in rule 0-10 under the Investment Company Act [17 CFR 270.0-10]) have net assets of $1 billion or more as of the end of the most recent fiscal year
- Smaller entities are funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year
Compliance Cost Estimates
The SEC project direct compliance costs broadly attributable to the following activities:
- reviewing the final rule’s requirements;
- determining whether to change a fund’s name or comply with the new requirements, as applicable;
- developing new (or modifying existing) practices, reporting, and recordkeeping requirements to align with the requirements of the final rule;
- integrating and implementing those practices, reporting, and recordkeeping requirements to the rest of the funds’ activities; and
- preparing new training materials and administering training sessions for staff in affected areas.
The SEC estimated that the initial costs to establish and implement practices designed to meet the requirements of the final amendments as described in the adopting release will range from $50,000 to $500,000 per fund, depending on the particular facts and circumstances of the fund. The SEC believes the costs would be closer to the lower end of the range for funds whose current practices are more similar to the requirements of the final rule and for a fund that only incurs costs associated with analyzing the requirements of the rule.
The SEC also concluded that some funds may change their name rather than comply with the amended rule, which it estimated would result in a total direct burden of $75,000 to $250,000 as a one-time cost, including analyzing the rule and deciding to change their name.
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Contact Mitch Avnet for further details: (646)346-2468 | firstname.lastname@example.org