Tuesday, September 26. 2023
Modernization of the 80 percent Investment Policy Requirement
Under the Names Rule, funds with certain names are required to adopt a policy to invest 80 percent of their assets in the investments suggested by that name. Additionally, the amendment will:
- broaden this requirement to apply to any fund name with terms indicating that the fund focuses on investments that (or investments whose issuers) have specific characteristics (for example, fund names with terms like “growth” or “value” and those indicating that the fund’s investment decisions comprise one or more environmental, social, or governance (ESG) factors). In accordance with the changes, a fund that equally considers ESG factors and non-ESG factors in its investment decisions would be prohibited from using ESG or similar terms in its name. Noncompliance would be considered materially deceptive or misleading.
- require funds with derivatives in their holdings to use the derivatives’ notional amount, instead of their market value to determine the funds’ compliance with their 80 percent investment policy
Temporary Departures from a Fund’s 80 percent Investment Policy
The amendments specify certain circumstances under which a fund may be exempt from the 80 percent investment policy. More specifically, this applies to sudden shifts in the market value of underlying investments, including specific time frames for returning to 80 percent, which is generally 90 days.
Unlisted Closed-End Funds and BDCs
Under the new amendments, a registered closed-end fund or BDC whose shares are not listed on a national securities exchange would be prohibited from changing its 80 percent investment policy without a shareholder vote. Because of the limited options to exit their investments if a change were made, this exception would guarantee investors the ability to vote on potential changes in investment policy.
Enhanced Prospectus Disclosure, Reporting, and Recordkeeping
The newly approved amendments will:
- require funds to keep certain records regarding how they comply with the rule or why they think they are not subject to it
- include changes to Form N-PORT that would require greater transparency on how the fund’s investments align with the fund’s investment focus
- require fund prospectus disclosure that defines the terminology used in a fund’s name
- provide increased information to investors and the SEC about how fund names track their investments
The Modernization of Notice Requirement
The updates will do the following:
- retain the current rule’s requirement that, unless the 80 percent investment policy is a fundamental policy of the fund, 60 days’ notice must be provided to fund shareholders of any change in the fund’s 80 percent investment policy
- update the Names Rule’s notice requirement to address funds directly that use electronic delivery methods to provide information to their shareholders and incorporate additional specificity about the content and delivery of the notice
Structured Data Language Format Requirement for Names-Related Disclosures
The SEC is also adopting a requirement that funds tag the majority of the new information (names-related disclosures) using a structured, machine-readable data language (specifically Inline eXtensible Business Reporting Language or “Inline XBRL”). Compared to non-machine-readable data languages such as ASCII or HTML, the XBRL requirement would make disclosures more readily available and accessible to the SEC, investors, and other market participants.
For further details on the Names Rule, please see the final rule on the SEC’s website.
The rule amendments will be effective 60 days following publication in the Federal Register. Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments, and fund groups with net assets of less than $1 billion will have 30 months to comply.