Monday, June 06. 2022
Provided in the Names Rule are requirements that a fund’s name accurately reflects the fund’s investments and risks. Since the adoption of the Names Rule, both the fund industry and compliance practices have continued to develop and advance. The SEC expects the proposed amendments would help ensure that the rule continues to meet its main objective of investor protection.
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. The rule proposal would:
- broaden this requirement to pertain to any fund name with terms suggesting 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)
- require a fund to use a derivatives instrument’s notional amount instead of its market value to determine the fund’s compliance with its 80 percent investment policy to address the rule’s application to derivatives investments
Temporary Departures from a Fund’s 80 percent Investment Policy
The proposed revision would specify certain circumstances under which a fund may be exempt from the 80 percent investment policy, more specifically, abrupt shifts in market value of underlying investments, including specific time frames for returning to 80 percent.
Unlisted Closed-End Funds and BDCs
Under the proposed revisions, a registered closed-end fund or business-development company (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. With limited options to exit their investments if the change were made, this barring would guarantee investors the ability to vote on potential changes in investment policy.
Enhanced Prospectus Disclosure, Reporting, and Recordkeeping
If the updates are approved, the proposal would:
- include amendments that would provide increased information to investors and the SEC about how fund names track their investments
- require fund prospectus disclosure that defines the terminology used in a fund’s name
- include modifications to Form N-PORT that would require greater transparency on how the fund’s investments align with the fund’s investment focus
- require funds to maintain certain records regarding how they comply with the rule or why they think they are not subject to it
Materially Deceptive and Misleading Use of ESG Terminology
In accordance with the proposal, 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.
The Modernization of Notice Requirement
The proposal would implement the following changes:
- the rule’s notice requirement would be revised to directly address funds that use electronic delivery methods to provide information to their shareholders.
- the current rule’s requirement that notice must be provided to fund shareholders of any change in the fund’s 80 percent investment policy (unless the 80 percent investment policy is a fundamental policy of the fund) would remain unchanged.
Structured Data Language Format Requirement for Names-Related Disclosures
The SEC is also proposing to require funds to tag the new names-related disclosures using a structured, machine-readable data language, particularly Inline XBRL, in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual. 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.
Interested parties may provide feedback within 60 days after the rule’s publication in the Federal Register. For more information, including instructions on how to submit comment, refer to the Investment Company Names rule proposal on the SEC’s website.