On May 25, 2022, the Securities and Exchange Commission (SEC) proposed an amendment to the Investment Company Act of 1940’s “Names Rule.” The Names Rule was set in place 20 years ago to assure that a fund’s name does not deceive investors on the risks and potential industry concentrations that the fund may invest in. These changes update the existing guidelines for changes that have happened in SEC reporting since the original policies were put into place.
The proposed changes impact six existing requirements:
- 80% Investment Policy: Currently, funds with certain names are required to adopt and disclose that 80% of their investments are concentrated in a sector suggested by its name. The proposal would expand those names that are required to adopt an 80% investment policy to names with terms such as “growth”, “value”, and “sustainable”.
- Departures from the 80% Investment Policy: This change would allow funds to temporarily change their investment strategy to one that does not align with their existing 80% policy. These changes would only be allowed in cases where there were extreme market fluctuations, unusually large cash inflows or redemptions, cash positions taken to avoid a loss, or liquidation or reorganization of a fund. The fund would have to be back into compliance with their 80% policy within 30 days.
- Closed-End Funds (CEF) and Business Development Companies (BDC): This amendment would require registered CEFs and BDCs whose shares are not listed on a national stock exchange from changing their 80% policy without a shareholder vote.
- Enhanced Disclosure and Reporting: The proposal would include changes to Form N-PORT. The form would be amended to include detailed information on the value of the fund’s 80% policy and the number of days that value fell below 80%.
- Use of ESG Terminology: This change would prohibit funds from using ESG terminology in their names unless they have an 80% investment policy concentrated in ESG factors.
- Notice Requirements: The proposal would still require funds to notify shareholders of any change in their 80% policy, but they would also be required to include additional details about the content to those shareholders who have elected for electronic delivery.
The SEC has opened a comment period for 60 days on this proposal. Comments can be submitted electronically, by email, or by paper. Should these updated rules be adopted, the SEC has proposed a one year transition period for compliance.
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