What’s in a name? It seems the United States Securities and Exchange Commission (the “SEC”) would disagree strongly with the female protagonist of William Shakespeare’s Romeo and Juliet that a rose by any other name would smell so sweet.
On May 25, 2022, the SEC announced proposed amendments to Rule 35d-1 (the “Names Rule”) under the Investment Company Act of 1940 (the “1940 Act”). The name rule was adopted in 2001 and generally requires that if a fund’s name suggests a focus on a particular type of investment, or on investments in a particular industry or geographic area, the fund must adopt a policy investment of at least 80% of the value of its assets in the type of investments, industry, country or geographical region suggested by its name. Notably, fund names that incorporated terms such as “growth” or “value” were deemed to convey an investment strategy rather than an investment objective and were therefore excluded from the policy’s 80% requirement.
In early 2020, the SEC issued a request for public comment on whether the name rule was effective and whether there were any viable alternatives to consider, noting market and other developments since the name rule was adopted. the rule, such as the prevalence of ETFs, the use of derivatives, and an increased focus on thematic areas. SEC Chairman Gary Gensler observed, “A lot has happened in our financial markets over the past two decades. As the fund industry has grown, loopholes in the current name rule may compromise investor protection. In particular, some funds have claimed that the rule does not apply to them even though their name suggests that the investments are selected according to specific criteria or characteristics.
The proposed amendments will, among other things, expand the scope of the 80% investment policy of the name rule to apply to any fund name with language suggesting that the fund focuses on investments that have, or investments whose issuers have, special characteristics. In addition, the proposed amendments will change the requirement that a fund apply the 80% policy at the time of investment in favor of identifying specific circumstances where a fund might deviate from the specific policy and timeframes. to restore compliance. The Proposed Amendments will also change the way certain derivative instruments are valued for purposes of calculating a fund’s 80% tranche and will clarify the types of derivative instruments a fund may include in its 80% tranche. Of particular note, the proposed amendments indicate that the SEC will find the use of an ESG term in a fund’s name to be misleading and misleading if the ESG factor identified by that term was not a material factor in the decision to include or exclude a particular investment in the portfolio. Finally, the proposed amendments include changes to reporting on Form N-PORT, how to communicate investment policy changes to fund shareholders, record keeping of the fund’s compliance with the rule, and would require funds closed-end or unlisted BDCs to seek shareholder approval before moving to an 80% investment policy.
The public comment period for the proposed changes will begin when they are published in the Federal Register and will remain open for 60 days.