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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, 270 and 274

[Release No. 33-11067; 34-94981; IC-34593; File No. S7-16-22]

RIN: 3235-AM72

Investment Company Names

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange Commission (the “Commission”) is proposing to

amend the rule under the Investment Company Act of 1940 (the “Investment Company Act” or

the “Act”) that addresses certain broad categories of investment company names that are likely to

mislead investors about an investment company’s investments and risks. The proposed

amendments to this rule are designed to increase investor protection by improving and clarifying

the requirement for certain funds to adopt a policy to invest at least 80% of their assets in

accordance with the investment focus that the fund’s name suggests, updating the rule’s notice

requirements, and establishing recordkeeping requirements. The Commission also is proposing

enhanced prospectus disclosure requirements for terminology used in fund names, and additional

requirements for funds to report information on Form N-PORT regarding compliance with the

proposed names-related regulatory requirements.

DATES: Comments should be received on or before August 16, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments:

•

Use the Commission’s Internet comment form

(https://www.sec.gov/rules/submitcomments.htm); or

•

Send an email to rule-comments@sec.gov. Please include File Number S7-16-22 on the

subject line;

Paper Comments:

•

Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange

Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-16-22. This file number should be included on

the subject line if email is used. To help the Commission process and review your comments

more efficiently, please use only one method. The Commission will post all comments on the

Commission’s website (http://www.sec.gov/rules/proposed.shtml). Comments are also available

for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE,

Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m.

Operating conditions may limit access to the Commission’s public reference room. All

comments received will be posted without change. Persons submitting comments are cautioned

that we do not redact or edit personal identifying information from comment submissions. You

should submit only information that you wish to make available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff

to the comment file during this rulemaking. A notification of the inclusion in the comment file of

any such materials will be made available on the Commission’s website. To ensure direct

electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Pamela Ellis, Mykaila DeLesDernier,

Bradley Gude, Senior Counsels; Amanda Hollander Wagner, Branch Chief; or Brian

McLaughlin Johnson, Assistant Director, at (202) 551-6792, Investment Company Regulation

Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street

NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public

comment: amendments to 17 CFR 270.35d-1 (“rule 35d-1”) under the Investment Company Act;

amendments to Form N-1A [referenced in 17 CFR 239.15A and 17 CFR 274.11A], Form N-2

[referenced in 17 CFR 239.13 and 17 CFR 274.11a-1], Form N-8B-2 [referenced in 17 CFR

274.12], and Form S-6 [referenced in 17 CFR 239.16] under the Investment Company Act and

the Securities Act of 1933 (“Securities Act”) [15 U.S.C. 77a et seq.]; amendments to Form NPORT [referenced in 17 CFR 274.150] under the Investment Company Act; amendments to 17

CFR 232.11 (“rule 11 of Regulation S-T”) and 17 CFR 232.405 (“rule 405 of Regulation S-T”)

under the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. 78a et seq.];

amendments to 17 CFR 230.485 (“rule 485”) under the Securities Act; and amendments to 17

CFR 230.497 (“rule 497”) under the Securities Act.

TABLE OF CONTENTS

INTRODUCTION AND BACKGROUND........................................................................ 5

A. Overview of Section 35(d) of the Act and the Names Rule .................................................. 8

B. Challenges Regarding Application of the Names Rule and Need for Modernization ......... 11

C. Overview of Rule Proposal .................................................................................................. 16

II. DISCUSSION ..................................................................................................................... 19

A. 80% Investment Policy Requirement................................................................................... 19

1. Names Suggesting an Investment Focus ......................................................................... 19

2. Temporary Departures from the 80% Investment Requirement ..................................... 33

3. Considerations Regarding Derivatives in Assessing Names Rule Compliance .............. 48

4. Unlisted Closed-End Funds and BDCs ........................................................................... 65

5. Effect of Compliance with an 80% Investment Policy ................................................... 69

B. Prospectus Disclosure Defining Terms Used in Fund Name............................................... 72

C. Plain English/Established Industry Use Requirement ......................................................... 78

D. Materially Deceptive and Misleading Use of ESG Terminology in Certain Fund Names .. 81

E. Modernizing the Rule’s Notice Requirement ...................................................................... 86

F. N-PORT Reports .................................................................................................................. 95

1. Investment Company Act Names Rule Investment Policy ............................................. 95

2. Investments to Be Included in a Fund’s 80% Basket .................................................... 100

G. Recordkeeping ................................................................................................................... 102

1. Funds Required to Adopt an 80% Investment Policy ................................................... 103

2. Funds That Do Not Adopt an 80% Investment Policy .................................................. 106

H. Unit Investment Trusts ....................................................................................................... 108

I. Transition Period and Compliance Date ............................................................................ 111

III. ECONOMIC ANALYSIS ............................................................................................... 113

A. Introduction ........................................................................................................................ 113

B. Broad Economic Considerations........................................................................................ 114

C. Economic Baseline............................................................................................................. 117

1. Fund Industry Overview ................................................................................................ 117

D. Benefits, Costs, and Effects on Efficiency, Competition and Capital Formation.............. 121

1. Benefits .......................................................................................................................... 122

2. Costs .............................................................................................................................. 133

E. Reasonable Alternatives Considered ................................................................................. 147

1. Returns-Based Requirement .......................................................................................... 147

2. Permit the Use of Derivatives’ Notional Values for Purposes of Names Rule Compliance

148

3. Modify Requirements for Tagging Prospectus Disclosure ........................................... 149

4. Board Approval or Notification of Temporary Departures ........................................... 150

5. Require a Higher Percentage of Assets Invested in Accordance with the Investment

Focus ............................................................................................................................. 151

6. Unlisted Closed-End Funds and BDCs ......................................................................... 152

F. General Request for Comment........................................................................................... 153

IV. PAPERWORK REDUCTION ACT ANALYSIS ......................................................... 155

A. Introduction ........................................................................................................................ 155

B. Rule 35d-1 .......................................................................................................................... 156

C. Prospectus Disclosure ........................................................................................................ 159

1. Form N-1A .................................................................................................................... 160

2. Form N-2 ....................................................................................................................... 161

3. Form N-8B-2 ................................................................................................................. 161

4. Form S-6 ........................................................................................................................ 162

D. N-PORT Reporting Requirements ..................................................................................... 163

E. Investment Company Interactive Data............................................................................... 164

F. Request for Comments ....................................................................................................... 167

V. INITIAL REGULATORY FLEXIBILITY ANALYSIS.............................................. 168

A. Reasons for and Objectives of the Proposed Actions ........................................................ 169

B. Legal Basis ......................................................................................................................... 169

C. Small Entities Subject to Proposed Rule Amendments ..................................................... 170

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements .................... 170

1. 80% Investment Policy Requirements – Proposed Scope Expansion and Other Proposed

Amendments .................................................................................................................. 172

2. Effect of Compliance with an 80% Investment Policy ................................................. 173

3. Recordkeeping Requirements........................................................................................ 174

4. Disclosure and Reporting Requirements ....................................................................... 175

5. Materially Deceptive and Misleading Use of ESG Terminology in Certain Fund Names

177

6. Exceptions for Certain UITs.......................................................................................... 179

E. Duplicative, Overlapping, or Conflicting Federal Rules ................................................... 179

F. Significant Alternatives ..................................................................................................... 180

G. Request for Comment ........................................................................................................ 183

VI. CONSIDERATION OF IMPACT ON THE ECONOMY ........................................... 183

VII. STATUTORY AUTHORITY ......................................................................................... 184

INTRODUCTION AND BACKGROUND

The name of a registered investment company or business development company

(“BDC”) is a means of communicating information about the fund to investors and is also an

important marketing tool for the fund. 1 While the Commission has often cautioned against

investors relying on a fund’s name as the sole source of information about the fund’s investments

and risks, it has also recognized that the name of a fund may communicate a great deal to an

investor. 2 A fund’s name is often the first piece of fund information investors see and, while

This release refers to registered investment companies and BDCs collectively as “funds.”

See Investment Company Names, Investment Company Act Release No. 24828 (Jan. 17, 2001)

[66 FR 8509 (Feb. 1, 2001)] (“Names Rule Adopting Release”); see also Request for Comments

on Fund Names, Investment Company Act Release No. 33809 (Mar. 2, 2020) [85 FR 13221

investors should go beyond the name itself and look closely at a fund’s underlying disclosures, a

fund’s name can have a significant impact on their investment decisions. These considerations

provided the policy basis underlying the Commission’s adoption of rule 35d-1 under the Act, the

“names rule,” in 2001. 3

Congress provided the Commission with rulemaking authority to address materially

deceptive or misleading fund names, recognizing the concern that investors may rely

inordinately on a fund’s name to determine its investments and risks. 4 The names rule, in turn,

helps ensure that a fund’s name does not misrepresent the fund’s investments and risks.

Consequently, the rule helps to ensure that investors’ assets in funds are invested in accordance

with their reasonable expectations based on the fund’s name. 5 The role of this rule remains

important and distinct from other disclosure requirements, in that fund names are subject to the

unique practical constraint of being concise by necessity, but still convey significant information

(Mar. 6, 2020)] (“2020 Request for Comment”), at n.11 and accompanying text. The comment

letters on the 2020 Request for Comment (File No. S7-04-20) are available at

https://www.sec.gov/comments/s7-04-20/s70420.htm. All references to comment letters in this

release are available in this comment file.

Names Rule Adopting Release, supra footnote 2.

See id. at n.3 and accompanying text (“In amending section 35(d), Congress reaffirmed its

concern that investors may focus on an investment company’s name to determine the company’s

investments and risks, and recognized that investor protection would be improved by giving the

Commission rulemaking authority to address potentially misleading investment company

names.”).

See id. at text preceding n.48; see also, e.g., Comment Letter of the CFA Institute (May 5, 2020)

(“CFA Institute Comment Letter”); Comment Letter of Chris Barnard (Mar. 9, 2020) (“Barnard

Comment Letter”); Comment Letter of the University of Miami School of Law Investor Rights

Clinic (Apr. 27, 2020) (“IRC Comment Letter”). But see ICI Comment Letter I (emphasizing that

the Commission noted when it adopted the names rule that investors should not rely on a fund’s

name as the sole source of information about that fund).

to an investor. However, as the fund industry has developed, and practices regarding names rule

compliance have continued to evolve over the past two decades, we believe that improvements to

the names rule are appropriate for the rule to continue to meet this purpose. 6 For example,

interpretive issues as to when a fund is subject to the names rule have raised questions about the

rule’s application with respect to particular fund names that could mislead investors about the

fund’s investment focus, such as when a fund’s name suggests investment in companies that

meet certain environmental, social, or governance (“ESG”) criteria. Competitive market

pressures create incentives for asset managers to include terminology in their funds’ names

designed to attract investor assets. We believe it is critical that fund names that suggest certain

information about a fund’s investments and attendant risks do so accurately. Under certain

circumstances, the current structure of the rule also may permit funds to depart from the

investment focus suggested by their name over time, which can deprive investors of the

protections of the rule.

The rule also is not currently well-suited to address ways in which the fund industry has

evolved since its adoption, both in terms of funds’ increasing use of derivatives to further their

investment strategies and investors’ increasing election for the electronic delivery of fund

See Comment Letter of Allianz Global Investors U.S. Holdings LLC (May 27, 2020) (“AllianzGI

Comment Letter”); see also Comment Letter of the Consumer Federation of America (May 12,

2020) (“CFA Comment Letter”) (arguing that funds “clearly understand both how important fund

names can be in communicating and advertising to investors and that fund names can influence

investor decisions,” and, as a result, funds “are very careful to choose names that are appealing to

investors”).

documents, such as prospectuses and shareholder reports. We are proposing to amend the names

rule to address these and other concerns.

A. Overview of Section 35(d) of the Act and the Names Rule

Section 35(d) of the Act prohibits a registered investment company from adopting as part

of its name or title any word or words that the Commission finds are materially deceptive or

misleading. 7 This section of the Act further authorizes the Commission to define such names or

titles as are materially deceptive or misleading. Congress adopted this provision due to concerns

that investors may focus on an investment company’s name to determine the company’s

investment objectives and level of risk, and recognized that investor protection would be

improved by giving the Commission rulemaking authority to address potentially misleading fund

names. 8

The names rule generally requires that if a fund’s name suggests a focus in a particular

type of investment (e.g., ABC Stock Fund, the XYZ Bond Fund, or the QRS U.S. Government

Fund), or in investments in a particular industry (e.g., the ABC Utilities Fund or the XYZ Health

Care Fund), or geographic focus (e.g., the ABC Japan Fund or XYZ Latin America Fund), the

fund must adopt a policy to invest at least 80% of the value of its assets in the type of

investment, or in investments in the industry, country, or geographic region, suggested by its

15 U.S.C. 80a-34(d). BDCs, which are not registered investment companies, are subject to the

requirements of section 35(d) pursuant to section 59 of the Act [15 U.S.C. 80a-58].

See S. Rep. No. 293, 104th Cong., 2d Sess. 8-9 (1996).

name. 9 The names rule imposes a similar 80% investment policy requirement for funds that have

names suggesting that a fund’s distributions are exempt from federal income tax or from both

federal and state income tax (“tax-exempt funds”). 10 Under the rule, a fund may generally elect

to make its 80% investment policy a fundamental policy (i.e., a policy that may not be changed

without shareholder approval) or instead provide shareholders notice at least 60 days prior to any

change in the 80% investment policy. 11 However, an 80% investment policy relating to a taxexempt fund name must be a fundamental policy. Further, unit investment trusts (“UITs”) that

have made their initial deposit prior to July 31, 2002 are not required to comply with the rule’s

requirements to adopt an 80% investment policy. 12

Under the rule, a fund is required to invest in accordance with its 80% investment policy

“under normal circumstances.” In addition, the rule provides that a fund must apply its 80%

investment policy at the time the fund invests its assets. If, subsequent to an investment, the

“Assets” is currently defined in the names rule as net assets, plus the amount of any borrowings

for investment purposes; see also section 2(a)(41) of the Act [15 U.S.C 80a-2(a)(41)] (defining

“value”).

Such a fund must adopt a fundamental policy: (1) to invest at least 80% of the value of its assets

in investments whose income is exempt from federal income tax or from both federal and state

income tax, or (2) to invest its assets so that at least 80% of the income that it distributes will be

exempt from federal income tax or from both federal and state income tax.

Under the Act, a fund may not depart from a fundamental policy unless it has been authorized by

the vote of a majority of its outstanding shareholders. 15 U.S.C. 80a-13(a)(3). In this release, we

refer to a policy that a fund must currently adopt under the names rule as an “80% investment

policy” and the fund’s investments invested in accordance with this policy, the fund’s “80%

basket.” We are proposing a parallel definition of “80% basket” in the proposed amendments to

the names rule, and when referring to the proposed rule, references to a fund’s “80% basket” refer

to the proposed definition of this term. See proposed rule 35d-1(g)(1).

July 31, 2002 was the compliance date of the rule. See Names Rule Adopting Release, supra

footnote 2. Based upon a review of Morningstar data as of October 2021, 222 currently-active

UIT series were formed before this date.

fund’s assets are no longer invested in accordance with the policy, the fund’s future investments

must be made in a manner that will bring it into compliance.

The rule also includes certain requirements for the notices that funds must send prior to a

change in an 80% investment policy that is not a fundamental policy. These notices are required

to be provided in plain English in a separate written document. A fund must also include a

prominent statement reading “Important Notice Regarding Change in Investment Policy,” or a

similar clear and understandable statement, in bold-face type.

In adopting the names rule, the Commission made clear that it is not intended to be a safe

harbor for materially deceptive or misleading names. 13 The prohibitions of section 35(d) and,

indeed, the anti-fraud provisions of the federal securities laws regarding disclosures to investors,

continue to apply to funds notwithstanding their compliance with the names rule. 14 A name that

would lead a reasonable investor to conclude that the fund invests in a manner that is inconsistent

with the fund’s actual or intended investments or the risks of those investments would be

See Names Rule Adopting Release, supra footnote 2, at n.16 and accompanying text.

See, e.g., 15 U.S.C. 77q(a) and 17 CFR 240.10b-5(b) (prohibiting making untrue statements of

material fact or making material omissions to obtain money or property in the offer or sale of

securities or in connection with the purchase or sale of a security); 17 CFR 230.156 (prohibiting

sales literature that is materially misleading in connection with the offer or sale of securities

issued by an investment company); and 17 CFR 275.206(4)-8 (prohibiting investment advisers to

pooled investment vehicles from making untrue statements of material fact or making material

omissions to an investor or prospective investor in the pooled investment vehicle); see also In re

Ambassador Capital Management, LLC, and Derek H. Oglesby, Initial Decision Rel. No. 672

(Sep. 19, 2014) (made final in Investment Company Act Release No. 31371 (Dec. 11, 2014))

(determining an adviser caused violations by a fund of sections 34(b) and 35(d) of the Act by

causing violations of 17 CFR 270.2a-7 while still holding the fund out as a money market fund);

Names Rule Adopting Release, supra footnote 2, at n.44 and accompanying text.

deceptive or misleading even if the fund is in compliance with its 80% investment policy. 15 In

addition, a fund must adopt and implement written compliance policies and procedures

reasonably designed to prevent violations of the federal securities laws generally, which would

include section 35(d) and the names rule. 16 Fund compliance officers are required to include a

discussion of any material compliance matter involving the names rule in their required annual

reports to the board addressing the operation of funds’ compliance policies and procedures. 17

B. Challenges Regarding Application of the Names Rule and Need for

Modernization

The names rule has not been amended following its adoption in 2001, and since that time,

the staff, members of the fund industry, and investor advocacy groups have identified a number

of challenges regarding the application of the names rule that could have investor protection

implications. The Commission published a Request for Comment on Fund Names in March

2020, which sought public comment on the framework for addressing funds’ names, particularly

in light of market and other developments since the rule’s adoption. 18

Names Rule Adopting Release, supra footnote 2, at nn.16 and 44 and accompanying text; see

also In the Matter of the Private Investment Fund for Governmental Personnel, Inc., Investment

Company Act Release No. 2474 (Jan. 18, 1957) (“[The Commission] must take into account the

effect which the name may have not only on the sophisticated and informed investor, but also on

the unwary and the ignorant.... Actual deception of investors need not be shown; it is sufficient

that the name of the company or its securities be found to have a tendency or capacity to deceive

or mislead. Nor is it necessary that we sample public opinion to determine what the name in

question may mean to investors...”).

See 17 CFR 270.38a-1 (“rule 38a-1”).

See rule 38a-1(a)(4)(iii).

2020 Request for Comment, supra footnote 2.

Commenters generally agreed that a fund’s name is an important piece of information

that investors use to select a fund, and that asset managers give considerable thought to the fund

names that they choose in light of their goals in communicating to investors. 19 They also agreed

that the names rule provides important investor protections and stated that it has been largely

effective in regulating misleading and deceptive fund names, but some commenters suggested

further improvements. 20 Some provided context as to just how much the investment management

industry has changed in the twenty years since the names rule was adopted and suggested

updates may be appropriate. For example, commenters stated that registered investment

companies manage considerably more assets than they did in 2001 ($22.8 trillion total net assets

as of March 2020 compared to $7.2 trillion in 2001) and that the variety of fund types and fund

strategies has increased since 2001, with exchange-traded funds (“ETFs”) and funds of funds

having grown since then and funds such as emerging market, international, and alternative

strategy funds having attracted substantial amounts of investment. 21 The Commission staff have

See, e.g., Comment Letter of Aaron Cantrell, Head of Economic Research, Record Currency

Management and Isabel Estevez, PhD Candidate, University of Cambridge (May 5, 2020)

(“Cantrell and Estevez Comment Letter”); CFA Comment Letter; ICI Comment Letter I;

AllianzGI Comment Letter.

See, e.g., Comment Letter of Invesco Ltd. (May 5, 2020) (“Invesco Comment Letter”); Comment

Letter of the Public Investors Advocate Bar Association (Apr. 15, 2020) (“PIABA Comment

Letter”); CFA Institute Comment Letter.

See ICI Comment Letter I; see also SIFMA AMG Comment Letter (stating that there have been

significant evolution and innovation in the asset management industry since 2001); Comment

Letter of T. Rowe Price (May 21, 2020) (“T. Rowe Price Comment Letter”) (stating that since the

adoption of the names rule, funds have “expanded their strategies, increased the use of derivatives

and new types of financial instruments, and expanded the diversity of products available to

investors”); and Comment Letter of State Street Global Advisors (May 5, 2020) (“SSGA

Comment Letter”) (“[t]he investment management industry has changed considerably since the

Names Rule was adopted in 2001”).

also observed an increase in filings by funds with investment focuses in ESG or “thematic” areas

such as cybersecurity, blockchain, and artificial intelligence. Further, as highlighted in the 2020

Request for Comment, since the Commission adopted the names rule there has been significant

growth in “passive management” funds that seek to replicate the return on a particular index. 22

The current scope of the rule has created interpretive issues. The Commission has

previously taken the position that fund names that incorporate terms such as “growth” and

“value” connote an investment objective, strategy, or policy (i.e., “investment strategies”) and

are therefore not within the scope of the 80% investment policy requirement. 23 This has resulted

in some fund names being excluded from this requirement because the name contains a term

suggesting an investment strategy, even if the name also suggests an investment focus to

investors. Certain funds with names that may raise the same types of concerns as those that the

rule’s current scope directly addresses may therefore not have adopted an 80% investment

policy.

The potential investor protection issues that these interpretive scoping considerations

raise are particularly evident in the treatment of funds with names that suggest an investment

focus in companies that meet certain ESG standards. Investors may reasonably expect funds with

2020 Request for Comment, supra footnote 2, at n.22; see also Investment Company Institute,

2021 Fact Book: A Review of Trends and Activities in the Investment Company Industry, at 4849, available at https://www.ici.org/system/files/2021-05/2021_factbook.pdf (“2021 ICI Fact

Book”) (stating that at the end of 2020, index mutual funds and index ETFs together had $9.9

trillion in total net assets and accounted for 40% of assets in long-term funds, as compared to

19% at the end of 2010).

Names Rule Adopting Release, supra footnote 2, at n.43 and accompanying text. (“In addition,

the rule does not apply to fund names that incorporate terms such as “growth” and “value” that

connote types of investment strategies as opposed to types of investments.”)

these names to invest in companies with policies, practices, or characteristics that are consistent

with these standards, particularly when the fund’s name contains the term “ESG” or similar

terminology (such as “sustainable,” “green,” or “socially responsible”). 24 As discussed in more

detail below, this type of terminology may be particularly powerful in fund names, as funds can

attract significant interest and stand out to investors by using these terms in their names. 25 The

proposed amendments to the names rule would address fund names with ESG and similar

terminology by providing that funds whose names include these terms are subject to the rule’s

80% investment policy requirement, and by defining certain uses of ESG terminology in fund

names as materially deceptive and misleading. This would help to prevent potential

“greenwashing” in fund names by requiring a fund’s investment activity to support the

investment focus its name communicates so that investors will not be deceived or misled by the

fund’s name. Interpretive positions taken by funds that these kinds of names are not subject to

the rule have resulted in investors in these funds not receiving these protections.

The 2020 Request for Comment also asked questions exploring whether the names rule is

as effective as it could be at addressing changes to funds’ portfolios over time, for example by

asking whether compliance with the rule’s 80% investment policy requirements should continue

to be determined as of the time of investment, as opposed to a fund maintaining the required

level of investment at all times. A fund in some circumstances can drift away over time from the

See Enhanced Disclosures by Certain Investment Advisers and Investment Companies about

Environmental, Social, and Governance Investment Practices, Investment Company Act Release

No. 34594 (May 25, 2022) (“ESG Proposing Release”), published elsewhere in this issue of the

Federal Register.

See infra footnote 124 and accompanying text.

type of investment focus that the fund’s name suggests. 26 The current names rule may not be as

effective as it could be at addressing changes in funds over time, both due to possible “drift” and

the current rule’s allowing a fund to comply with its 80% investment policy only under “normal

circumstances.”

The 2020 Request for Comment also raised the issue that, in the years following the

names rule’s adoption in 2001, funds have increasingly used derivatives and other financial

instruments to execute their strategies. 27 The Commission has interpreted the names rule to

permit funds to include synthetic instruments, such as derivatives, in the fund’s 80% basket if the

instrument has economic characteristics similar to the securities included in the 80% basket. 28

However, the Commission has not specifically addressed how to include a derivatives instrument

in that calculation. This, in turn, may have implications for whether a fund’s name accurately

reflects the economic reality of the fund’s sources of returns and risk.

Lastly, the rule’s requirements for delivering notices of changes to a fund’s investment

policy are worded in a way that could suggest that funds must deliver these notices in paper. For

This drift, however, currently may be limited in that any future investment must be made in a

manner that will bring the fund into compliance with the 80% investment requirement. See rule

35d-1(b).

See 2020 Request for Comment, supra footnote 2, at 7-8; see also, e.g., Use of Derivatives by

Registered Investment Companies and Business Development Companies; Required Due

Diligence by Broker-Dealers and Registered Investment Advisers Regarding Retail Customers’

Transactions in Certain Leveraged/Inverse Investment Vehicles, Investment Company Act

Release No. 33704 (Nov. 25, 2019) [85 FR 446 (Jan. 24, 2020)] and Use of Derivatives by

Registered Investment Companies and Business Development Companies, Investment Company

Act Release No. 34084 (Nov. 2, 2020) [85 FR 83162 (Dec. 21, 2020)] (“Derivatives Rule

Adopting Release”).

Names Rule Adopting Release, supra footnote 2, at section II.A.1.

example, the rule includes requirements on the envelope in which the notice is delivered. A

number of commenters raised this issue given many investors have elected to receive fund

materials electronically, stating that the rule should provide funds with more flexibility on

delivery method. 29 We believe that we could provide greater specificity about the application of

the notice requirement to investors who have elected electronic delivery. 30

C. Overview of Rule Proposal

After consideration of these issues, we are proposing amendments to the names rule to

modernize and enhance the investor protections that it currently provides.

•

Expansion of Scope. We are proposing to expand the rule’s 80% investment policy

requirement beyond its current scope, to apply to any fund name with terms

suggesting that the fund focuses in investments that have, or investments whose

issuers have, particular characteristics. This would include, for example, fund names

with terms indicating that the fund’s investment decisions incorporate one or more

ESG factors.

•

Changes Over Time and Temporary Departures from a Fund’s 80% Investment

Policy. To address concerns as to whether the rule effectively addresses changes to

fund names and portfolios over time and about when a fund must be in compliance

with its 80% investment policy, we are proposing amendments to the current

requirement that a fund’s policy apply at the time of investment, and “under normal

circumstances.” Instead, the proposed amendments specify the particular

See, e.g., Fidelity Comment Letter; Invesco Comment Letter; ICI Comment Letter I.

See infra footnote 136.

circumstances under which a fund may depart from its 80% investment policy,

including specific time frames for getting back into compliance.

•

Derivatives. To address the rule’s application to derivatives investments, we are

proposing to amend it to require funds to use a derivatives instrument’s notional

amount, rather than its market value, for the purpose of determining the fund’s

compliance with its 80% investment policy. Also, we are proposing to amend the

names rule to address the derivatives instruments that a fund may include in its 80%

basket.

•

Unlisted Closed-End Funds and BDCs. We are proposing to require that a registered

closed-end fund or BDC, whose shares are not listed on a national securities exchange

and that is required to adopt an 80% investment policy, must make its 80%

investment policy a fundamental policy in all cases. As a result, these funds would

not be permitted to change their 80% investment policies without a shareholder vote.

This proposed amendment is meant to address investor protection concerns regarding

funds that can change their 80% investment policies without shareholders having the

ability to vote on the change or readily exit the fund.

•

Enhanced Prospectus Disclosure. We also are proposing amendments to funds’

prospectus disclosure requirements that would 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. We are proposing

effectively to require that any terms used in the fund’s name that suggest either an

investment focus, or that the fund is a tax-exempt fund, must be consistent with those

terms’ plain English meaning or established industry use.

•

Materially Deceptive and Misleading Use of ESG Terminology. The use of ESG or

similar terminology in a fund’s name would deceive and mislead investors where the

identified ESG factors do not play a central role in the fund’s strategy. Accordingly,

we would define the names of “integration funds” as materially deceptive or

misleading if the name indicates that the fund’s investment decisions incorporate one

or more ESG factors. For purposes of this release, an integration fund is a fund that

considers one or more ESG factors alongside other, non-ESG factors in its investment

decisions, but such ESG factors are generally no more significant than other factors in

the investment selection process, such that ESG factors may not be determinative in

deciding to include or exclude any particular investment in the portfolio.

•

Modernization of Notice Requirement. We are further proposing to update the names

rule’s notice requirement to expressly address funds that use electronic delivery

methods to provide information to their shareholders. The proposed amendments also

would require notices to describe not only a change in the fund’s 80% investment

policy, but also a change to the fund’s name that accompanies the investment policy

change.

•

Form N-PORT Reporting Requirements. We are proposing amendments to Form NPORT to require greater transparency on how fund investment selection methods

match the investment focus that the fund’s name suggests. These proposed

amendments would include a new reporting item regarding a fund’s names rule

compliance. They also would include a new reporting item requiring a fund subject to

the 80% investment policy requirement to indicate, with respect to each portfolio

investment, whether the investment is included in the fund’s 80% basket.

•

Recordkeeping. The proposed amendments would require funds that must adopt an

80% investment policy to adhere to recordkeeping requirements that are designed to

provide the Commission and staff, as well as the fund’s compliance personnel, the

ability to evaluate the fund’s compliance with the rule’s requirements.

Funds that do not adopt an 80% investment policy would be required to maintain a

written record of their analysis that such a policy is not required under the names rule.

II.

DISCUSSION

A. 80% Investment Policy Requirement

1. Names Suggesting an Investment Focus

We are proposing to broaden the scope of the names rule’s current 80% investment

policy requirement also to apply to fund names that include terms suggesting that the fund

focuses in investments that have, or whose issuers have, particular characteristics. 31 The

proposed amendments provide as examples fund names with terms such as “growth” or “value,”

or terms indicating that the fund’s investment decisions incorporate one or more ESG factors. 32

This would be in addition to fund names that currently require an 80% investment policy, which

We are also proposing to add BDCs to the definition of “fund” in the rule. See proposed rule 35d1(g)(5) (defining “fund”).

Proposed rule 35d-1(a)(2). The term “ESG” encompasses terms such as “socially responsible

investing,” “sustainable,” “green,” “ethical,” “impact,” or “good governance” to the extent they

describe environmental, social, and/or governance factors that may be considered when making

an investment decision.

are funds whose names suggest a focus in a particular type of investments or industry, or in

particular countries or geographic regions, or those that suggest certain tax treatment.

This scope expansion is designed to help ensure that fund names that communicate to

investors that the fund focuses its investments in a particular way are addressed by the rule. The

names rule is designed to ensure that a fund’s investment activity supports the investment focus

its name communicates and, thus, the investor expectations the name creates. 33 The proposed

scope expansion recognizes that even where a fund’s name could be construed as referring to an

investment strategy, it nevertheless can also connote an investment focus, and we believe this

connotation is likely to be materially deceptive and misleading unless supported by an 80%

investment policy. 34 That is, a fund name might connote a particular investment focus and result

in reasonable investor expectations regardless of whether the fund’s name describes a strategy as

opposed to a type of investment. 35 Further, as we note below, academic research indicates that a

As used in this release, consistent with proposed rule 35d-1(a)(2), “investment focus” means a

focus in a particular type of investment or investments, a particular industry or group of

industries, particular countries or geographic regions, or investments that have, or whose issuers

have, particular characteristics. As discussed in more detail below, under the proposed

amendments, where a fund’s name suggests an investment focus that has multiple elements, the

fund’s 80% investment policy must address each element.

See supra paragraph accompanying footnote 23.

Distinguishing whether a term connotes a “strategy” versus a “type of investment” can be a

subjective determination, prone to second guessing, and the categories of “strategy” versus “type

of investments” are not mutually exclusive. Interpretive questions caused by these issues draw

Commission resources to address. For example, the Division of Investment Management’s

Disclosure Review and Accounting Office staff spends a significant amount of time and attention

on names rule compliance issues. We also believe that the proposal would address concerns

raised by commenters regarding inconsistent treatment across funds in interpreting “strategy” by

expanding the rule’s coverage, rendering moot the need to determine whether a fund name

describes a type of investment versus an investment strategy. See, e.g., SIFMA AMG Comment

Letter; T. Rowe Price Comment Letter.

significant number of funds follow an investment strategy that does not align with the investment

strategy identified in the fund’s name and, thus, we believe that the proposed scope expansion

would better define and help prevent materially deceptive and misleading fund names in light of

the investor protection concerns that this practice raises. 36

Investors’ expectations as to the composition of a fund’s portfolio can result even when

investment-focus-suggesting terms used in a fund’s name may have more than one reasonable

definition. For example, terms like “green” or “sustainable” may be more subjective than a term

like “large cap equity” and thus not always viewed as referring to a “type” of investment. But

these terms still communicate to investors that the fund will concentrate in investments that the

fund considers “green” or “sustainable.” Current fund practices are mixed on how funds

understand the scope of the names rule, in that some funds consider certain terminology in their

names to require an 80% investment policy under the rule, while others do not. 37

Some commenters responding to the 2020 Request for Comment supported an approach

similar to our proposal. 38 Some of these commenters asserted that many investors often rely on

fund names, rather than disclosures such as those concerning the fund’s objective, strategies, and

risks, when making an investment decision and that fund managers purposefully adopt names

designed to draw interest in their fund. 39 Some also stated that funds with certain names not

currently required to adopt an 80% investment policy can often connote an investment focus to

See infra footnote 165 and accompanying text.

See ICI Comment Letter I.

See, e.g., Crowley Comment Letter; Silver Comment Letter; CFA Comment Letter.

See IRC Comment Letter; Silver Comment Letter; CFA Comment Letter.

investors and, therefore, can have the effect of misleading or deceiving investors. 40 Commenters

similarly said the inclusion of “buzzwords” in funds’ names can “give the illusion of safety or

preservation of capital as objectives.” 41 One commenter also stated that investors do not make a

distinction between “strategies” and “types of investments” when making an investment decision

and, instead, will assume that the fund will invest in the ways suggested by the name. 42

Other commenters objected to any expansion of the rule to require an 80% investment

policy for fund names that suggest an investment strategy. 43 These commenters’ concerns

generally centered around perceived complexity and subjectivity in determining what assets are

appropriate for the 80% basket. Specifically, these commenters argued that investment strategies

are too subjective to be quantifiably measured in an asset-based test like the 80% investment

policy requirement and that there can often be many investment methods to achieve the same

strategy. 44 A number of commenters raised these points specifically in discussing an approach

See PIABA Comment Letter (“PIABA contends that the Names Rule should apply to the

investment strategy of a fund, particularly where the investment strategy entails a high degree of

risk. The terms “growth” and “value” should not [be] used to mislead investors as to aggressive,

high risk funds.”); CFA Comment Letter; see also CFA Institute Comment Letter (stating that the

rule is limited in its effectiveness but that it should not be expanded to cover strategies).

See Silver Comment Letter; see also PIABA Comment Letter (discussing funds—registered

funds as well as hedge funds—that have been marketed using language such as “high-grade”

although the funds employ risky (including leveraged) investment strategies); CFA Comment

Letter.

See CFA Institute Comment Letter.

See, e.g., SIFMA AMG Comment Letter; Comment Letter of Capital Research and Management

Company (May 5, 2020) (“Capital Group Comment Letter”); ICI Comment Letter I. But see, e.g.,

CFA Comment Letter; Practus Comment Letter; PIABA Comment Letter; MSCI Comment Letter

(arguing that names suggesting strategies should be subject to the 80% investment policy

requirement).

See, e.g., Nia Impact Capital Comment Letter (stating that the terms “sustainable” and “ESG” are

“still quite subjective in nature”); SIFMA AMG Comment Letter; T. Rowe Price Comment

that would require funds with ESG terminology in their names to adopt an 80% investment

policy. 45 Some commenters also stated that application of the 80% investment policy

requirement to a strategy could lead to standardization in funds’ investment portfolios that is not

market-driven and limit fund flexibility to change strategies in response to market changes or

events. 46 For these reasons, a number of commenters suggested that fund disclosure would be a

more appropriate tool for investors to educate themselves about the strategy better, rather than

requiring funds whose names describe a strategy to adopt an 80% investment policy. 47

As discussed above, we believe that fund names included in the proposed expanded

scope—such as names with terms like “growth,” “value,” or “sustainable” where a fund may not

have adopted an 80% investment policy under the current rule—communicate to investors that

the fund will concentrate in investments that the fund believes have those particular

characteristics. The proposed amendment also would apply to other fund names that historically

may have not required an 80% investment policy (depending on the context), such as names that

Letter; see also CFA Comment Letter (arguing that while the rule should apply to strategies, a

different approach than an 80% investment policy should be taken).

See, e.g., Cantrell & Estevez Comment Letter; Credit Suisse Comment Letter; Invesco Comment

Letter. Some commenters also recommended avoiding prescriptive definitions of terms like

“ESG” and sustainable.” See, e.g., BlackRock Comment Letter; Cantrell & Estevez Comment

Letter; Ceres Comment Letter. But see, e.g., Beirbaum Comment Letter; Global Affairs

Associates Comment Letter; Janain Comment Letter (each maintaining that funds that include

ESG terms or similar terminology in their names should be subject to the requirement to adopt an

80% investment policy).

See Capital Group Comment Letter; ICI Comment Letter I; Invesco Comment Letter; SIFMA

AMG Comment Letter.

See SIFMA AMG Comment Letter; Capital Group Comment Letter; T. Rowe Price Comment

Letter.

include terms like “global,” “international,” “income,” or “intermediate term (or similar)

bond.” 48

Conversely, there would continue to be fund names that would not require the fund to

adopt an 80% investment policy because the names would not connote an investment focus

under the proposal. For example, these would include names that reference characteristics of a

fund’s portfolio as a whole, or that reference elements of an investment thesis without specificity

as to the particular characteristics of the component portfolio investments. We do not believe that

such names suggest that the fund focuses its investments in any of the ways covered under the

proposed expanded scope, though such names would continue to be subject to section 35(d)’s

prohibition on materially misleading or deceptive names, and funds with these names would

continue to be subject to the anti-fraud provisions of the federal securities laws regarding

disclosures to investors. These names would include, for instance, names that suggest

characteristics of the fund’s overall portfolio, such as a name indicating the fund seeks to achieve

a certain portfolio “duration” or that the fund is “balanced.” 49 They also include names that

See Names Rule Adopting Release, supra footnote 2, at n.42 and Division of Investment

Management, Frequently Asked Questions about Rule 35d-1(Investment Company Names)

(available at https://www.sec.gov/divisions/investment/guidance/rule35d-1faq.htm) at Questions

8, 9, and 11. These FAQs represent the views of the staff of the Division of Investment

Management. They are not a rule, regulation, or statement of the Commission. The Commission

has neither approved nor disapproved the FAQs’ content. The FAQs, like all staff statements,

have no legal force or effect: they do not alter or amend applicable law, and they create no new or

additional obligations for any person.

To the extent that a term used in a fund name could reasonably be understood to describe the

characteristics of the portfolio as well as, or alternatively, the characteristics of the component

portfolio investments—for example, the term “global”—we believe such a name would suggest

an investment focus under the proposed amendments. Nevertheless, as discussed in more detail

reference a particular investment technique, such as “long/short.” We also believe that names

that suggest a possible result to be achieved, such as “real return,” or a name that references a

retirement target date, similarly do not suggest a focus in a particular type of investment or

investments that have particular characteristics. In these cases the name indicates the fund’s

objectives but without specifying the fund’s investments or intended investments. Regardless of

whether a fund is required to adopt an 80% investment policy under the rule, a fund must,

consistent with rule 38a-1, adopt and implement written policies and procedures reasonably

designed to prevent violations of the federal securities laws, which include section 35(d) and the

names rule. 50

Where a fund’s name suggests an investment focus that has multiple elements, the fund’s

80% investment policy must address all of the elements in the name. Take, for example, the fund

name “ABC Wind and Solar Power Fund.” The fund’s investment policy could provide that each

security included in the 80% basket must be in both the wind and solar industries, or instead that

80% of the value of the fund’s assets will be invested in a mix of investments, with some solar

investments, some wind investments, and some investments in both industries. Similarly, the

“XYZ Preferred Securities and Income Fund” could adopt a policy to invest at least 80% of the

value of its assets in preferred securities and securities that meet the fund’s standards for being

income-producing. A fund’s 80% investment policy must address each element in the fund name

that suggests an investment focus, but permits the fund to take a reasonable approach in

below, a “global” fund could use any reasonable definition of “global” as we are not proposing to

mandate any particular test for what this term means.

See supra footnote 16 and accompanying text.

specifying how the fund’s investments will incorporate each such element in the name. For

example, the “XYZ Environmental, Social, and Governance Fund” must adopt an 80%

investment policy to address all three of those elements, and we recognize that there are multiple

reasonable ways the policy could address these elements. Any fund that has a name that suggests

an investment focus would be required to adopt an 80% investment policy even if the fund’s

name also contains a term that does not suggest an investment focus. For example, the “XYZ

Technology and Real Return Fund” would be required to adopt an 80% investment policy to

invest 80% of the value of its assets in the technology sector despite the phrase “real return” also

appearing in the name.

In some cases, what would be appropriate to include in the fund’s 80% basket would be

context-specific. For example, we understand that funds currently do not include the value of

short positions, including short-exposure derivatives, related to the investment focus suggested

by a fund’s name in their 80% baskets, absent some terminology in the fund’s name such as

“inverse,” “hedged,” or “long/short” that suggests to investors that short activity is or may be

part of the fund’s investment approach (e.g., the “XYZ Long/Short Equity Fund”). 51 We request

comment below on funds’ current practices regarding including or excluding short positions in

their 80% baskets and whether any changes in this area would be appropriate.

Consistent with the current names rule, funds would be able to define terms used in their

names in a reasonable way, but, in a change from the current rule, would be subject to the

This hypothetical fund would be subject to the 80% investment requirement because of the

inclusion of the term “equity,” which suggests a type of investment, and not because of the term

“long/short,” which does not suggest an investment focus.

proposed requirement that any terms used in the fund’s name that suggest an investment focus

must be consistent with those terms’ plain English meaning or established industry use. 52 What

constitutes “reasonable” in this context could vary depending on the fund name, but requires a

meaningful nexus between the given investment and the focus suggested by the name. For

instance, when the investment focus relates to an industry, there are different approaches a fund

could take to determine if a given security is tied to the economic fortunes and risks associated

with the named industry. For example, we believe it would be reasonable for a fund to define

securities in a given industry as securities issued by companies that derive more than 50% of

their revenue or income from, or own significant assets in, the industry. In such cases, there may

be instances where the percentage could be smaller, such as where a large company is a

dominant firm in a given industry (e.g., the firm is an acknowledged leader in the industry). A

fund’s compliance policies and procedures could address its processes to allocate portfolio

companies in its 80% basket, for example, by reference to a specific test based on the source of

the companies’ revenue.

We understand that some funds also use text analytics to assign issuers to industries

based on the frequency of particular terms in an issuer’s disclosures. For example, if an issuer’s

public disclosure documents repeatedly use a term like “blockchain,” some funds would assign

the issuer to the blockchain or fintech industry without further analysis. Although text analysis

may be a helpful component of a fund’s analysis, we do not believe it is reasonable to conclude

Cf. Names Rule Adopting Release, supra footnote 2, at n.43 (“As a general matter, an investment

company may use any reasonable definition of the terms used in its name and should define the

terms used in its name in discussing its investment objectives and strategies in the prospectus.”).

that an issuer is in a given industry solely because the issuer’s disclosure documents frequently

include words associated with the industry.

Further, we believe it would generally be reasonable for a fund of funds or other

acquiring fund to include the entire value of its investment in an appropriate acquired fund when

calculating compliance with the 80% investment requirement without looking through to the

acquired fund’s underlying investments. For example, a fund of funds with the name “XYZ

Industrials Fund” with an 80% investment policy to invest in the industrials sector could count

the entire value of its investments in the “ABC Automotive Fund” when calculating compliance

with the 80% investment requirement, provided that the ABC Automotive Fund has an 80%

investment policy to invest in its subsection of the industrials sector.

We request comment on the proposed requirement for funds with names that suggest an

investment focus to adopt and implement an 80% investment policy.

Should we expand the requirement for certain funds to adopt an 80% investment

policy, as proposed, to cover names that include terms suggesting an investment

focus in investments or issuers that have particular characteristics? Is it clear what

types of names would subject a fund to the expanded scope of this requirement

under the proposed rule? Should we only require certain fund names that suggest

an investment focus, such as those that “reasonably suggest” an investment focus,

to adopt an 80% investment policy? Would the proposed amendments address all

types of names that connote an investment focus to investors, or otherwise create

investor expectations regarding the composition of the fund’s portfolio?

Conversely, are there certain names that would be included under the expanded

scope for which investors would not have these types of expectations?

Is it appropriate to retain, as proposed, the requirement for fund names that

suggest a focus in a particular type of investment or investments, investments in a

particular industry or group of industries, or particular countries or geographic

regions to adopt an 80% investment policy? Should we eliminate or add to these

types of names in the rule text, given the proposed expanded scope of the

requirement (i.e., including within the scope names that include terms suggesting

a focus in investments or issuers that have particular characteristics)?

Should we, as proposed, adopt a scoping requirement that does not distinguish

between types of investments and investment strategies? Do investors make a

distinction between investment strategies and types of investments when

assessing fund names in making an investment decision?

Should the names rule’s 80% investment policy requirement apply, as proposed,

to fund names with terms such as “ESG” and “sustainable” that reflect certain

qualitative characteristics of an investment? Why or why not? Are investors

relying on these terms as indications of the kinds of companies in which the fund

invests or does not invest? Would this be the case even to the extent that funds

with ESG and similar terminology in their names may use disparate means to

select their portfolio investments? Should there be any additional requirements for

funds that use ESG or similar terminology in their names?

As an alternative to basing the calculation of the 80% basket on the fund’s assets,

should we instead use a different method of calculation? As discussed in more

detail below, we considered, as a reasonable alternative to the proposal, whether

to require funds’ historical returns to exhibit minimum exposures to certain risk

factors in lieu of the percentage of assets test. Should we instead adopt this sort of

method of calculation that assesses the returns that a fund’s investments

contribute to the fund’s overall performance, or that requires a fund with a name

suggesting a particular investment focus to exhibit minimum exposures to certain

risk factors that correlate with the investment focus its name suggests?

Will funds be able to reasonably determine what investments qualify for their

80% baskets under the proposed rule? What steps and tools will funds use to

make these determinations? If not, what steps should we take to clarify this,

particularly given the proposed expanded scope of the 80% investment policy

requirement? Is it likely that funds with similar names will come to different

reasonable determinations as to what investments qualify for inclusion in their

80% baskets? If so, will investors be confused by these names?

Should funds with names with multiple elements be required to address all of

those elements? Should this be required at all times or, if not, what limits, if any,

should there be regarding fund names with multiple elements in light of the

prohibition against materially deceptive or misleading names under the Act?

Should a fund whose name includes multiple elements be required to invest some

specific minimum percentage (e.g., 5%, 10%, 25%) in each element?

Is there any particular topic or issue that funds encounter in complying with the

80% investment policy currently, or that they would encounter in complying with

the proposed amendments to the 80% investment policy requirement, that should

be addressed by Commission guidance? For example, would funds benefit from

guidance about what procedures might be reasonable for a fund whose name

indicates a focus in a particular industry to select its 80% basket investments?

As discussed above, we understand that, absent a term in a fund’s name such as

“inverse,” funds do not currently include short positions in the fund’s 80% basket.

Should the Commission address by guidance or a provision in the names rule the

inclusion of short positions in a fund’s 80% basket related to the fund’s

investment focus, and if so, what practices with respect to the inclusion or

exclusion of short positions would be appropriate in light of section 35(d) and the

policy goals of the names rule’s 80% investment policy requirement? For

example, assume a fund with “equity” in its name and nothing in the name

suggesting that the fund also engages in short sales, such as the phrase

“long/short.” If the fund had $100 and invested it all in equity securities, then

were to sell short equity securities with a value of $50, how should that short sale

affect the fund’s compliance with its 80% investment policy? Should the short

sale reduce the value of the equity investments included in the 80% basket, and

are there specific circumstances where a short sale should not reduce the value of

the fund’s 80% basket securities? How should we address short sales where the

returns of the assets sold short are correlated with returns of securities (or the

asset class) in the fund’s 80% basket, but the assets sold short are not identical to

any of the securities in the 80% basket (or are not in the same asset class as the

securities in the 80% basket)? If the short sale should reduce the value of the

equity investment in the 80% basket in the example above, what reduction would

be appropriate—e.g., should the reduction be $50, the value of the equity

securities sold short? 53

10.

Should we provide a specific provision in the rule requiring funds with ESG (or

similar terminology) in their names only to attribute a particular type of

investment towards their 80% basket, or guidance that addresses this? Why or

why not? Are there other types of guidance regarding ESG investing and the

names rule that we should provide?

11.

Should we adopt any specific requirements with regards to the portion of the

fund’s assets not included in the 80% basket? For fund names that suggest an

investment focus that has multiple elements, should we adopt any specific

requirements, such as a specific minimum percentage (e.g., 20%, 25%, etc.) of

assets invested, with regards to how each element must be accounted for in the

fund’s 80% investment policy?

12.

Are there any other particular types of fund names we have not specifically

addressed above, for which we should require a specific treatment under the

names rule as we propose to amend it? Should those particular names be subject

to the requirement to adopt an 80% investment policy or not?

13.

Should we codify any of the guidance provided above? For example, should we

add an exception to the rule that permits funds of funds, and other acquiring

funds, to include the entire value of their investment in an appropriate acquired

See infra section II.A.3 (addressing the valuation of derivatives instruments for the purpose of

determining a fund’s compliance with its 80% investment policy).

fund in calculating their 80% basket without looking through to the acquired

fund’s underlying investments?

14.

With respect to certain name terms that could connote both an investment focus

and the characteristics of the fund’s overall portfolio (e.g., “global”), should we,

as proposed, require funds with names including these terms to adopt an 80%

investment policy? If not, how should we differentiate when these terms are being

used to suggest an investment focus and when they are not?

15.

Consistent with the current names rule, the proposed amendments would

generally apply to money market funds. 17 CFR 270.2a-7 (“rule 2a-7”) also

requires funds that use the term “money market” in their names to comply with

the requirements of that rule. Are the requirements of rule 2a-7 sufficient to

prevent materially misleading or deceptive money market funds names, or should

we continue to apply the names rule to those funds?

2. Temporary Departures from the 80% Investment Requirement

The proposed amendments would permit a fund to depart temporarily from the

requirement to invest at least 80% of the value of its assets in accordance with the investment

focus or tax treatment its name suggests (“80% investment requirement”) only under certain

specified circumstances. 54 These temporary departures would be permitted only: (1) as a result of

market fluctuations, or other circumstances where the temporary departure is not caused by the

fund’s purchase or sale of a security or the fund’s entering into or exiting an investment; (2) to

The proposed temporary departure provision would be applicable not only to funds whose names

suggest a particular investment focus, but also to tax-exempt funds that are required to invest their

assets in accordance with the provisions of proposed rule 35d-1(a)(3)(i).

address unusually large cash inflows or unusually large redemptions; (3) to take a position in

cash and cash equivalents or government securities to avoid a loss in response to adverse market,

economic, political, or other conditions; or (4) to reposition or liquidate a fund’s assets in

connection with a reorganization, to launch the fund, or when notice of a change in the fund’s

80% investment policy has been provided to fund shareholders at least 60 days before the change

pursuant to the rule. 55 Under each of these circumstances except fund launches (where

accompanying temporary departures could not exceed a period of 180 consecutive days),

reorganizations (for which the proposed rule does not specify a required time frame for

accompanying temporary departures), or where the 60-day notice has been provided to

shareholders, a fund would have to bring its investments back into compliance with the 80%

investment requirement within 30 consecutive days. 56 In all cases, a fund would have to come

back into compliance as soon as reasonably practicable. 57

In contrast, the names rule currently provides that a fund’s 80% investment policy applies

“under normal circumstances,” leaving it to funds to determine what constitutes something other

than a normal circumstance. This aspect of the current rule was designed to provide funds

“Reorganization” is defined in section 2(a)(33) of the Act and includes actions such as voluntary

liquidations.

Proposed rule 35d-1(b)(1) and (g)(7) (defining “launch” as a period, not to exceed 180

consecutive days, starting from the date the fund commences operations).

“As soon as reasonably practicable” would not strictly mean “as soon as possible” in all cases and

is intended to allow for consideration by the adviser of how to return to compliance in a manner

that best serves the interest of the fund and its shareholders (but in no case longer than the

proposed 30-day limit where applicable). For example, a fund need not return to compliance

within 2 days, even if doing so is technically possible, if such an approach would harm the fund

or its shareholders by, for instance, causing the fund to purchase illiquid assets at a premium.

flexibility to manage their portfolios while requiring that they normally invest 80% of their assets

consistent with their 80% investment policy. 58 In addition, under the current rule, compliance

with the 80% investment requirement is determined at the time a fund invests its assets. This

provision was designed to avoid requiring a fund to rebalance its investments if the fund’s

portfolio were no longer invested in accordance with the fund’s 80% investment policy as a

result of, for example, market movements or an influx of cash from new investors. 59 The rule

currently requires that if, subsequent to an investment, the 80% investment requirements of the

rule are no longer met, the fund’s future investments must be made in a manner that will bring

the fund into compliance with those requirements.

The new approach we are proposing is designed to permit appropriate flexibility to depart

temporarily from the 80% investment requirement in particular, time-limited circumstances

when doing so would be beneficial to the fund and its shareholders, while providing additional

parameters designed to prevent a fund from investing inconsistently with its 80% investment

policy for an extended period of time. The new approach continues to address, for instance,

certain circumstances in a fund’s life cycle in which it might not be invested fully in its 80%

basket, as well as circumstances in which external events could cause the portfolio to “drift” in a

way that causes the fund to depart temporarily from the 80% investment requirement. For

example, a new fund may need a reasonable amount of time after commencing operations to

See Names Rule Adopting Release, supra footnote 2, at nn.37-40 and accompanying text.

See Investment Company Names, Investment Company Act Release No. 22530 (Feb. 27, 1997)

[62 FR 10955 (Mar. 10, 1997)] at n.28 and accompanying text.

comply with the 80% investment requirement, or a fund with “small cap” in its name may see

certain of its investments grow such that they are no longer “small cap” and need to re-invest in

relative short order. 60 An investor choosing to invest in a fund with a name conveying a

particular investment focus may expect that the fund will not stray from this investment focus for

a protracted period of time in these and similar examples. While the current rule includes a

requirement that a fund must make future investments in a manner to bring the fund into

compliance with the 80% investment requirement, this provision does not address situations

where the fund is not investing its assets in a given period of time.

Moreover, the parameters we are including in the proposal reflect our belief that

investors’ expectations for funds’ investment focuses may not depend on whether market events

negatively affect the investment in the fund’s portfolio. For example, investors increasingly seek

out funds that are structured as passive investment vehicles, such as index-based mutual funds

and ETFs, in order to obtain specific types of investment exposure for their portfolios. 61 These

investors are specifically seeking a return tied to the investment focus suggested in the fund’s

name. 62 These investors may expect the fund to invest in a manner that is consistent with its

stated investment focus with the understanding that investors may rebalance their own portfolios

See also Names Rule Adopting Release, supra footnote 2, at n.39 and accompanying text.

Based on data obtained from Morningstar Direct, in 2001 there were approximately 432 mutual

fund and ETF index funds. As of the end of 2019, there were approximately 2,311 index funds.

2020 Request for Comment, supra footnote 2, at n.22. At the end of 2020, index mutual funds

and index ETFs together had $9.9 trillion in total net assets and accounted for 40% of assets in

long-term funds, as compared to 19% at the end of 2010. See 2021 ICI Fact Book.

See CFA Comment Letter (stating that when funds deviate from their 80% investment policy for

extended periods of time, this can affect asset allocation programs some investors use to

determine which funds to buy or sell by changing the nature of the investment).

if desired rather than expecting the fund to do so. As another example, consistency in investment

companies’ investments with their names and investors’ reasonable expectations may be

particularly important to retirement plan and other investors who place great emphasis on

allocating their investment company holdings in well-defined types of investments, such as

stocks, bonds, and money market instruments. 63 As a result, consistency with the investment

focus suggested by the fund’s name would seem to be a primary concern for these investors.

To address these concerns, the proposed rule amendments specify that a fund departing

from the 80% investment requirement must bring its investments back into compliance as soon

as reasonably practicable, and that the maximum amount of time for the departure would be 30

consecutive days, other than in the case of a fund launch (which would be limited to 180

consecutive days starting from the day the fund commences operations) or a reorganization (for

which the proposed rule does not specify a required time frame for accompanying temporary

departures). We are proposing this “as soon as reasonably practicable” standard because we

anticipate that most temporary departures would last substantially less than 30 days, though this

could depend on the specific facts and circumstances. We recognize that some investors may

prefer for a fund to be permitted to depart from its investment focus for longer than 30 days to

avoid any losses that the fund may incur to come back into compliance within that time period.

We believe, however, that, at some point, departures may begin to change the nature of the fund

See id.; see also Names Rule Adopting Release, supra footnote 2, at n.8 and accompanying text.

fundamentally, which would undermine investor expectations created by the fund’s name. 64 The

proposed time limits are designed to prevent such a fundamental change.

A shorter required time period to come back into compliance, for example seven days,

would ensure a fund rapidly rebalances its portfolio, but could result in forced sales at depressed

prices or in a tax-disadvantaged manner, to the detriment of investors. 65 As another example,

purchasing less liquid securities in a compressed timeframe in order to comply with the fund’s

80% investment policy could drive up the price for those securities, also potentially adversely

affecting investors. While there is still the possibility that these adverse effects could occur with

the proposed, longer periods, we believe that it is a lessened concern in those time frames given

the increased flexibility that a longer period of time would provide to rebalance the portfolio and

for any market-wide issue to resolve.

We are proposing to give fund launches a longer period, 180 consecutive days, in

recognition of the likelihood that it can take longer for funds to find investments during their

start-up, particularly for funds that invest in securities whose supply is limited. 66 We

acknowledge that establishing a set time frame to return to the 80% investment requirement may

result in operational changes for some funds, in order to assess the new time limits on temporary

departures relative to the current rule’s requirement to assess compliance with the 80%

See Janain Comment Letter (recommending limiting the amount of time funds can engage in

temporary defensive positions as they believe that some funds have taken liberties and that “[a]t

some point, temporary becomes normal”); see also CFA Comment Letter (highlighting concerns

about “drift”); Crowley Comment Letter (expressing concerns about extended departures from

the 80% investment requirement).

Some commenters highlighted these sorts of challenges while expressing concerns regarding

changing the rule to include a maintenance test for the 80% investment requirement. See, e.g.,

BlackRock Comment Letter; Capital Group Comment Letter; ICI Comment Letter I.

See also Names Rule Adopting Release, supra footnote 2, at n.39 and accompanying text.

investment requirement at the time of investment. However, we anticipate many funds,

particularly open-end funds, already assess their names rule compliance daily or intra-daily (for

example, those that trade portfolio assets daily). Therefore we anticipate that for many funds, the

proposed new approach, which would require compliance with the 80% investment requirement

except under the rule’s specified limited circumstances, would not result in significant

operational changes although we acknowledge that may not be the case for all funds.

While we continue to believe that there are circumstances where a fund’s temporary

departure from the 80% investment requirement would be appropriate, we believe that specifying

these circumstances in the rule, as opposed to a more principles-based approach, would help

ensure that these departures are temporary in nature and limited in scope. 67 Thus, in place of the

rule’s current standard that a fund’s 80% investment policy applies “under normal

circumstances,” we are proposing four specific exceptions that address circumstances where such

departures would be limited in time, have investor protection benefits, and/or involve

circumstances where an investor is unlikely to be materially misled or deceived.

First, the proposed rule would permit temporary departures that occur as a result of

market fluctuations, or other circumstances where the temporary departure is not caused by the

fund’s purchase or sale of a security or the fund’s entering into or exiting an investment. This

recognizes that a fund may not be in compliance with the 80% investment requirement for a

short period of time while the fund addresses such an event. For example, the investments in a

fund’s 80% basket may decline in value such that they fall below 80% of the fund’s assets.

See, e.g., SIFMA AMG Comment Letter; BlackRock Comment Letter; T. Rowe Price Comment

Letter.

Further, the underlying index of an index fund could rebalance, which may cause the fund to

have less than 80% of its assets invested in the reconstituted index until the fund has the

opportunity to realign its investments.

The proposed rule also would permit funds experiencing unusually large cash inflows or

outflows in response to redemption requests to depart temporarily from the 80% investment

requirement. This would provide a fund the opportunity to depart temporarily from the fund’s

80% investment requirement in order to invest the incoming cash, or sell investments to meet the

outflow, in an orderly way. Similarly, the proposed rule would permit temporary departures for

funds to take temporary defensive positions in cash, cash equivalents, or government securities

to react to adverse conditions. 68 These generally reflect prior Commission statements regarding

some circumstances in which departures from the 80% investment requirement would be

appropriate under the current rule. 69

We are also proposing to permit funds temporarily to invest less than 80% of their assets

in the 80% basket to reposition or liquidate assets in connection with a reorganization or to

launch the fund. For fund launches, the temporary period would not be permitted to exceed 180

consecutive days starting from the day the fund commences operations. Both reorganizations and

See, e.g., Registration Form Used by Open-End Management Investment Companies, Investment

Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)]. The proposed

provision permitting temporary departures to avoid losses in response to adverse market,

economic, political, or other conditions in the names rule reflects the formulation of temporary

defensive positions from Form N-1A. See Form N-1A, Instruction 6 to Item 9(b)(1). As a result,

funds should understand this provision as consistent with this disclosure requirement and any

related disclosure the fund provides. Further, we believe that context dictates that “other

conditions” is not all-encompassing, but rather would be other conditions similar to an adverse

market, economic, or political condition.

See Names Rule Adopting Release, supra footnote 2, at section II.A.4 (describing ways in which

funds might use the “under normal circumstances” standard to engage in temporary departures).

launches may result in a fund holding assets in a way that is inconsistent with its 80% investment

policy in order to complete the action. For example, at start-up it may take time for a new fund to

find and purchase available investments consistent with the fund’s investment focus and hold

cash in the interim. In the case of a merger, a target fund may need to rebalance its portfolio to

more closely mirror the investments held by the acquiring fund.

Unlike the other circumstances in which the proposed rule amendments would permit

temporary departures, the proposed rule amendments would not limit the time of departures

associated with fund reorganizations or where the fund has provided notice it intends to change

its 80% investment policy, and additionally the time for departures associated with fund launches

could last for 180 consecutive days from the date the fund commences operations. Planned

reorganizations may take longer to complete than 30 days or even 180 days. Moreover, the

planned action will be disclosed and the reorganization is likely to be a permanent change to the

nature of the investor’s investment. 70 Similarly, a change to a fund’s 80% investment policy is a

permanent change to the fund’s investments, about which funds notify investors pursuant to the

provisions of the rule. Thus, we do not believe that changes in the fund’s investment portfolio to

support the upcoming reorganization would generally be inconsistent with investors’ reasonable

expectations. As a result, we do not believe that an express time limit is necessary for departures

from the 80% investment requirement made in connection with these actions. Such departures,

like all of the proposed departures, would still be required to be resolved as soon as reasonably

practicable.

For example, when the board of an open-end fund determines to approve a reorganization, the

fund would supplement its prospectus.

In the case of the launch of a new fund, it may be better for investors if the fund takes

additional time to invest in a manner consistent with the fund’s 80% investment policy in order

to avoid the potential for adverse impacts on the price of a targeted investment, to scale up an

investment, or to find a better investment that corresponds to the investment focus relative to

what is currently available. Nonetheless, we believe that, consistent with current guidance, such

a period should not exceed 180 consecutive days. 71 The proposed amendments therefore would

not permit any fund to exceed 180 consecutive days to invest its assets consistent with the 80%

investment requirements when launching a fund. 72 Further, in effect, the proposed amendments

would generally require open-end funds to be fully invested within a much shorter time than 180

days, consistent with the proposed requirement to do so “as soon as reasonably practicable.”

These funds should be able to fully invest in their investment focus relatively quickly because

they invest in relatively liquid assets and because they receive cash from share purchases on an

ongoing basis. Accordingly, if a new open-end fund were to acquire assets at the time of launch

that largely mirrored the assets in another pre-existing fund in the fund family, but with a

different name that reflects a different set of investment parameters that would be applied to that

portfolio in the future, the manager should generally adjust the new fund’s portfolio to the new

parameters in a much shorter time than 180 days in accordance with an 80% investment policy

based on the investment focus the fund’s name suggests.

See Names Rule Adopting Release, supra footnote 2, at n.39 and accompanying text.

Cf. id. at n.40 (stating that, in very limited circumstances, it may be appropriate for a closed-end

fund that invests in securities whose supply is limited to take longer than six months to invest

offering proceeds).

We request comment on the proposed treatment of temporary departures from the 80%

investment requirement.

16.

To what extent do funds currently “drift” away from the investment focus

suggested by their name? If they do, to what extent is this attributable to the

provisions of the current names rule, such as the time of investment test? In

general, how effective is this provision, and the “under normal circumstances”

provision, at addressing materially deceptive or misleading names over time?

17.

Should we limit the exceptions for market fluctuations, unusually large cash

flows, and temporary defensive positions to 30 days as proposed or some other

amount of time? Does the proposed 30-day limit raise any interpretive questions

or potential compliance concerns the Commission should address in the rule text

or as guidance? Are we correct in our belief that it will be unusual for funds to

need to engage in these activities past that period? At what point can it be

reasonably said that the nature of the fund has changed in these circumstances?

18.

Should funds be limited, as proposed, to taking positions in cash and cash

equivalents or government securities outside of their 80% investment policies in

the case of a temporary defensive position? Are there other investments that funds

use to protect the fund in the case of adverse market, economic, political, or other

conditions? For example, should the rule allow funds to invest in securities that

are similar to these investments? What kinds of investments do funds hold

currently when taking defensive positions?

19.

Is the requirement to bring a fund back into compliance with the 80% investment

requirement as soon as reasonably practicable appropriate? Is it sufficient to

protect against concerns about portfolio drift?

20.

Is “as soon as reasonably practicable” readily understood? Would funds benefit

from additional guidance on what would (or would not) satisfy this standard?

How long would it typically take for a fund to come back into compliance with its

80% investment policy where a fund asset has increased or decreased in value?

21.

Under the proposed amendments, the 30-day period runs from the time the fund

invests less than 80% of the value of its assets in accordance with its 80%

investment policy. Should the rule instead specify that it run from the beginning

of one of the precipitating sets of circumstances that the rule describes?

22.

Under what circumstances do funds currently depart from the 80% investment

requirement? Are there any circumstances not covered by the proposed rule

amendments that an investor would expect? For example, should we also exempt

departures relating to a name or investment policy change? If so, how long do

these actions typically take? Should we limit such departures to 30 days? To what

extent do these actions typically fall within the definition of “reorganization”

under the Act, for example, by resulting in the sale of 75% or more in value of the

assets of a fund?

23.

Instead of specifying the circumstances in which a fund may depart from the 80%

investment requirement, should we retain the current provision that an 80%

investment policy applies under normal circumstances but specify that, in any

event, departures may not persist for more than 30 days? Would investor

expectations be met under these circumstances?

24.

Instead of limiting temporary departures (except in the context of fund

reorganizations or launches) to 30 days, should the rule instead provide that, if a

temporary departure persists past 30 days, the fund’s board must approve, or be

informed in writing about, the temporary departure? If we were to require board

approval, should we require that a majority of the independent directors also

approve of the departure? Should the approval or written report be required to be

given by, or provided to, the board immediately, or no later than its next regularly

scheduled board meeting? To the extent that the rule were to include board

reporting, should we also require the report to include a recommendation from the

fund’s adviser about whether to rebalance the fund’s holdings over a longer

period of time, or to initiate a name change? Should we include a recordkeeping

requirement for the report? Should we also require reporting to the Commission

on a non-public basis regarding a departure that lasts longer than 30 days, the

reasons for the departure, and the adviser’s plan to resolve the departure, with a

follow-up report to the Commission once the departure has been resolved? Should

we require a fund to notify the board about temporary departures even if they do

not persist beyond 30 days? For example, while funds would be required to

include a discussion of material compliance matters involving the names rule in

their annual reports required under rule 38a-1, should we further require that these

reports, or board reports in connection with regularly scheduled board meetings,

identify the number of and reason for temporary departures during the period

covered by the report? 73

25.

Does the proposed 30-day limitation create any compliance issues with other

provisions of the federal securities laws? For example, how would a fund address

a situation where, in order to meet the 30-day limit, it had to invest more than

15% of its net assets in illiquid investments, contrary to 17 CFR 270.22e-4 (“rule

22e-4,” or the “liquidity rule”)? Should we permit temporary departures to exceed

the 30- or 180-day limits where meeting the 80% investment requirement would

conflict with the requirements of the liquidity rule, and if so, how should we

address any attendant investor protection concerns? Are there any circumstances

when the investments suggested by a fund’s name become illiquid for more than

30 days?

26.

Should we provide a specific time limit on temporary departures relating to fund

reorganizations? If so, how long should it be?

27.

Similarly, should we provide a specific time limit on the temporary departure

where the fund has provided notice to shareholders under the rule? If so, should it

be 60 days consistent with the rule’s notice requirements or some other time?

Should we extend a similar provision to funds with redeemable securities that

have suspended redemptions under section 22(e) of the Act, or under analogous

See supra footnote 17.

circumstances, such as market closures, for funds that do not issue redeemable

securities?

28.

Is 180 consecutive days the appropriate time to permit temporary departures

relating to fund launches? If not, what would be a more appropriate time? Should

we generally provide different time frames depending on the type of fund? For

example, should we require a shorter period than 180 days for launches of openend funds, which typically invest in relatively liquid assets and which receive

cash from share purchases on an ongoing basis, to avoid harm to early investors in

those funds? Is the proposed definition of “launch” appropriate, or would a

different definition (e.g., the date that a fund’s registration statement becomes

effective) be more appropriate?

29.

To what extent do portfolio managers keep funds close to the 80% investment

requirement currently, or do they typically retain some buffer above that amount?

30.

How often do different types of funds currently assess compliance with an 80%

investment policy? Are we correct in our assessment that many funds already

review their names rule compliance daily or on an intraday basis? How does this

compliance assessment take into account whether characteristics of an investment

may have changed (e.g., changes in market capitalization of equity holdings, or

changes with respect to whether a particular holding continues to be an

investment in a particular industry)? To the extent that certain funds generally

assess compliance at least daily, does the proposed alternative approach to the

current time of investment test increase investor protection, both for these funds

specifically and across the fund industry?

31.

Should we make any changes to the proposed temporary departure provisions to

more specifically address tax-exempt funds? For example, should the provisions’

30-day limit specifically address tax-exempt funds that adopt a policy to invest

their assets so that at least 80% of the income they distribute is tax-exempt, given

that income distributions can be less frequent than monthly? How often do such

funds engage in temporary departures under the current rule?

3. Considerations Regarding Derivatives in Assessing Names Rule Compliance

We are proposing to address both the valuation of derivatives instruments for purposes of

determining compliance with its 80% investment policy, as well the derivatives that a fund may

include in its 80% basket. Specifically, the proposed amendments would require that, in

calculating its assets for purposes of names rule compliance, a fund must value each derivatives

instrument using its notional amount, with certain adjustments discussed below, and reduce the

value of its assets by excluding cash and cash equivalents up to the notional amounts of the

derivatives instrument(s). 74 The proposed amendments also would specify that, in addition to any

derivatives instrument that a fund includes in its 80% basket because the derivatives instrument

provides investment exposure to the investments suggested by the fund’s name, the fund may

include in its 80% basket a derivatives instrument that provides investment exposure to one or

more of the market risk factors associated with the investments suggested by the fund’s name. 75

Accordingly, when a fund determines its compliance with its 80% investment policy, all

derivatives instruments would be included in the denominator in the calculation, as well as any

See proposed rule 35d-1(g)(2).

See proposed rule 35d-1(b)(2).

derivatives in the fund’s 80% basket, i.e., the numerator in the calculation. We designed these

proposed amendments to reflect the investment exposure derivatives investments create better

and to increase comparability, as some funds currently value derivatives instruments using their

notional amounts for purposes of determining their compliance with the 80% test while other

funds use market values. 76 The amendments are designed both to allow funds to use names that

may more effectively communicate their investments and risks to investors and reduce the risk

that a fund may use derivatives to invest in a manner inconsistent with the investment focus

suggested by the fund’s name.

Funds currently are permitted to include synthetic instruments, such as derivatives

instruments, in the fund’s 80% basket if the synthetic instrument has economic characteristics

similar to the securities included in the 80% basket. 77 A fund, therefore, currently could include

derivatives with these characteristics along with cash market investments in assessing whether

80% of the value of its assets is invested in accordance with the investment focus that the fund’s

name suggests. A derivatives instrument’s “value,” as defined in the Act, however, may bear no

relation to the investment exposure created by the derivatives instrument. 78 For example, a total

See, e.g., Capital Markets Comment Letter (stating that “[i]n practice, however, funds have been

inconsistent in how derivative investments apply towards the 80% investment requirement: while

some funds assert that a derivative’s notional value is more appropriate than its market value for

purposes of complying with the 80% investment policy, many funds employ a derivative’s market

value for the asset-based test”).

Names Rule Adopting Release, supra footnote 2, at 8511, n.13 (stating that the rule’s reference to

“investments,” rather than “securities” as proposed, would permit a fund in appropriate

circumstances to include a synthetic instrument in the 80% basket if it has economic

characteristics similar to the securities included in that basket).

15 U.S.C §2(a)(41)(B) (defining “value,” in part, as the market value of securities for which

market quotations are readily available and, for all other investments, as fair value as determined

in good faith by the board of directors).

return swap on a market index generally will have a zero market value at inception, and will

change in market value based on any appreciation or depreciation in the index, not on the fund’s

investment exposure. A fund entering into a swap or other derivative referencing a market index

with a notional amount of $1 million would achieve the same economic exposure as investing $1

million in the underlying securities directly, but the swap’s market value therefore generally

would be far smaller than $1 million and would not reflect the swap’s investment exposure.

Further, using a derivatives instrument’s market value for purposes of assessing names

rule compliance could prevent a fund from using a name that effectively communicates its

investments. Take, for example, a fund with the term “emerging market debt” in its name. While

the fund could directly own emerging market debt securities, this could be inefficient due to

transaction and custody costs, foreign regulatory requirements, and reduced liquidity. It may be

most efficient for the fund to enter into a total return swap that provides economic exposure to

the emerging market debt securities. However, the swap’s market value may be a small

percentage of the fund’s net assets such that the fund’s emerging market debt investments would

not be sufficient to comply with the fund’s 80% investment policy.

Moreover, using derivatives instruments’ market values for purposes of assessing names

rule compliance could result in a fund being in compliance with the fund’s 80% investment

policy despite the fund having significant exposure to investments that are not suggested by the

fund’s name. For example, a fund with emerging market debt in its name could invest 80% of its

assets in emerging market debt, but also could use derivatives to obtain substantial investment

exposure to U.S. equities. The fund might satisfy its 80% investment policy using the

derivatives’ market values for this purpose because the market value of a fund’s derivatives

investment can be small and unrelated to its investment exposure, as discussed above. But this

fund’s name could be deceptive and misleading if the performance of U.S. equities and not

emerging market debt were the primary driver of the fund’s risk and returns.

Use of derivatives’ notional amounts

The names rule is designed to ensure that a fund’s investment activity supports the

investment focus its name communicates, and for funds that use derivatives instruments, the

investment exposure of those derivatives instruments is generally better reflected by a derivatives

instrument’s notional amount than by its market value. For most types of derivatives instruments,

the notional amount generally serves as a measure of a fund’s investment exposure to the

underlying reference asset or metric. A total return swap, for example, can provide a return that

is the economic equivalent of a direct investment in the derivative’s reference asset.

Accordingly, we are proposing that for purposes of determining a fund’s compliance with its

80% investment policy, the fund must value a derivatives instrument using its notional amount

with certain adjustments. 79

In calculating notional amounts for these purposes, a fund would be required to convert

interest rate derivatives to their 10-year bond equivalents and to delta adjust the notional amounts

of options contracts. The proposed requirement to convert interest rate derivatives to 10-year

bond equivalents is designed to result in adjusted notional amounts that better represent a fund’s

exposure to interest rate changes. 80 We believe that, absent this adjustment, short-term interest

A fund’s use of notional amounts when determining the value of the fund’s assets in the 80%

basket would not affect the fund’s valuation practices under rule 2a-5 under the Act [17 CFR

270.2a-5].

See Derivatives Rule Adopting Release, supra footnote 27, at section II.E.1.

rate derivatives can produce large unadjusted notional amounts that may not correspond to large

exposures to interest rate changes. 81 Further, the proposed requirement to delta adjust options is

designed to provide for a more tailored notional amount that better reflects the exposure that an

option creates to the underlying reference asset. 82 We believe that requiring these tailoring

adjustments is appropriate for purposes of the names rule in order for a fund’s 80% investment

policy to best reflect the fund’s investment exposure, which in turn would help ensure that the

investment focus a fund’s name communicates is not materially deceptive or misleading.

Requiring these adjustments would prevent a fund, for example, from including a deep out-of-the

money option in its 80% basket to comply with its 80% investment policy. In that case, the

option’s unadjusted notional amount would not represent the exposure that the option creates to

the underlying reference asset at that time.

Scope of the proposed approach

Our proposed approach would apply to all of a fund’s derivatives instruments. That is,

when assessing compliance with a fund’s 80% investment policy, the fund would be required to

value all of its derivatives positions using notional amounts. The proposed approach would apply

to both the numerator and the denominator in the calculation that the fund would use to

determine compliance with its 80% investment policy. 83

Id.

Our proposed approach to value derivatives instruments using their notional amounts does not

distinguish between derivatives instruments that are assets versus derivatives that are liabilities of

the fund. For example, assume a fund enters into a total return swap based on an index with a

notional amount of $100 million, and that index declines a very small amount. The total return

swap would be a liability of the fund until the fund extinguishes that liability through the payment

Deduction from assets of cash and cash equivalents up to notional amounts

Funds that use derivatives instruments to gain exposure to the markets in which they

invest may maintain portions of their assets in cash and cash equivalents. For purposes of

determining such a fund’s compliance with its 80% investment policy, our proposed approach

would require the deduction of cash and cash equivalents from assets (i.e., the denominator in the

80% calculation) up to the notional amounts of the fund’s derivatives instruments. 84 This aspect

of the proposed approach is designed to remove from the calculation cash and cash equivalents,

which do not themselves provide market exposure, where they effectively function as low-risk

collateral for the derivatives instruments whose notional amounts already are included in the

denominator and thus including this collateral would effectively “double-count” the fund’s

exposure. 85 That is, where a fund holds derivatives and cash and cash equivalents, the fund is

obtaining its investment exposure through the derivatives, not the cash and cash equivalents, and

including both the derivatives measured at their notional amounts and the value of the cash and

cash equivalents would overstate the scale of the fund’s market exposure obtained through the

derivatives instruments. If a fund held derivatives and cash market securities, like investments in

equity securities or bonds, both the notional amounts of the derivatives and the value of the

of variation margin. The notional amount of the swap would still reflect the magnitude of the

fund’s investment exposure notwithstanding the fund’s then-current loss on the investment. For

this reason, the proposal would require funds, in measuring their assets for purposes of names

rule compliance, to include the notional amount of any derivatives instrument, regardless of

whether it is an asset or liability of the fund.

See proposed rule 35d-1(g)(2).

Cf. Invesco Comment Letter (recommending that a fund electing to include derivatives in its 80%

investment policy be required to deduct the value of cash and cash equivalents when determining

the denominator for its 80% test).

securities would be required to be included because the fund would be obtaining market

exposure through both kinds of investments.

Using an example, assume an equity fund enters into an equity swap with a notional

amount of $80 and holds $80 in U.S. Treasury bills and $20 in other securities. 86 Assume the

swap has a market value of $0. If the equity fund were to include the notional amount of the

swap in numerator and in the denominator when determining the fund’s compliance with its 80%

investment policy without excluding the U.S. Treasury bills, the fund would not be in

compliance with the 80% investment requirement ($80 swap notional amount /$180 = 44%).

This would be the case even though, economically, the fund is achieving an investment exposure

akin to investing $80 in equity securities directly (i.e., the swap could be viewed as a synthetic

position in equity securities). If the equity fund were to deduct the $80 in U.S. Treasury bills

from the denominator when determining the fund’s compliance with its 80% investment policy,

the fund would satisfy that requirement ($80 swap notional amount / $100 = 80%). By way of

contrast, however, assume that the fund invests the $80 in corporate debt instead. Now, the fund

would fail the 80% investment requirement: $80 swap notional amount / $180, composed of $80

swap notional + $80 corporate debt + $20 other investments = 44%. The equity fund would not

predominately have the equity exposure that its name would suggest.

See, e.g., Derivatives Rule Adopting Release, supra footnote 27, at text accompanying n.749

(stating that “[t]he Commission has also stated that items commonly considered to be cash

equivalents include Treasury bills, agency securities, bank deposits, commercial paper, and shares

of money market funds”).

Derivatives instruments included in the 80% basket

We recognize that, in addition to using derivatives as direct substitutes for cash market

investments, some funds use derivatives instruments to hedge exposures or to obtain exposure to

market risk factors associated with the fund’s investments (for example, interest rate risk, credit

spread risk, and foreign currency risk). Those instruments may have very high notional amounts.

For example, a foreign equity or bond fund may hold substantial currency forwards or swaps to

hedge foreign currency risk. If the rule did not allow funds to treat the notional amounts of those

derivatives instruments as investments that reflect the fund’s investment focus, the notional

amounts of those derivatives instruments could cause a fund to fall out of compliance with its

80% investment policy. For example, if ABC Foreign Equity Fund invested $100 in foreign

equity securities, $100 in currency forwards, and held no other assets, the fund would not satisfy

its 80% investment policy if the currency forwards were not included in the fund’s 80% basket

($100 in foreign equity securities / $100 in foreign equity securities + $100 currency forwards =

50%).

Thus, in addition to any derivatives instrument that the fund includes in its 80% basket

because it provides investment exposure to the investments suggested by the fund’s name, our

proposed approach would permit a fund to include in its 80% basket a derivatives instrument that

provides investment exposure to one or more of the market risk factors associated with the

investments suggested by the fund’s name. As a result, the derivatives instruments included in a

fund’s 80% basket would either be functioning as a substitute for direct investments in the

securities suggested by the fund’s name or used to facilitate the fund’s investment in those

securities by increasing or decreasing the fund’s exposure to risk factors associated with those

securities. We believe that our proposed approach would help ensure that the fund’s use of

derivatives would not be inconsistent with investors’ reasonable expectations of the fund’s

investment activity.

As illustrated in the example above regarding ABC Foreign Equity Fund, a foreign equity

fund may hedge currency risks by entering in currency forwards with high notional amounts. If

these notional amounts were not included in the fund’s 80% basket, the fund might not be able to

comply with its 80% investment policy even though the currency forwards relate to the foreign

equity securities suggested by the fund’s name. Accordingly, we believe it would be reasonable

for a fund to include a derivatives instrument in its 80% basket where the derivatives instrument

provides investment exposure to one or more of the market risk factors associated with the

investments suggested by the fund’s name. As another example, the XYZ Corporate Bond Fund,

whose portfolio includes corporate bonds as well as interest rate swaps to manage the portfolio’s

overall duration, could include the interest rate derivatives in its 80% basket.

Comments received

Several commenters responding to the 2020 Request for Comment addressed the

valuation of derivatives in measuring a fund’s compliance with its 80% investment policy. Many

commenters urged the Commission to permit funds to use notional amounts to value derivatives

instruments because a derivatives instrument’s market value may bear little relation to the fund’s

investment exposure to the kinds of investments suggested by the fund’s name. 87 Further, one

commenter suggested amendments to the names rule that generally would require a fund that

See, e.g., BlackRock Comment Letter; Capital Group Comment Letter; ICI Comment Letter I; T.

Rowe Price Comment Letter.

includes derivatives in its 80% basket to use the notional value of derivatives instruments,

adjusted as this proposal reflects, when measuring its compliance with its 80% investment

policy. 88 We agree with commenters that notional amounts better reflect the fund’s investment

exposure. For the reasons discussed above, our proposed approach would require a fund to use

the notional amounts of its derivatives instruments when measuring the fund’s compliance with

its 80% investment policy.

In contrast, other commenters suggested that a fund’s derivatives investments generally

should be valued at market value for these purposes. 89 Some commenters stated that this

approach better indicates price sensitivity, the risks to a fund’s portfolio, and comparability

across funds. 90 A derivative’s market value reflects profits and losses that the fund has incurred

on any given date, and we agree that the concerns that commenters discuss are important for

funds to consider as part of their valuation and risk management processes. However, we believe

these topics are less relevant to the names rule’s policy goal of ensuring that a fund’s

investments, and the sources of the fund’s returns, are in line with the investment focus that the

See Invesco Comment Letter (suggesting that a fund should generally value a derivatives

instrument included in its 80% basket using the derivatives instrument’s notional value, “gross

up” the denominator in the 80% test to include these derivatives’ notional amounts, and

suggesting adjustments for interest rate derivatives and involving the “delta adjustments” of the

notional value of options positions; also suggesting that the fund deduct the value of cash and

cash equivalents when determining the denominator for its compliance with the 80% investment

policy requirement); see also BlackRock Comment Letter (requesting clarification that the market

value of cash and cash equivalents should be deemed an eligible asset that is included in a fund’s

80% basket and considered part of the derivatives exposure in determining compliance with a

fund’s 80% investment policy).

See, e.g., Council of Institutional Investors Comment Letter; Nuckolls Comment Letter.

Id.

fund’s name reflects. This is because, as discussed above, a fund’s gains and losses on a

derivatives investment do not reflect the investment exposure the derivatives create. We also

believe that transparency regarding a fund’s compliance with its 80% investment policy and the

investments a fund includes in its 80% basket are important. Our proposal would provide

transparency, which in turn would permit additional comparability, in the proposed Form NPORT reporting requirements that would require funds to identify each investment that is

included their 80% baskets. 91 Current Form N-PORT reporting requirements would continue to

provide transparency regarding the market value of each of these investments.

Another commenter addressed the use of derivatives instruments more generally. This

commenter suggested that the Commission “limit” an approach that would permit funds to use

notional values for purposes of names rule compliance, stating that derivatives instruments have

risks that differentiate them from cash market holdings. 92 That commenter also stated that it

would be misleading or deceptive for a fund to gain significant exposure through a derivative to

a particular asset class but use a name that reflects exposure to a different asset class. 93

Alternatively, a commenter suggested that a fund’s name should reflect the use of derivatives

when a fund uses derivatives frequently or when the fund uses derivatives for frequent, nontactical uses and creates exposures equal to or greater than one-third of the total exposures for all

investment vehicles in the fund’s portfolio. 94

See infra section II.F; see also proposed Item C.2.e of Form N-PORT.

Consumer Federation of America Comment Letter.

Id.

CFA Institute Comment Letter.

We agree that funds’ use of derivatives presents unique risks. After the compliance date

of rule 18f-4 (17 CFR 270.18f-4), funds that enter into derivatives under that rule will be

required to satisfy that rule’s conditions. 95 We do not believe that a fund’s name generally would

provide such specific information about fund risks—such as differences in risks between

derivatives and cash-market investments—which instead must be disclosed in a fund’s

prospectus. Particularly where a fund name refers to asset classes like “equity” or “credit,”

investors might not form specific expectations about how the fund would obtain that investment

exposure—in contrast to fund names that refer to categories of instruments like “stock” that may

result in these types of investor expectations.

However, we do agree that it could be misleading or deceptive for a fund to gain

significant exposure through a derivatives instrument to a particular asset class but use a name

that reflects exposure to a different asset class. Our proposed approach is designed to address this

concern, in requiring a fund to value all of its derivatives instruments using their notional

amounts for purposes of determining names rule compliance as this would better reflect the

investment exposure of all of the fund’s derivatives investments.

We request comment on our proposed approach with regard to the valuation of

derivatives instruments when assessing the fund’s compliance with its 80% investment policy, as

well as the derivatives that a fund may include in its 80% basket:

32.

Is it appropriate to require a fund to use a derivatives instrument’s notional

amount, with certain adjustments, and to reduce the value of its assets for this

purpose by excluding any cash and cash equivalents up to the notional amount of

See Derivatives Rule Adopting Release, supra footnote 27.

the derivatives instrument, as proposed? Are there circumstances in which the use

of market values would be more appropriate, and if so, what are these

circumstances? Should we restrict the use of notional amounts in cases where

investors place importance on the fund holding the underlying assets, as opposed

to cases where investors place importance on the exposures that the fund’s

investments create? How would we identify those cases? For example, should we

limit the extent to which an ESG-focused fund, or some subset of ESG-focused

funds, may use derivatives’ notional amounts? Alternatively, rather than focusing

on the fund’s financial exposure, should we, for example, focus on measures of

risk? If so, which risk measures would be most effective for this purpose and

why?

33.

Is it appropriate to require a fund to convert the notional amounts of interest rate

derivatives into 10-year bond equivalents and to delta adjust the notional amounts

of options contracts for purposes of determining compliance with the 80%

investment policy, as proposed? Are there compliance or other challenges

associated with the proposed approach for interest rate derivatives and options

contracts? Are there additional adjustments that should be made for purposes of

assessing a fund’s compliance with its 80% investment policy? Should we permit

these adjustments rather than require them? Is it sufficiently clear that funds

would eliminate from the calculation closed-out derivatives positions, that is,

derivatives that were closed out with the same counterparty and result in no credit

or market exposure to the fund, or should the rule address these positions? What

positions do funds treat as closed-out currently when determining compliance

with the names rule?

34.

For purposes of determining a fund’s compliance with its 80% investment policy,

we are proposing that the fund reduce the value of its assets by excluding any

cash and cash equivalents up to the notional amount of the derivatives

instruments. Is this reduction appropriate? Does this exclusion of cash and cash

equivalents up to the notional amount of the derivatives instruments reduce the

value of the fund’s assets by too much or too little? Are there other low-risk

collateral investments that may be used for cash management, such as short-term

bonds, that also should be excluded for this purpose? Should only assets that may

be used as collateral for derivatives instruments be excluded for this purpose? If

so, how should we determine if those assets may be used as collateral for

derivatives instruments? Alternatively, rather than excluding cash and cash

equivalents from the value of assets, should we permit a fund to include in its

80% basket cash and cash equivalents used as collateral for derivatives

instruments that provide synthetic exposure to the type of investment(s) in which

the fund’s name suggests a focus?

35.

As proposed, the derivatives valuation approach would apply not only to non-taxexempt funds that are required to adopt an 80% investment policy, but also to

funds that have adopted a policy to invest at least 80% of the value of their assets

in investments the income from which is exempt, as applicable, from federal

income tax or from both federal or state income tax. We are not aware of

circumstances in which the returns of a derivatives instrument referencing a tax61

free security are themselves tax-free. Are there such circumstances? If not, should

we specifically exclude tax-exempt funds from the requirement to use derivative

instruments’ notional amounts for purposes of determining their assets under the

names rule?

36.

Should we permit, rather than require as proposed, a fund to use notional amounts

of derivatives instruments for purposes of determining the fund’s compliance with

its 80% investment policy? If so, are there any limits that the rule should

include—or guidance the Commission should provide—on funds’ ability to use

notional amounts for these purposes, or to switch between notional and market

values? For example, should a fund that chooses to use notional amounts to value

derivatives instruments for purposes of determining names rule compliance, but

then later chooses to use their market value for these purposes, be required to

provide prior notice to investors, for example, 60 days before the change were

effected? Would investors find such information helpful? Should the fund’s board

be informed of, or approve, such a change?

37.

Would permitting the use of notional amounts, rather than requiring this

approach, as proposed, result in a fund valuing similar derivatives instruments

differently for purposes of complying with the fund’s 80% investment policy?

Should a fund be permitted to value similar derivatives instruments differently for

purposes of complying with the fund’s 80% investment policy as long as the fund

discloses that difference in its prospectus? Would an investor find that disclosure

helpful?

38.

Are there operational or interpretive challenges associated with the proposed

approach to addressing derivatives instruments in the names rule, and if so, what

are these and how should the Commission’s rules and/or guidance address those

challenges?

39.

If a fund were to use derivatives instruments to obtain exposure to short positions

in one or more reference assets, the proposed amendments would require a fund to

use these derivatives instruments’ notional amounts for purposes of determining

compliance with its 80% investment policy. These investments therefore would

be valued at their notional amounts in the denominator in all cases, and at their

notional amounts in the numerator where the fund includes investments that

provide short exposure in the numerator. Is this treatment appropriate, or would

the use of market values for short positions in the context of assessing names rule

compliance be more appropriate? If funds currently subject to the 80% investment

policy requirement include short positions in their 80% baskets, how are these

positions valued for these purposes (e.g., using the value of the short position, the

value of the asset sold short, or if the fund obtains short exposure using

derivatives, the derivatives’ notional amounts)? Should the names rule address the

valuation of physical short sales, and if so, how should these be valued for

purposes of assessing names rule compliance? Should we provide in the rule that,

for purpose of the names rule, a short sale’s value is the value of the security or

other asset sold short? Would that provide reasonably comparable treatment for

physical short sales and derivatives that provide short investment exposure?

Should the rule prohibit a fund from including derivatives instruments in its 80%

basket when those instruments provide inverse exposure to the investments

suggested by the fund’s name?

40.

In addition to any derivatives instrument that the fund includes in its 80% basket

because it provides investment exposure to the investments suggested by the

fund’s name, we are proposing to permit a fund to include in its 80% basket

derivatives instruments that provide investment exposure to one or more of the

market risk factors associated with the investments suggested by the fund’s name.

What types of funds, and derivatives use, would be implicated by our proposed

approach? Would this proposed approach raise investor protection issues?

Alternatively, should we require, rather than permit, a fund to include in its 80%

basket derivatives instruments that provide investment exposure to one or more of

the market risk factors associated with those investments? Are there

circumstances in which exposure to associated risk factors provided by the

derivatives instruments may be contrary to, or otherwise different from, the

investments suggested by the fund’s name and should not be permitted?

41.

Are there limits to the derivatives instruments that a fund should be permitted to

include in its 80% basket because they provide investment exposure to one or

more of the market risk factors associated with the investments suggested by a

fund’s name? For example, should the rule permit a fund only to include

derivatives instruments in its 80% basket when they hedge currency or interest

rate risks associated with one or more specific investments that the fund holds in

its 80% basket?

42.

A fund’s name generally does not provide investors with specific information

about fund risks, such as differences in risks between derivatives and cash-market

investments—which instead must be disclosed in a fund’s prospectus. However,

where a fund’s name refers to certain asset classes, for example “stocks” and

“bonds,” do investors form specific expectations about how the fund would obtain

that investment exposure? In those cases, should we prohibit a fund from

including derivatives in its 80% basket on the basis that investors expect the fund

to invest directly in those kinds of securities in the cash markets? Alternatively,

should we require a fund that includes derivatives instruments in the fund’s 80%

basket to include “derivatives” (or similar terminology) in its name? Are there

other cases where we should require a fund that includes derivatives instruments

in the fund’s 80% basket to include this type of terminology in its name?

43.

In addition to derivatives, are there other asset types or instruments that would

benefit from more clarification about how they should be valued for purposes of

determining compliance with the fund’s 80% investment policy?

4. Unlisted Closed-End Funds and BDCs

We are proposing to require that a fund’s 80% investment policy must always be a

fundamental investment policy if the fund is a registered closed-end investment company or

BDC that does not have shares that are listed on a national securities exchange (together,

“unlisted closed-end funds and BDCs”). 96 A “fundamental investment policy” under the

proposed rule amendments would be a policy adopted under section 8(b)(3) of the Act or, if the

See proposed rule 35d-1(a)(2)(ii).

fund is a BDC, a policy that is changeable only if authorized by the vote of a majority of the

outstanding voting securities of the fund. 97 As a result, unlisted closed-end funds and BDCs

would not be permitted to change their 80% investment policies without shareholder approval.

Under the current rule, unless a fund’s name suggests that it is a tax-exempt fund, an

unlisted closed-end fund’s or BDC’s 80% investment policy must either be a fundamental policy

or subject to a requirement in the rule to provide shareholders 60-days’ advance notice of any

change in the policy. The Commission permitted funds to provide shareholders advance notice,

in lieu of adopting a fundamental policy, because the advance notice would provide shareholders

sufficient time to decide whether to redeem their shares in the event that the investment company

decides to pursue a strategy involving a different investment focus. 98 Unlisted closed-end funds

and BDCs, however, do not issue redeemable shares or list their shares on a national securities

exchange. A shareholder in an unlisted closed-end fund or BDC generally will have no ready

recourse, such as the ability to redeem or quickly sell their shares, if the fund were to change its

investment policy and the investment focus that the fund’s name indicates. 99 We therefore do not

Proposed rule 35d-1(g)(6). Section 8(b)(3) of the Act requires a registered investment company to

recite all of its policies that it deems matters of fundamental policy in its registration statement.

For a registered investment company, section 13(a)(1) of the Act requires a vote of a majority of

its outstanding voting securities for changes to policies adopted under section 8(b)(3). The

proposed amendments would only permit BDCs to change such policies if authorized by the vote

of a majority of the outstanding voting securities of the BDC.

Names Rule Adopting Release, supra footnote 2, at n.19 and accompanying text.

While unlisted closed-end funds and BDCs often offer a periodic issuer repurchase tender offer,

these can be discretionary on behalf of the issuer or adviser, only offered at specific intervals

(e.g., quarterly), and limited to a certain percentage or amount to repurchase, such as participation

in the issuer’s dividend re-investment program. See, e.g., FS Energy and Power Fund, SEC Staff

No-Action Letter (Jan. 10, 2012), available at https://www.sec.gov/divisions/marketreg/mrnoaction/2012/fsenergy-011012.pdf (discussing one such BDC’s repurchase program). These

share repurchases can take an extended period of time, and shareholders may be unable to fully

divest their shares.

believe that advance notice is effective in the case of unlisted closed-end funds and BDCs

because their shareholders generally cannot use the time provided by the notice to exit their

investments if they do not wish to remain invested after the change in the fund’s investment

policy. For example, absent this proposed change, these funds could launch with one name and

corresponding 80% investment policy but then change that policy with little to no recourse for

their shareholders. The proposal would address this by ensuring that investors in unlisted closedend funds and BDCs would be able to vote on a change in investment policy in light of their

limited options to exit their investments if the change were made.

We request comment on the proposed requirement for unlisted closed-end funds and

BDCs that any 80% investment policy they adopt in compliance with the names rule must be a

fundamental investment policy.

44.

Should we expand this requirement to any other type of fund? For example,

secondary-market liquidity for some listed closed-end funds and BDCs may not

be sufficient for shareholders to exit their investments within the 60-day notice

period without needing to sell at a price that represents a significant discount from

net asset value either because of the introduction of significant new sell-side

interest or because of an existing discount in the market. Should we require that

any 80% investment policy that these funds adopt also be a fundamental

investment policy?

45.

Are there any unlisted closed-end funds or BDCs for which our proposed

approach may be less necessary to address investor protection considerations? For

example, are there any unlisted closed-end funds or BDCs that offer shareholders

liquidity through discretionary repurchase programs sufficient to allow

shareholders to tender all of their shares within the 60-day notice period?

46.

As an alternative to this requirement, should we require longer advance notice

than 60 days for these funds? If so, what length of time would be necessary for

shareholders to exit their investments? Further, should we not require

fundamental policies of unlisted interval funds that provide advance notice and

make a discretionary repurchase offer under 17 CFR 270.23c-3(c) for their

outstanding shares? Would the current regulatory limits on interval funds’

repurchases affect the investor protection considerations of this alternative

approach?

47.

Should potential barriers to exit be the primary consideration underlying whether

we require funds’ names rule investment policies to be fundamental investment

policies? For example, should we only require unlisted closed-end funds or BDCs

to adopt their names rule investment policies as fundamental investment policies,

and remove the current requirement for tax-exempt funds’ names rule investment

policies to be fundamental investment policies?

48.

Should we require any other protections for investors in unlisted closed-end funds

and BDCs? For example, should we mandate that these funds must make an issuer

tender offer or a repurchase offer when they change an 80% investment policy

and are not already required to redeem their shares? Should we offer this as an

alternative in the names rule to the proposed fundamental policy requirement? If

so, how much should we require these funds to offer to repurchase, for example,

100% or some other percentage?

5. Effect of Compliance with an 80% Investment Policy

We are proposing a new provision in the names rule providing that a fund’s name may be

materially deceptive or misleading under section 35(d) even if the fund adopts an 80%

investment policy and otherwise complies with the rule’s requirement to adopt and implement

the policy. 100 The Commission has previously stated that the names rule’s 80% investment

policy requirement is not intended to create a safe harbor for fund names, and we are proposing

to codify this view to make clear that a fund name may be materially deceptive or misleading

even where the fund complies with its 80% investment policy. 101

The rule requires, and proposed rule amendments would continue to require, a fund to

invest at least 80% of its assets consistent with its name, but do not prescribe how the fund

invests the remaining 20%. A fund’s name could be materially deceptive or misleading for

purposes of section 35(d) if, for example, a fund complies with its 80% investment policy but

makes a substantial investment that is antithetical to the fund’s investment focus (e.g., a “fossil

fuel-free” fund making a substantial investment in an issuer with fossil fuel reserves). Similarly,

a fund’s name could be materially deceptive or misleading for purposes of section 35(d) if the

fund invests in a way such that the source of a substantial portion of the fund’s risk or returns is

different from that which an investor reasonably would expect based on the fund’s name,

regardless of the fund’s compliance with the requirements of the names rule (e.g., a short-term

bond fund using the 20% basket to invest in highly volatile equity securities that introduce

100

Proposed rule 35d-1(c).

101

Names Rule Adopting Release, supra footnote 2 (“We note, however, that the 80% investment

requirement is not intended to create a safe harbor for investment company names. A name may

be materially deceptive and misleading even if the investment company meets the 80%

requirement.”).

significant volatility into a fund that investors would expect to have lower levels of volatility

associated with short-term bonds). In discussing fund names that may be materially deceptive

and misleading notwithstanding the fund’s compliance with its 80% investment policy, the

Commission previously stated that index funds generally would be expected to invest more than

80% of the value of their assets in investments connoted by the applicable index. 102 As noted in

the 2020 Request for Comment, a fund may be invested 80% or more in an index included in the

fund’s name, but that underlying index may have components that are contradictory to the

index’s name. In such circumstances, even though the fund meets the names rule requirements

by its investments in the index, the name could still be materially misleading or deceptive. 103 As

a final example, a fund that is perpetually out of compliance with the 80% investment

requirement on account of temporary departures may have a name that is materially deceptive or

misleading under section 35(d) even if each temporary departure is permissible under the rule.

We request comment on the proposed provision stating that technical compliance with an

80% investment policy does not cure a fund name that is otherwise materially deceptive or

misleading.

102

See Names Rule Adopting Release, supra footnote 2, at section II.A.1 (also stating that a UIT

with a name indicating that its distributions are tax-exempt may have a misleading name even if it

invests 80% of its assets in tax-exempt investments).

103

See also, e.g., IRC Comment Letter; Silent Majority Comment Letter; PIABA Comment Letter

(recommending treating names of indexes used in fund names the same as fund names

themselves). But see BlackRock Comment Letter; Invesco Comment Letter; SIFMA AMG

Comment Letter (recommending the Commission clarify that index funds can meet their 80%

investment policies if they invest 80% of the value of their assets in the constituents of the

underlying index).

49.

Should we codify in the rule, as proposed, the position that the names rule’s 80%

investment policy requirement is not intended to create a safe harbor for fund

names? Is the proposed provision clear?

50.

Under what circumstances would a fund’s name be misleading or deceptive under

section 35(d) even where the fund complies with its 80% investment policy?

Should we identify any of these circumstances in the rule? For example, when a

fund uses terminology such as “XYX-free” in its name, or any similar

terminology suggesting exclusionary screens in its investment selection process,

would the fund’s name be materially deceptive or misleading if the fund’s

portfolio were to include investments, in any amount, that contradict this

terminology? As another example, should the rule define a fund’s name as

materially deceptive or misleading if the name includes the term “XYX Index,”

where the fund’s 80% basket investments include components of the XYZ Index,

but those component securities themselves are not closely tied to the type of

investments suggested by the “XYZ” term in the fund’s name? Conversely,

should the rule specify that a fund’s 80% investment policy meets the

requirements of the rule if the fund invests 80% or more of the value of its assets

in the components of the underlying index, regardless of whether that index has

components that are not closely tied to the type of investments suggested by the

“XYZ” term in the fund’s name?

51.

Should the rule require certain funds, such as index funds, to invest a greater

percentage of their assets in the investments suggested by the fund’s name (e.g.,

95%)? As another example, should ESG-focused funds be subject to a greater

percentage (e.g., 95%) than the proposed 80%? Why or why not?

B. Prospectus Disclosure Defining Terms Used in Fund Name

We are proposing amendments to funds’ registration forms—specifically, Form N-1A,

Form N-2, Form N-8B-2, and Form S-6—that would require each fund that is required to adopt

and implement an 80% investment policy to include disclosure in its prospectus that defines the

terms used in its name, including the specific criteria the fund uses to select the investments that

the term describes, if any. 104 We are also proposing a requirement that funds must tag new

information that would be included using a structured data language (specifically Inline

eXtensible Business Reporting Language or “Inline XBRL”). 105 For purposes of the proposed

disclosure requirements, “terms” would mean any word or phrase used in a fund’s name, other

than any trade name of the fund or its adviser, related to the fund’s investment focus or

strategies. However, words like “fund” or “portfolio” in a fund’s name do not describe an

investment focus or strategy and would not need to be defined. The proposed amendments are

designed to help investors better understand how the fund’s investment strategies correspond

104

See proposed instruction to Item 4(a)(1) of Form N-1A; proposed instruction to Item 8(2) of Form

N-2; and proposed instruction to Item 11 of Form N-8B-2.

105

See General Instruction C.3.(g) of Form N-1A; General Instruction I of Form N-2; proposed

General Instruction 2.(l) of Form N-8B-2; and proposed General Instruction 5 of Form S-6; see

also infra footnote 114.

with the investment focus that the fund’s name suggests, as well as to provide additional

information about how the fund’s management seeks to achieve the fund’s objective.

Neither the names rule nor funds’ registration forms currently incorporate a general

requirement for a fund that is subject to the names rule to include disclosure in its prospectus

defining the terms used in the fund’s name. However, the names rule does currently include this

requirement for funds with names suggesting investment in particular countries or geographic

regions. 106 These funds must disclose in their prospectuses the specific criteria used by the fund

to select these investments.

Similarly, in adopting the names rule, the Commission stated that a fund that is subject to

the rule’s 80% investment policy requirement should disclose this policy as one of its principal

investment strategies in its prospectus. 107 Further, the Commission also stated that, generally, a

fund may use any reasonable definition of the terms used in its name and should define the terms

used in its name in discussing its investment objectives and strategies in the prospectus. 108

Therefore, although there is not currently a general requirement for funds to define the terms

used in their names, we understand that it is currently common practice for funds to include

prospectus disclosure that describes their 80% investment policies and that defines any terms that

their names include. The amendments we are proposing would codify certain best practices of

106

See rule 35d-1(a)(3)(ii).

107

See Names Rule Adopting Release, supra footnote 2, at n.15.

108

See id. at n.43; see also section 8(b) of the Act (requiring a registered investment company’s

registration statement to contain certain information, including a recital of its investment

policies).

some funds that currently provide disclosure defining terms used in a fund’s name. 109 The

proposed disclosure requirement would not, however, otherwise alter or address disclosure that

funds currently provide, for example in response to prospectus disclosure requirements regarding

the fund’s investment policies.

Understanding how terms used in a fund’s name are understood by the fund’s investment

manager is key information that an investor needs to make an investment decision, as this will

help the investor understand whether the investment focus the name suggests is consistent with

the investor’s investment goals and risk tolerance. There are many types of fund names for which

understanding additional detail about how these terms are defined would provide greater clarity

to an investor about the investment focus that the name suggests. We are therefore proposing to

replace the specific disclosure requirement for fund names focusing on particular countries or

geographic regions with the general requirement to define terms used in the fund’s name

whenever the fund’s name suggests an investment focus requiring an 80% investment policy.

Funds have flexibility to use reasonable definitions of the terms that their names use. A

fund’s use of reasonable definitions of the terms used in the fund’s name may not, however,

109

Codifying these practices might especially be helpful for a fund that relies on rule 498 under the

Securities Act of 1933 to send a summary prospectus, since such a fund would include only

content that the form requirements specifically require or permit to be included in the summary

prospectus. The proposal would amend Item 4 of Form N-1A, which is one of the items that is

required to be included in a summary prospectus that an open-end fund uses. See rule 498(b)(2)

under the Securities Act of 1933 [17 CFR §230.498(b)(2)]; see also Enhanced Disclosure and

New Prospectus Delivery Option for Registered Open-End Management Investment Companies,

Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)]

(permitting the use of a summary prospectus by registered open-end management investment

companies).

under the proposed rule otherwise change the meaning of these terms to be inconsistent with

their plain English meaning or established industry use. 110 As discussed above, definitions

should have a meaningful nexus between the term used in the fund’s name and the fund’s

investment focus. 111 However, there could be multiple reasonable definitions of the same term

that multiple funds use in their names, so understanding additional detail about these definitions

would help investors better distinguish among funds. 112 For example, multiple funds may include

the term “large-cap” in their name to indicate that they invest in “large-capitalization” stock.

There could be multiple reasonable definitions of the term “large cap,” however, because these

funds may have different ways of analyzing pertinent references (including, for example,

common indices, classifications used by rating organizations, and definitions used in financial

publications).

We are proposing to require that all funds that would be subject to the proposed new

prospectus disclosure requirements would have to tag the information we are proposing to

require funds disclose on their registration forms in a structured, machine-readable data

110

See proposed rule 35d-1(a)(2)(iii) and 35d-1(a)(3)(ii); see also infra section II.C (discussion of

the proposed requirement that terms used in a fund’s name be consistent with those terms’ plain

English meaning or established industry use).

111

See supra discussion accompanying footnote 52. Commission staff could request information

from the fund regarding the fund’s basis for determining that the fund name is sufficiently

consistent with the definitions provided, just as staff currently may request information from a

fund to support its disclosure reflecting the fund’s compliance with various provisions of the Act

and rules thereunder.

112

See supra section II.A.1 discussing how a fund may make determinations for what investments

are appropriate for the 80% basket.

language. 113 The proposed requirements would include block text tagging of narrative

information about a fund’s 80% investment policy and the terms used in its name, including the

specific criteria the fund uses to select the investments that the term describes, if any.

Specifically, we are proposing to require funds to tag the disclosures in Inline XBRL in

accordance with Rule 405 of Regulation S-T (17 CFR 232.405) and the EDGAR Filer

Manual. 114

Many funds are already required to tag certain registration statement disclosure items

using Inline XBRL. 115 Requiring Inline XBRL tagging of names rule disclosure for all funds that

113

Many funds are already required to tag certain registration statement disclosure items using Inline

XBRL. See infra footnote 115. However, UITs that register on Form N-8B-2 and file posteffective amendments on Form S-6 are not currently subject to any tagging requirements. The

costs of these requirements for funds that are currently subject to tagging requirements and those

that newly would be required to tag certain disclosure items are discussed in the Economic

Analysis and the Paperwork Reduction Act Analysis sections below. See infra discussion in

sections III.D.2 and IV.E.

114

This proposed tagging requirement would be implemented by including cross-references to rule

405 of Regulation S-T in each applicable fund registration form (and, as applicable, updating

references to those fund registration forms in rule 11 and rule 405 in those fund registration forms

that currently require certain information to be tagged in Inline XBRL—that is, Form N-1A and

Form N-2), by revising rule 405(b) of Regulation S-T to include the proposed names rule

disclosures, and by proposing conforming amendments to rule 485 and rule 497 under the

Securities Act. Pursuant to rule 301 of Regulation S-T, the EDGAR Filer Manual is incorporated

by reference into the Commission’s rules. In conjunction with the EDGAR Filer Manual,

Regulation S-T governs the electronic submission of documents filed with the Commission. Rule

405 of Regulation S-T specifically governs the scope and manner of disclosure tagging

requirements for operating companies and investment companies, including the requirement in

rule 405(a)(3) to use Inline XBRL as the specific structured data language to use for tagging the

disclosures.

115

The Commission has adopted rules requiring funds registering on Forms N-1A and N-2 to submit

certain information using Inline XBRL format. See, e.g., Interactive Data to Improve Financial

Reporting, Release No. 33-9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)] as corrected by

Release No. 33-9002A (Apr. 1, 2009) [74 FR 15666 (Apr. 7, 2009)] (requiring, among other

things, open-end funds to provide risk/return summary information from their prospectuses in

XBRL format); Inline XBRL Filing of Tagged Data, Release No. 33-10514 (June 28, 2018) [83

would be subject to this disclosure requirement would benefit investors, other market

participants, and the Commission by making the disclosures more readily available and easily

accessible for aggregation, comparison, filtering, and other analysis, as compared to requiring a

non-machine-readable data language such as ASCII or HTML. This would enable automated

extraction and analysis of granular data about how funds are defining the terms used in their

names, allowing investors and other market participants to more efficiently perform large-scale

analysis and comparison across funds and time periods. An Inline XBRL requirement would

facilitate other analytical benefits, such as more easily extracting and searching disclosures about

funds’ names and their 80% investment policies (rather than having to manually run searches for

these disclosures through entire documents), and automatically comparing these disclosures

against prior periods. We believe requiring structured data for the new names-related disclosure

for all funds that would be subject to these disclosure requirements would make this disclosure

more readily available, accessible, and comparable for investors, other market participants, and

the Commission.

We request comment on the proposed amendments to prospectus disclosure requirements

regarding funds’ definition of the terms used in their names.

52.

Are the proposed new instructions in the applicable fund registration forms

requiring funds to define the terms used in their names appropriate and clear?

Would the proposed amendments help meet the needs of investors to better

FR 40846 (Aug. 16, 2018)]; Securities Offering Reform for Closed-End Investment Companies,

Release No. 33-10771 (Apr. 8, 2020) [85 FR 33290 (Jun. 1, 2020)]; Filing Fee Disclosure and

Payment Methods Modernization, Release No. 33-10997 (Oct. 13, 2021) [86 FR 70166 (Dec. 9,

2021)].

understand how the fund’s investment strategies correspond with the investment

focus that the fund’s name suggests as well as provide additional information

about how the fund’s management seeks to achieve the fund’s objective?

53.

Should the proposed prospectus disclosure requirements be applicable, as

proposed, to registrants on Form N-1A, Form N-2, Form N-8B-2, and Form S-6?

If some types of funds should be exempt, have different disclosure requirements,

or not be subject to the proposed structured data requirement, which and why?

54.

Would it be helpful and appropriate to revise the proposed instruction to expressly

provide that a fund must use a reasonable definition of the terms used in its name?

55.

Is the definition of “terms” in the proposed instructions sufficiently clear? Should

these proposed instructions use another word instead of “terms” or define the

word “terms” differently? If so, what should this alternate definition be and how

should we define it?

56.

Should we require all funds that would be subject to the proposed new prospectus

disclosure requirements to tag the newly-required information in Inline XBRL, as

proposed? Why or why not?

57.

Should we require funds to use a different structured data language to tag the

proposed disclosure on fund names? Why or why not? If so, what structured data

language should we require?

C. Plain English/Established Industry Use Requirement

For funds that are required to adopt an 80% investment policy, we are proposing to

require that any terms used in the fund’s name that suggest either an investment focus, or that

such fund is a tax-exempt fund, must be consistent with those terms’ plain English meaning or

established industry use. 116 This requirement is designed to provide investors with a better

understanding of the fund and its investment objectives by effectively requiring a fund’s name to

be consistent with a reasonable investor’s likely understanding of the investment focus or tax

status that the fund’s name suggests.

The proposed plain English or established industry use requirement would address

concerns that a fund sponsor may subvert an investor’s reasonable expectations of a fund’s

investment focus by using terminology in the fund’s name in a manner that is inconsistent with

the plain English or established industry use. The proposed amendments similarly reflect our

belief that a name’s meaning should not be permitted to be materially altered by fund disclosure.

For example a fund that calls itself a “solar energy fund” would not be able to use disclosure to

qualify the name in the prospectus by stating that the fund’s 80% basket includes investments in

the securities of any type of alternative energy company. While we understand that certain terms

may be defined in multiple reasonable ways, we believe that defining a given term in a fund’s

name in a way that is inconsistent with those terms’ plain English meaning or established

industry use is misleading for investors. The proposed amendments would define these names as

materially deceptive or misleading even if the fund’s prospectus disclosure defines a given term

in the name to match the fund’s investments.

We received comments on the 2020 Request for Comment that identified this issue and

stated that funds should not be able to use disclosure to “cure” misleading names. 117 Under the

116

See proposed rule 35d-1(a)(2)(iii) and 35d-1(a)(3)(ii).

117

See, e.g., Consumer Federation Comment Letter; Duffy Comment Letter; McPhee, Jason K.

Comment Letter.

proposed amendments, disclosure would not be permitted to “fix” or “remedy” a misleading

name that uses terms in a way that is inconsistent with their plain English meaning or established

industry use, and therefore contrary to reasonable expectations. This is consistent with section

35(d), which addresses fund names specifically and without regard to other disclosure. It also is

consistent with the Commission’s belief that a fund’s name may communicate a great deal to an

investor, even though investors should not rely on the name as the sole source of information

about the fund’s investments and risks.

We seek comment on the proposed plain English and established industry use

requirement:

58.

Should the names rule include the proposed requirement that terms used in a

fund’s name must be consistent with the terms’ plain English meaning or

established industry use?

59.

Is the proposed requirement clear? Is Commission guidance needed to clarify the

requirement? If so, what guidance would be helpful? Are there standards that

should be considered with respect to what is plain English and/or established

industry use?

60.

Are there any terms that could be consistent with established industry use that

would not be consistent with those terms’ plain English meaning or the

understanding of a reasonable investor? If so, what terms, and how should we

address these?

61.

Would current funds be required to change their names or disclosure if the plain

English/established industry use requirement is adopted as proposed?

62.

Would the proposed plain English requirement encourage funds to select names

(or cause them to have to change their names to new names) that could be less

informative to investors? For example, would the proposed requirement result in

overly-broad or neutral names that may be less helpful to investors?

D. Materially Deceptive and Misleading Use of ESG Terminology in Certain Fund

Names

As approaches to ESG investing vary, and investment products that incorporate one or

more ESG factors vary in the extent to which ESG factors are

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