Names Rule FAQ Released by the SEC
SEC RELEASES
Introduction
The SEC recently published an FAQ to answer certain industry questions surrounding the amendments to the Names Rule adopted in 2023.
The SEC adopted those amendments in September of 2023 with the goal of preventing misleading or deceptive Investment Fund Names. The main focus is on the 80% rule, which requires the Fund to maintain at least 80% of allocations or asset values in the type of investments that fit the Fund’s name (Growth, Value, ESG, etc.). Firms that go below 80% typically have 90 days to return to the 80% mark.
As it relates to disclosure requirements, there are many new requirements for Funds as well. We have provided a synopsis of the Names Rule FAQ below.
Who Is This Applicable To?
- Registered Investment Companies (RICs); and
- Business Development Companies (BDCs).
Name Rule FAQ Synopsis
- Is shareholder approval required to adopt or revise an Investment Policy to comply with the 80% rule?
- Shareholder approval is only required if the revisions or adopted Policy deviates from the existing fundamental Policy.
- An Investment Policy that references equity investments would not need approval to amend the Policy to reference equity investments with growth characteristics.
- Funds should also consider state law, the Fund’s charter, or by-laws when making these considerations.
- How does the Rule apply to Single-State Tax-Exempt Funds?
- Funds with a name suggesting distributions are exempt from federal and state income tax must have:
- At least 80% of the value of its assets in investments whose income is tax exempt both federally and in the named state; or
- Have its assets allocated so that 80% of the income distributed will be tax-exempt both federally and in the names state.
- Funds with a name suggesting distributions are exempt from federal and state income tax must have:
- Are Funds with the name “municipal” treated as Tax-Funds under the rule?
- Yes, these names suggest that the Fund’s distributions are tax-exempt. However, Funds that solely use “municipal” solely, instead of “municipal tax-exempt”, can count income subjected to the alternative minimum tax towards their 80% requirement.
- How does the rule apply to “high-yield” names?
- This term should generally refer to corporate bonds that are below certain creditworthiness standards.
- For Funds using “High-yield” in conjunction with “municipal” and “tax-free”, the 80% rule would be applied to the municipal tax-free, with the understanding that the market for low-grade municipal bonds is significantly lower.
- However, the antifraud provisions still apply for the use of high-yield in regard to municipal, tax-free Funds.
- Do terms such as “tax-sensitive, tax-managed, or tax aware” have the same 80% rule as “tax-free”?
- No, the SEC interprets those terms as relating to the Fund’s overall characteristics. However, Funds are reminded that there is still a prohibition against misleading names, which in this case would be a fund that pays no attention to tax results of their investment strategy but still calls themselves “tax aware”.
- How does the rule apply to a Fund name with “income” included?
- The use of this name alone would not incur the 80% rule, as the SEC sees the term income to apply to a strategy that emphasizes the achievement of current income (not solely fixed-income securities).
- How does the rule apply to the use of “money market” in its name?
- The use of “money market” in a Fund name would require at least 80% of its value of assets in the specific type of money market suggested in its name. However, if the name implies that the Fund invests in money markets generally, there does not need to be a policy to comply with this rule, as Rule 2a-7 already makes more stringent requirements.
Vigilant’s Conclusion
For Firms this applied to, it is important to be sure necessary policies to comply with the Name Rule are adopted.
Funds need to assess their allocations and investment strategies to be sure that they comply with both the 80% requirement, and the prohibition against titles that are misleading.
If you have any further questions relating to the Names Rule or would like to learn more about how Vigilant can help, schedule a call by clicking on the button below.