Thought Leadership  •  April 30, 2024

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New Investment Company Names Rule Drives Refined Investment Focus

The SEC has amended the 2001 fund “Names Rule” and the resulting changes likely affect a fund’s investment policy, disclosures and reporting obligations. The original rule addressed certain broad categories of investment company names that can mislead investors about the company’s investments and risks. The recent amendment significantly expands the scope of the original ruling.

Now, at least 80% of a fund’s asset value must align with the definition of the fund name. For instance, if a company is named XYZ Growth Fund, then 80% of the assets must be in securities that align with the fund name, as defined in the prospectus. It is also noteworthy that there are not standard definitions for terms like “growth,” “value” or “ESG,” and each fund can define its name in a unique way. In other words, “ESG” could be defined differently from fund to fund.

Under the final amendments, as under the current Names Rule, a fund is required to determine at the time it invests whether the security is appropriately included in the fund’s 80% basket. Additionally, each fund must be reviewed quarterly for compliance. If out of compliance, the fund has 90 days to realign assets to the fund name.

The SEC also clarified terms that do not suggest an investment focus, and for which an 80% investment policy will not be required. Such terms include names that suggest a portfolio-wide result to be achieved, such as “real return,” “balanced” or “managed risk”; names that reference a particular investment technique, such as “long/short” or “hedged”; and names that reference asset allocation determinations that evolve over time, such as a “retirement target date” or “sector rotation.”

The ruling will require enhanced transparency through changes to Form N-PORT, requiring the reporting of the definition(s) of terms used in the fund’s name, the value of the fund’s 80% basket, and whether an investment is included in the fund’s 80% basket. Additional term definitions and investment criteria explanation in enhanced prospectus disclosure will be required, some of which requires iXBRL tagging. These new iXBRL requirements 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.

Now is a good time to:

  • Evaluate the impact by identifying funds that are affected.
  • Determine the internal process for fund naming.
  • Engage DFIN as a one-stop shop for tagging, reporting and filing.

The effective date of the Names Rule was December 11, 2023. The compliance dates, however, are staggered. For entities with net assets of $1 billion or more, compliance is required by December 11, 2025. For smaller entities, the compliance date is June 11, 2026.

DFIN’s Arc Suite® is best positioned to handle the enhanced reporting and disclosure as the industry’s leading end-to-end regulatory, reporting, legal, filing and distribution platform.