The Securities and Exchange Commission has released frequently asked questions guidance on its controversial Names Rule for funds.
The 2023 amendments broadened the scope of the original names rule’s 80% investment policy requirement "to include any fund name with terms suggesting that the fund focuses in investments that have, or investments whose issuers have, particular characteristics," the SEC states.
Eric Pan, president and CEO of the Investment Company Institute, the fund industry's trade group, blasted the SEC when it passed the final rule in 2023, stating that it "sweeps more than three-quarters of all the funds in the U.S. into its dragnet, going far beyond ESG funds — the supposed root of the rulemaking — with no justification."
ICI and its members "are still considering the full impact of the updated guidance," the group told ThinkAdvisor in a statement. "We are pleased that the SEC staff provided critical FAQ guidance that funds can use to comply with the Fund Names Rule."
ICI, the group said, is "optimistic that the updated guidance will help to resolve some of the interpretive questions raised by the amended Names Rule, and we appreciate the SEC staff’s collaborative engagement with ICI and our members on the updated FAQs. Despite this guidance, compliance will still be challenging, and we still believe that a longer compliance period is necessary to provide funds with adequate time to complete implementation in an orderly manner.”
Investment advisors that manage mutual funds must follow the requirements of the Fund Names Rule.
The expanded amendments made in 2023 "raise numerous interpretive questions and implementation challenges, both for funds previously subject to the rule and for the many additional funds that will now be in scope," Gail Bernstein, general counsel and head of public policy at the Investment Adviser Association in Washington, told ThinkAdvisor Tuesday in an email.
In addition to environmental, social and governance related themes, "the rule covers fund names that suggest particular investment characteristics like specific credit qualities, as well as focused money market funds (e.g., XYZ U.S. Treasury Money Market Fund), and commonly understood objectives like 'growth' and 'value,' among other things," Bernstein said. "Prior to the amendments, managers of growth and value funds, for instance, did not have an 80% test."
FAQ Details
The FAQ explains, for instance, "that the rule does not require shareholder approval if a fund wishes to adopt or revise a fundamental 80% investment policy to comply with rule 35d-1, as amended in 2023," Bernstein said.
For example, in the SEC staff’s view, "a fund that has a fundamental 80% investment policy that broadly references equity investments would generally not be deviating from that policy if it were to revise this fundamental policy to reference equity investments with growth characteristics," the FAQ states.
"A fund would need to determine, based on its individual circumstances, whether it would be necessary to seek shareholder approval to adopt a new fundamental investment policy (or revise an existing fundamental policy) in light of the 2023 amendments," according to the SEC. "A fund also should generally consider whether factors outside the Investment Company Act, such as state law or the fund’s charter or by-laws, would require shareholder approval in order to adopt or revise a fundamental 80% investment policy."
The FAQ also discusses fund names that do not suggest an investment focus and states that the Names rule does not apply to a fund that uses the term “tax-sensitive” (or a similar term) in its name.
In the SEC staff's view, "the term 'tax-sensitive' references overall characteristics of the fund’s portfolio (as do similar terms such as 'tax-efficient,' 'tax-advantaged,' 'tax-managed,' and 'tax aware'), and therefore indicates the fund’s objectives without communicating to investors the particular characteristics of the investments that will make up the fund’s portfolio," the FAQ states.
Credit: Diego Radzinschi/ALM
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