The Securities and Exchange Commission has updated its frequently asked questions guidance on its Names Rule for funds, signaling a looser interpretation after a 2023 update that sparked controversy. It also extended deadlines for related compliance dates.
The Names Rule, first adopted in 2001, requires 80% of assets in certain types of funds to be invested based on the focus suggested by its name — for example, if the fund's name suggests investments in a particular industry or geographic area.
The rule was amended in 2023 to broaden the scope of the 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 said then.
These characteristics included credit quality; terms like "growth" and "value"; and environmental, social and governance factors.
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."
In a separate action Wednesday, the SEC extended the compliance dates for Form N-PORT reporting requirements related to the Names Rule. The extension will provide additional time for funds and the commission "to consider the proposed amendments to Form N-PORT and avoid certain costs associated with regulatory requirements that the Commission is proposing to eliminate," the agency said.
The new compliance dates are Nov. 17, 2027, for fund groups with net assets of $10 billion or more and May 18, 2028, for fund groups with less than $10 billion in net assets as of the end of their most recent fiscal year.
Amy Lynch, president and founder of FrontLine Compliance, told ThinkAdvisor Thursday in an email that the FAQ has been updated "to reflect the new SEC's approach" to the Names Rule.
The SEC has "made it clear via the new N-PORT proposal and extension of the compliance date that this [Names] rule will be loosened a bit," Lynch said. "Perhaps even a new proposal amendment to the rule itself may come out prior to the first compliance date in June. However, more likely is that the interpretation of the 80% requirement will be less strict and guidance such as this new FAQ reflects that approach."
As ICI explains, the updated FAQ makes the following changes:
- Provides relief from shareholder notification requirements for non-material changes to a fund's 80% investment policy made solely to comply with the amended rule. "This guidance provides clarity about the notification requirement when funds are making changes solely because of the amended requirements, and provides relief from costs associated with those notifications," ICI said.
- Permits certain funds to count the value of cash and cash equivalents that cover unfunded commitments toward the fund's 80% basket in certain circumstances. The change "will make it easier for these funds to meet the names rule requirements without altering their investment strategies," the fund group said.
- Clarifies that funds that use the term 'growth' or 'value' in their names, when combined with certain modifying terms, will not be required to have an 80% investment policy with respect to the term 'growth' or 'value,' as applicable. "This guidance is helpful for, for example, certain growth allocation fund names. It also clarifies that 'Growth and Income' funds will generally not be required to have an 80% investment policy with respect to the word 'growth' in the fund's name," ICI said.
- Clarifies that a fund with the terms "merger" or "merger arbitrage" in its name will not be required to have an 80% policy with respect to those terms.
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