SEC Extends Compliance Dates for Funds’ Adherence to ‘Names Rule’ Amendments
The U.S. Securities and Exchange Commission announced a six-month extension of the compliance dates for amendments adopted in September 2023 to the Investment Company Act of 1940 “Names Rule,” designed to prevent investment funds from misleading investors with deceptive titles.
The compliance date for fund groups with net assets of $1 billion or more is extended from Dec. 11, 2025, to June 11, 2026, and the compliance date for all smaller fund groups is extended from June 11, 2026, to Dec. 11, 2026.
The extension is designed to balance the investor benefit of the amended Names Rule framework with funds’ needs for additional time to implement the amendments properly, develop and finalize their compliance systems, and test their compliance plans.
To help funds avoid additional costs when coming into operational compliance with the Names Rule amendments, the SEC said it aligned the compliance dates with the timing of certain annual disclosure and reporting obligations that are tied to the end of a fund’s fiscal year.
Since the adoption of the Names Rule in 2001 – including the proliferation of fund assets under management and the number of those with diverse fund strategies, such as those with thematic and ESG-related objectives, i.e., environmental, social, or governance-related objectives – the move aims to modernize regulations.
The amendments to Rule 35d-1 of the Investment Company Act, known as the Names Rule, aims to broaden the number of funds required to adhere to the 80% investment policy. This policy mandates that at least 80% of a fund’s assets align with the investment focus suggested by its name.
According to the SEC, fund names are often the first piece of information investors encounter, serving as a crucial signal for investment decisions. These amendments are designed to ensure that fund names accurately reflect the fund’s portfolio.
As previously reported by AltsWire, the changes and implications include the following.
Expanded 80% rule: The rule now applies to funds using terms like “growth,” “value,” or those related to thematic investments, including ESG factors. This ensures that funds using such terms genuinely reflect those strategies in their holdings.
Derivatives accounting: Funds using derivatives will now calculate their 80% compliance based on the notional amount of these instruments, rather than market value, providing a more accurate representation of exposure.
Enhanced disclosures: Funds must provide clearer definitions of terms used in their names within their prospectuses. Terms must align with plain English or industry standards. Form N-PORT reporting will also be enhanced to provide greater transparency.
Compliance and reporting: Funds are required to conduct quarterly reviews of their portfolio’s adherence to the 80% rule and generally have 90 days to correct any deviations. According to the SEC, recordkeeping requirements will also be implemented with the amendment.
Unlisted funds: Closed-end funds and business development companies not listed on national exchanges will generally require shareholder votes to change their 80% investment policies. According to the SEC, this is intended to protect investors with limited exit options.
Modernized notices: The SEC has updated notice requirements to include electronic delivery methods and provide more specific information to shareholders regarding changes to the policy.
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