The U.S. Securities and Exchange Commission (SEC) has once again provided critical guidance for investment companies with its recent issuance of the 2025 Names Rule Frequently Asked Questions (FAQs). Released on January 8, 2025, these clarifications focus on the amended Investment Company Names Rule (Rule 35d-1 under the Investment Company Act of 1940), especially the requirement that funds whose names imply a particular investment focus must adopt an 80% investment policy in line with that focus. 

Understanding these updates is essential for investment advisers to maintain compliance and avoid costly missteps in fund naming and portfolio management. Let’s break down what the 2025 Names Rule FAQs mean for the industry. 

What’s New in the 2025 Names Rule FAQs? 

The SEC’s FAQs interpret and clarify the amended Names Rule, specifically how funds should apply the 80% investment policy rule based on the use of certain key terms in their names. 

Single-State Municipal Funds and the 80% Basket 

Funds labeled as single-state municipal bond funds now have clearer parameters. They may include securities issued by entities outside the named state within their 80% investment basket — but only if: 

• The interest on those securities is exempt from both federal income tax and the income tax of the named state. 

• This investment strategy is clearly disclosed in the fund prospectus. 

This interpretation gives municipal bond funds some flexibility but places the emphasis on transparent disclosure to investors. 

“Municipal” vs. “Tax-Exempt” Terminology 

The FAQs draw a critical distinction between funds using “municipal” and those using “tax-exempt” in their names: 

• Funds using “municipal” may include securities whose income is subject to the Alternative Minimum Tax (AMT) in the 80% calculation. 

• Funds using “tax-exempt” cannot include AMT-subject securities, since “tax-exempt” suggests a broader exemption that AMT exposure would contradict. 

This subtle but important difference can affect the composition and marketing of funds. 

When “Income” Means Income Generation, Not Fixed Income 

The FAQs clarify that when the term “income” is used to describe a general investment objective—such as pursuing current income—rather than referring specifically to fixed income securities, the 80% investment policy does not apply. Essentially, the word “income” alone doesn’t obligate a fund to focus primarily on income-producing assets. 

The Nuances of “High Yield” in Fund Names 

Typically, the term “high yield” suggests investment in below-investment-grade corporate bonds, which triggers the 80% investment policy requirement. However, if paired with terms like “municipal” or “tax-exempt,” the fund: 

• Does not have to invest 80% in below-investment-grade securities but must meet the 80% threshold with respect to municipal securities more broadly. 

This affords funds greater flexibility while ensuring alignment with investors’ expectations. 

Why the 2025 Names Rule FAQs Matter for Investment Advisers 

For investment advisers, these FAQs are more than just interpretive commentary—they have direct operational and compliance implications: 

• Review Holdings for Compliance: Advisers need to ensure portfolio holdings meet the 80% investment policy consistent with the fund’s name. 

• Update Disclosures: Prospectus and marketing materials must be updated to clearly disclose any permissible investment flexibilities or nuances. 

• Coordinate with Legal Teams: Collaboration with legal and compliance professionals is essential to revise fund naming conventions and disclosure policies, reducing risk of regulatory issues. 

Conclusion 

The SEC’s 2025 Names Rule FAQs provide vital clarity on the amended Names Rule’s expectations. From distinguishing between “municipal” and “tax-exempt” funds to clarifying when “income” triggers investment policy requirements, these guidelines aim to protect investors from misleading fund names while granting funds reasonable investment flexibility. 

Investment advisers should promptly incorporate these insights into their compliance practices, ensuring fund names accurately reflect investment strategies and that portfolio adherence to the 80% rule is airtight. Doing so will maintain regulatory compliance and uphold investor trust in an increasingly complex marketplace. 

Stay informed and proactive—understand the 2025 Names Rule FAQs and align your funds accordingly! 

Download the complete First Quarter 2025 Regulatory Update today to find out more.