The Securities and Exchange Commission (SEC) has introduced significant amendments to Rule 35d-1, widely known as the Names Rule, impacting the naming and operational practices of investment funds.

Key Amendments and Their Implications for Registered Investment Advisers

Here’s a concise overview of the key amendments and their implications for RIA’s:

Expanded Scope of Names Rule

• The amendments broaden the scope of the 80% investment policy requirement to apply to any registered fund name with terms that suggest particular characteristics or a thematic investment focus.

Inclusion of “Particular Characteristics”

• The SEC doesn’t define “particular characteristics” but offers examples like “growth” or “value” and terms indicating incorporation of Environmental, Social, and Governance (ESG) factors.
• These names will be subject to the same 80% investment policy requirement as names suggesting specific types of investments or tax-exempt distributions.

Portfolio Review Requirement

• Funds must review their portfolio assets quarterly to ensure compliance with the 80% investment policy. This change softens from the 2022 proposal’s assumed continual review.
• Specific time frames, typically 90 days, are given to return to compliance if the fund deviates from the requirement due to drift or other circumstances. This amendment extends the 2022 proposal’s 30-day timeframe.

Provisions Included

• Form N-PORT Reporting: Funds must report the value of their 80% basket and whether investments are included. Definitions of terms used in fund names must also be reported quarterly.
• Derivatives: Funds must use derivatives’ notional amounts to determine compliance with the 80% policy, with adjustments. Certain currency hedges are excluded from compliance calculations.
• Unlisted Funds and BDCs: Generally, unlisted closed-end funds and BDCs can’t change their 80% investment policy without shareholder approval. However, they can do so without a vote if specific conditions are met.
• Recordkeeping: Funds must keep records related to compliance with the rule, including investments in the 80% policy basket.
• Plain English Requirements: Terms in fund names suggesting investment focus or tax-exempt distributions must align with their plain English meaning or established industry use.
• Shareholder Notice: Registered funds must notify shareholders upon a change in their 80% requirement, as well as a change to a fund’s name that accompanies such policy change.

These amendments represent a concerted effort by the SEC to enhance transparency and accuracy in the naming and operation of investment funds, ultimately aiming to bolster investor confidence and protection. As regulatory requirements evolve, fund managers and advisers must remain vigilant in ensuring compliance with these updated provisions to uphold industry standards and investor trust.