The amended SEC Names Rule extends the 80% investment policy to fund names that suggest particular characteristics, such as “growth”, “value” or ESG, and it asks funds to show they’re living up to those names every quarter. The changes were adopted in September 2023, they took effect on 11 December 2023, and larger fund groups have until 11 December 2025 to comply, which can sound like a long runway until you consider that the work touches every fund name in a range, the prospectus, the compliance process and quarterly regulatory filings.
What is the SEC Names Rule?
Rule 35d-1 under the Investment Company Act is there to stop fund names misleading investors. At its heart is the 80% investment policy, which means that if a fund’s name suggests a focus on a particular type of investment, industry or region, the fund has to adopt a policy of investing at least 80% of its assets in line with that name.
The rule was introduced in 2001 and, as many commenters pointed out, hadn’t been revisited since. The SEC proposed the update in May 2022 and adopted the final amendments on 20 September 2023.
What does the amended Rule 35d-1 change?
The biggest change is to scope, because the 80% requirement now applies to any fund name containing terms that suggest the fund focuses on investments with particular characteristics, and the SEC’s own examples include “growth” and “value”, as well as terms indicating that investment decisions incorporate one or more ESG factors.
The 80% test still applies at the time of investment and “under normal circumstances”, but funds now need to review what sits in their “80% basket” at least quarterly. If a fund drifts below 80%, or departs from its policy in other than normal circumstances, it generally has 90 consecutive days to get back into compliance, which is a good deal more generous than the 30 days the SEC originally proposed.
The amendments also bring in a number of more detailed requirements:
- Derivatives at notional: funds generally use a derivative’s notional amount, with certain adjustments, when calculating compliance, with a limited carve-out for certain currency hedges.
- Defined terms in the prospectus: funds must define the terms used in their name, including the criteria used to select the investments those terms describe.
- Plain English meaning: terms in a fund’s name that suggest an investment focus have to be consistent with their plain English meaning or established industry use.
- Updated shareholder notice: changes to an 80% policy that isn’t fundamental still need 60 days’ notice to shareholders, now in a modernised form.
- Form N-PORT reporting: funds will report the value of their 80% basket, whether each investment is in the basket, and the definitions of the terms used in their name, for the third month of each quarter.
- Recordkeeping: funds must keep records documenting their compliance.
- Closed-end funds and BDCs: unlisted registered closed-end funds and business development companies generally can’t change their 80% policy without a shareholder vote, unless they run a qualifying tender or repurchase offer.
What the SEC didn’t change
The SEC didn’t adopt its proposal to treat ESG “integration” fund names as materially deceptive. Under that idea, a fund that considers ESG factors alongside other factors, but no more significantly than them, wouldn’t have been able to use ESG terms in its name, and the SEC says it isn’t taking action on that approach at this time.
The separate ESG disclosure proposal from May 2022 also remains a proposal for now. Complying with an 80% policy also doesn’t make a name safe if it’s otherwise materially deceptive or misleading.
When is the Names Rule compliance date?
- May 2022: the SEC proposes the amendments
- 20 September 2023: the SEC adopts the final amendments
- 11 October 2023: the amendments are published in the Federal Register
- 11 December 2023: the amendments take effect
- 11 December 2025: compliance date for fund groups with net assets of $1 billion or more
- 11 June 2026: compliance date for smaller fund groups
What it means in practice
For product and legal teams, the natural starting point is an inventory of which fund names include a term that now triggers the 80% requirement. “Growth”, “value”, “sustainable” and “ESG” are the obvious ones, while thematic names and less obvious characteristics will need a closer look, and for each fund you’ll either adopt an 80% policy, change the name, or document why the rule doesn’t apply.
For compliance and operations teams the work is ongoing rather than a one-off project, because quarterly basket reviews, records of which holdings count and quarterly N-PORT data all depend on a consistent, auditable view of the portfolio and of how each holding maps to the fund’s stated focus.
Document teams will feel it too, since defined terms flow into prospectuses and any name change ripples through every factsheet, shareholder report, web page and data feed that carries the fund’s name.
What to do now
- Run a names inventory, listing every fund whose name suggests an investment focus or characteristic and deciding whether to adopt a policy, rename the fund or take no action.
- Agree the definitions behind each term in a fund’s name, so that the prospectus, the 80% basket and N-PORT all tell the same story.
- Plan the data, working out where basket membership will be recorded and how it will reach your quarterly filings.
Starting with the inventory and the definitions now means the quarterly testing and reporting can be built on decisions that are already documented, rather than worked out under time pressure as the compliance date approaches.
At Kurtosys we help fund groups keep governed fund data in one place, so names, definitions and portfolio data stay consistent across factsheets, regulatory documents, shareholder reports and fund websites. When a name changes or a definition is tightened, that’s one change at the source with a clear audit trail. If you’re starting your Names Rule review, we’d be glad to help, so get in touch.
Sources: SEC press release 2023-188, SEC final rule: Investment Company Names, Release No. IC-35000, Federal Register, 88 FR 70436, as at 1 January 2024.
About this article
This article reflects the position at 1 January 2024 and was checked against the primary sources available at that time. Thomas Bjerkén, our regulatory reporting and fund data specialist, joined Kurtosys after it was published and now looks after our regulatory content. The SEC Names Rule has moved on since. For the latest position, see The US Names Rule is ten days away: what larger fund groups need in place.
