Expansion of the SEC “Names Rule”

A fund must adopt a policy to invest at least 80% of its assets in the type of investment suggested by its name. This now includes names that imply:

• Investment types (e.g., “Bond,” “Equity”)
• Industries or sectors (e.g., “Technology,” “Healthcare”)
• Geographic focus (e.g., “Asia,” “Emerging Markets”)
• Investment characteristics (e.g., “Growth,” “Value,” “ESG,” “Sustainable”)

Funds must review their portfolio holdings at least quarterly to ensure compliance with the 80% policy. If a fund falls below the threshold, it must return to compliance within 90 days (for the majority of instances, e.g., portfolio drift).

A fund with an 80 percent investment policy is required to define the terms used in its name, including the criteria the fund uses to select the investments that the term describes. The rule requires that any terms used in the fund’s name that suggest an investment focus, or that the fund’s distributions are tax-exempt, must be consistent with those terms’ plain English meaning or established industry use.

• Whether each investment in the fund’s portfolio is in the fund’s 80% basket;
• The value of the fund’s 80% basket, as a percentage of the value of the fund’s assets; and
• The definitions of the terms used in the fund’s name.

Funds must maintain written records for at least six years (first two years easily accessible), including:

At Time of Investment

Whether an investment is part of the 80% basket and the rationale. The basket’s value as a percentage of total assets.

Quarterly Portfolio Reviews

Documenting each investment included in the 80% and the basis for inclusion.

Drift Events

Records of when the 80% threshold is no longer met due to market drift, including the date and reason.

Departures in Unusual Circumstances

Documentation of the date and justification for any non-standard departure from the 80% policy.

Shareholder Notices

Copies of any notices sent regarding changes to the 80% policy.

Funds must provide 60 days’ advance notice to shareholders before changing their 80% investment policy. Requirements include:

• Delivery of the notice separately from other documents;
• Updates the legacy requirement alerting investors to a change in investment policy and/or name;
• Specific content guidelines; and
• Option for electronic delivery.

Unlisted closed-end funds and Business Development Companies (“BDCs”) cannot change their 80% policy without a majority shareholder vote, unless:

• A tender or repurchase offer is conducted in advance;
• 60 days’ prior notice is provided;
• The offer is not oversubscribed; and
• Shares are repurchased at net asset value (“NAV”).

UITs must comply with the 80% investment policy only at the time of initial deposit. They are required to adopt a fundamental 80% policy but are exempt from ongoing monitoring, temporary departure provisions, and extended record-keeping beyond the initial deposit.

• Derivatives must be valued using notional amounts.
• Currency hedging derivatives are excluded from the 80% basket.
• Funds may exclude cash, cash equivalents, and short-term Treasuries (≤1 year maturity) from the denominator, up to the notional amount of derivatives.
• Derivatives may be included in the 80% basket if they provide exposure to market risk factors aligned with the fund’s name.