As we head into the fourth quarter of 2024, investment advisers to registered funds are beginning to look ahead to the compliance dates for amendments to the Names Rule that were adopted by the Securities and Exchange Commission in 2023. As a reminder, the compliance dates are Dec. 10, 2025, for larger entities and June 10, 2026, for smaller entities.[1] At this time, boards of registered funds should be requesting regular updates from advisers on where they are in analyzing all of their funds to see if any funds that previously weren’t subject to the Names Rule will be required to adopt an 80% investment policy under the amended rule.

Such a review is necessary because the amendments significantly expand the 80% investment policy requirement to include fund names with terms suggesting a focus on investments—or issuers—that have “particular characteristics,” including “growth,” “value,” and terms indicating that the fund’s “investment decisions incorporate one or more ESG factors.” Some advisers may decide to change a fund’s name to avoid having to make the necessary changes, but if a fund is going to keep a name that now falls within the scope of the Names Rule, advisers should begin preparing for compliance now as there are many considerations that need to be made[2], including:

• For funds that need to now adopt an 80% investment policy, or amend their existing policy, any terms used in the fund’s name that suggest an investment focus, or that the fund is a tax-exempt fund, must be consistent with the plain-English meaning or established industry use of those terms. Additionally, fund compliance systems will need to be changed to ensure that the fund is in compliance with the 80% investment policy using these definitions as disclosed in the prospectus.
• As relates to funds with “growth” or “value” in the name, as well as funds with other terms in their name that need to be defined, advisers should review the current holdings in the fund using the defined terms to ensure that the fund’s portfolio is able to comply with its stated 80% investment policy.
• Whereas previously the test for whether a fund was in compliance with the Names Rule was whether or not it was in compliance at the time of purchase of a security, funds are now going to be required to review their holdings on a quarterly basis to ensure they remain in compliance with their stated 80% investment policy. Compliance systems and policies will need to be updated to account for this new requirement.
• For funds that are heavy users of derivatives and must comply with the Names Rule, the notional value of derivatives will need to be used, whereas previously some funds used market value.

One of the biggest questions out there currently is that for funds that do need to amend their registration statements to comply with the amendments to the Names Rule, will a 485(a) filing be required? Many funds are preparing to make such 485(a) filings in connection with annual updates to the fund’s registration statement, but many others are hopeful that the SEC staff will issue answers to FAQs relatively soon to help clarify the way in which funds can come into compliance. However, it is most likely that any such FAQs will not be issued until after November’s presidential election. 

As the fund industry moves through the process over the coming months of coming into compliance with the amended Names Rule, fund boards will want to ensure they have time to consider and approve any changes to a fund’s investment strategy that are required in light of the amendments. Boards should also make sure they are comfortable with the definitions that the adviser is using with respect to complying with the Names Rule requirements and that such definitions are “reasonable” and able to be monitored by compliance systems.

Rachael Schwartz is a partner at Sullivan & Worcester in New York. She has more than 16 years’ experience counseling registered investment companies (including mutual funds, exchange-traded funds, and closed-end funds) and their boards regarding all aspects of the 1940 Act and related securities laws relevant to funds and independent directors. Her work with fund boards includes counseling independent directors on Section 15(c) contract approvals and renewals, oversight of multi-manager and sub-advisory relationships, disclosure issues, fund governance, ESG matters, cybersecurity and the launch and reorganizations of funds and fund complexes. She also helps clients develop policies and procedures in connection with new SEC rules and regulations and advises independent directors on their duties and responsibilities related to these new rules.