On September 20, 2023, the United States Securities and Exchange Commission (“SEC”) adopted amendments to the Investment Company Act of 1940 “Names Rule,” which is the first amendment to this rule in approximately 20 years.
The amendment addresses broad categories of investment company names likely to mislead investors about an investment company’s investments and risks. Currently, the Names Rule requires registered investment companies (“funds”) and business development companies (“BDCs”) that have a name that suggests a particular focus or investment to adopt a policy to invest at least 80% of the value of their assets in those investments.
For example, the current Names Rule applies when a fund’s or BDC’s name suggests that it invests in:
- A type of security (e.g., stocks or bonds)
- A particular industry (e.g., technology or real estate)
- A particular geographic region (e.g., Eastern Europe or South America)
- A securities that pay tax-free dividends
The new amendments to the Names Rule will tighten up the Names Rule’s regulations by requiring more funds and BDCs to adopt an 80% investment policy. This would include funds and BDCs with names suggesting a focus in investments with particular characteristics such as “growth” or “value” or specific terms that would imply, for example, certain geographic, social, and environmental factors. Without explicitly stating, the SEC appeared to recognize that there is the possibility that certain thematic terms in the fund names present challenges – for example, terms such as “drones,” “millennial,” “AI,” and “Post-covid”. However, the SEC made it apparent that when a fund or BDC name suggests a thematic focus, it will be in the scope of the amended Names Rule.
As part of the amendments, it will require that the funds and BDCs review their portfolio assets’ treatment under its 80% investment policy at a minimum of quarterly. Funds and BDCs that are not in compliance must return to compliance as soon as reasonably practicable, with a maximum limit of generally 90 days.
The amendments will also include additional reporting and recordkeeping requirements for funds and BDCs regarding compliance with the names-related regulatory requirements. These include:
- Written records, at the time of each investment, specifying (i) whether the investment is included in the 80% basket and, if so, the basis for inclusion and (ii) the value of the basket as a percentage of the value of the fund’s assets
- Written records documenting the fund’s quarterly review of its portfolio
- If during the quarterly review or otherwise, the fund identifies a departure from the 80% investment policy due to drift, written records noting the date of identification and reason for departure
- If there is a departure from the 80% investment policy in other-than-normal circumstances, written records noting the date of and reason for the departure, including why the fund determined circumstances are other-than-normal
- Any notice sent to fund shareholders under the Names Rule, as amended
All of these records must be maintained for at least six years following the creation of each required record.
The SEC took a more restrictive approach regarding registered closed-end funds and BDCs that do not list their shares on a national securities exchange and are required to adopt an 80% investment policy. These registered closed-end funds and BDCs can change the 80% investment policy only with the approval of a majority of the outstanding voting securities of the company.
Lastly, the amendments to the Names Rule will become effective 60 days after publication in the Federal Register. Investment company groups with net assets over $1 billion will have 24 months to comply with the amendments, and those with net assets less than $1 billion will have 30 months to comply.
Author: Robert Schneider, CPA | [email protected]
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