On 7 January 2025, the United States Securities and Exchange Commission (US SEC) published updated Frequently Asked Questions (FAQs) related to Rule 35d-1 under the United States Investment Company Act of 1940, commonly known as the “names rule.” These 2025 FAQs reflect changes stemming from the 2023 amendments to the rule, which aim to address investment company names that could mislead investors about a fund’s investments and risks. As part of the update, the US SEC has withdrawn certain outdated FAQs from the 2001 guidance, marking a significant step in modernising regulatory interpretations for the financial industry.
The “names rule,” officially Rule 35d-1 under the United States Investment Company Act of 1940, was first adopted by the US SEC in 2001 to address the potential for misleading investment company names. Fund names can strongly influence investor decisions, often implying a particular investment focus or risk profile. To protect investors, the rule mandated that funds whose names suggest a specific type of investment, industry, or geographic region must invest at least 80% of their assets in accordance with those implications. Known as the “80% investment policy,” this requirement was designed to align fund marketing practices with their actual investment strategies.
Over the years, as investment products and strategies evolved, gaps in the original rule’s scope became evident. Certain fund names, such as those suggesting issuer characteristics or broader themes like “high-yield” or “tax-sensitive”, were not explicitly covered, raising concerns about consistency and investor transparency. Additionally, new fund types and marketing practices called for updates to ensure the rule’s relevance in a modern context.
In 2023, the US SEC amended Rule 35d-1 to expand its coverage, accounting for fund names that suggest characteristics of investments or their issuers, such as environmental, social, and governance (ESG) themes or specific credit qualities. These changes aimed to enhance investor protection by addressing ambiguities and ensuring that fund names accurately reflect their investment compositions and strategies.
US SEC Rule 35d-1, originally adopted in 2001, requires funds whose names suggest a focus on specific types of investments, industries, or geographic regions to allocate at least 80% of their assets in accordance with those designations. The rule’s 2023 amendments broadened its scope to include names suggesting characteristics of investments or their issuers. This move ensures greater alignment with contemporary investment practices and improves clarity for investors navigating an evolving financial landscape.
The 2025 FAQs, issued by the staff of the Division of Investment Management, provide updated interpretations and guidance tailored to the amended rule. Among the changes, the FAQs clarify the application of the 80% investment policy for funds with terms such as “high-yield,” “tax-sensitive,” and “income” in their names. For instance, funds using the term “high-yield” must generally adhere to the 80% investment threshold for corporate bonds below certain creditworthiness standards. Meanwhile, terms like “tax-sensitive” are deemed to reflect portfolio characteristics rather than specific investment types, exempting such funds from the 80% requirement under the rule.
The US SEC also retired several of the 2001 FAQs. The withdrawn guidance included topics related to the initial adoption of the names rule, such as compliance timelines and specific interpretations of fund naming conventions. For example, guidance on terms like “global” or “international” and the use of portfolio duration in fund names has been deemed either moot or sufficiently addressed in the 2023 amendments. This streamlining effort ensures that the regulatory framework remains relevant and precise, avoiding redundancy while maintaining protections for investors.
Under the revised guidance, funds now have clearer expectations about shareholder approvals for changes in fundamental policies. If a fund revises its fundamental 80% investment policy to comply with the amended rule without deviating from its existing fundamental policies, shareholder approval is not required. Additionally, funds with names suggesting tax-exempt distributions must adopt a fundamental policy to ensure compliance with the 80% requirement, which can be satisfied either through an asset test or an income test, depending on the fund’s focus.
The 2023 amendments to Rule 35d-1 were adopted after comprehensive consultations, with the 2025 FAQs representing the culmination of two years of evaluation and refinement. The withdrawal of outdated FAQs and publication of updated guidance come over two decades after the original names rule was introduced, demonstrating the US SEC’s ongoing commitment to adapting its policies to contemporary market conditions.
(Source: https://www.sec.gov/rules-regulations/staff-guidance/division-investment-management-frequently-asked-questions/2025-names-rule-faqs, https://www.sec.gov/rules-regulations/staff-guidance/division-investment-management-frequently-asked-questions/withdrawn-2001-names-rule-faqs)
