The Securities and Exchange Commission (SEC) staff issued updated FAQs regarding Rule 35d-1 under the Investment Company Act of 1940 (the “Names Rule”) on January 8, 2025. These updates reflect amendments that were adopted in 2023 and replace certain earlier guidance from 2001. The Names Rule requires investment funds to ensure their fund names accurately reflect the investment focus, mandating that at least 80% of the fund assets align with the terminology used in the fund names.
Larger funds must comply with this new rule by December 10, 2025, while smaller funds have until June 10, 2026 to comply.
Under the amended Names Rule, funds cannot use terminology that suggests a specific investment focus unless they adopt an 80% Investment Policy, which is a fundamental or nonfundamental policy committing to invest at least 80% of fund assets in line with the fund name. This applies to names implying investment in a particular asset class, industry, geographic region, or group of investments with certain characteristics. The rule establishes a framework for determining when a fund’s name must be supported by a corresponding investment policy.
Clarifications on the 80% Investment Policy. The SEC staff clarified that shareholder approval is not required when a fund adopts or modifies a fundamental policy solely to comply with the Names Rule unless the change represents a significant deviation from an existing fundamental policy.
Guidance for Tax-Exempt and Municipal Funds. Funds that suggest tax-exempt status in their names, such as Maryland Tax-Exempt Fund, must adopt an 80% Investment Policy and can use either an asset-based or income-based test in order to comply. Single-state tax-exempt funds may include securities from issuers outside the named state if the securities meet federal and state tax exemption requirements. The staff guidance also provided distinctions regarding terminology: funds with “municipal” or “municipal bond” in their names must adopt an 80% policy. However, funds using municipal rather than tax-exempt can include securities subject to the Alternative Minimum Tax in their 80% basket, while tax-exempt funds cannot.
Specific Terms in Fund Names and Their Implications. The updates expand the scope of the 80% Investment Policy requirement to include names suggesting investments with “particular characteristics.” The SEC staff addressed the application of the rule to commonly used terms:
- High-yield funds generally must invest 80% of their assets in below-investment-grade corporate bonds. However, municipal or tax-exempt high-yield funds may invest less than 80% in such bonds, though they must still comply with the 80% requirement for “municipal” or “tax-exempt” securities.
- Income funds are not required to adopt an 80% policy unless the name suggests an emphasis on specific income-generating securities rather than current income as a general investment objective.
- Money market funds with generic names that imply investment in money market instruments do not need an 80% policy, as they are governed by Rule 2a-7. However, funds specifying a particular type of money market instrument, such as US Treasury Money Market Fund, must meet the 80% investment requirement for that asset type.
The SEC staff’s updated FAQs provide additional guidance on compliance with the Names Rule, including a list of withdrawn 2001 Names Rule FAQs. Read the 2025 Names Rule FAQs.