SEC Staff Publish First FAQs for Amended Names Rule

At a Glance

• The  2025 SEC Names Rule FAQs clarify certain aspects of the 2023 amendments to Rule 35d-1 under the Investment Company Act of 1940.
• The FAQs provide guidance when terms like "high-yield," "tax-sensitive" “income,” and “money-market” require an 80% investment policy.
• The SEC Staff reiterates that funds must avoid misleading names under Section 35(d) of the Investment Company Act of 1940.

The staff of the SEC’s Division of Investment Management (the Staff) has published FAQs regarding amended Rule 35d-1 under the Investment Company Act of 1940 (the Amended Names Rule). The new FAQs, published on January 8, 2025, provide some guidance on the terms “high-yield,” “tax-sensitive,” “income” and “money-market” when used in a fund’s name. The FAQs also discuss the requirement to obtain a shareholder vote to adopt or change a fundamental 80% investment policy pursuant to the Amended Names Rule and the requirements with respect to single-state tax-exempt funds and municipal funds. The Staff has also separately clarified which of the FAQs issued in 2001 (2001 FAQs) have been withdrawn in light of the Amended Names Rule.

Background

On September 20, 2023, the SEC adopted the Amended Names Rule to better protect investors and close the gap with fund names that do not align with fund investments, particularly in light of industry developments since Rule 35d-1 was initially adopted in 2001. To achieve this goal, the Amended Names Rule, most notably, broadened the scope of funds that would be required to adopt an 80% investment policy to include those funds that have terms suggesting that the fund focuses in investments that have, or investments whose issuers have, particular characteristics (e.g., growth, value, or environmental, social and governance (ESG)). Further discussion on the Amended Names Rule and requirements imposed thereunder can be found here. A number of interpretive questions arose under the Amended Names Rule, which led the Staff to publish the new FAQs.

The 2025 Names Rule FAQs address the following:

Guidance Regarding Certain Terms Commonly Used in Fund Names

“High-yield” in conjunction with “municipal” or “tax-exempt.” The Staff confirmed that if the term “high-yield” is used in conjunction with the terms “municipal” or “tax-exempt” in the fund’s name, it would not object if the fund invested less than 80% of the value of its assets in “high-yield” bonds. This position is consistent with the Staff’s longstanding views on the use of the term “high-yield” with the terms “municipal” or “tax-exempt,” industry practice and 2001 FAQs.

“Tax-sensitive” and similar terms. The terms “tax-sensitive,” “tax-efficient,” “tax-advantaged” and “tax-aware” describe the objectives of a fund rather than the characteristics of investments in the fund’s portfolio. Therefore, an 80% investment policy would not be required.

“Income.” The Staff clarified that a fund should adopt an 80% investment policy if the term “income” refers to “fixed income” securities; otherwise, the term “income” would not — on its own —  require adoption of an 80% investment policy, because it describes a portfolio-wide result. The Staff did not clarify what additional terms would require an 80% investment policy.

“Money market.” A fund that uses the term “money market” would need to adopt an 80% policy to invest in the types of money market instruments suggested by the fund’s name. For example, a fund calling itself the “XYZ U.S. Treasury Money Market Fund” would, in the Staff’s view, need to adopt a policy to invest at least 80% of the value of its assets in U.S. Treasury securities. A money market fund that has a name suggesting that it invests in money market instruments generally would not need to adopt an 80% investment policy.

Fundamental 80% Policy

“Municipal” or “municipal bond.” Funds with the terms “municipal” or “municipal bond” would be treated as tax-exempt funds and are required to adopt a fundamental 80% investment policy pursuant to Rule 35d-1(a)(3). However, unlike funds that use “tax-exempt” in their names, funds that use “municipal” or “municipal bond” may include securities that generate income subject to the alternative income tax as part of its 80% investments. This is consistent with the 2001 FAQs.

Shareholder approval. The Staff clarified that shareholder approval is required only if a new or revised fundamental policy substantially deviates from an existing fundamental policy. For example, in the Staff’s view, a fund that has a fundamental 80% investment policy that broadly references equity investments would generally not be deviating from that policy if it were to revise its fundamental policy to reference equity investments with growth characteristics. A fund will need to determine whether a new or revised policy represents a substantial deviation from an existing policy.

Single-state tax-exempt funds. The Staff confirmed that a fund may count investments of an issuer outside a state that is not part of the fund’s name as part of the fund’s 80% investment basket if the security pays interest that is exempt from both federal income tax and the tax of the named state. However, consistent with the 2001 FAQs, the fund must disclose in its prospectus that it invests in issuers outside of the named state.

Withdrawn 2001 FAQs

The Staff also withdrew eight FAQs that were published in 2001 because they were either moot, overridden or inconsistent with the Amended Names Rule. The other 2001 FAQs are retained with the modifications discussed above.

Takeaways

Although the 2025 Names Rule FAQs address certain aspects of the Amended Names Rule, many questions still remain. The Staff noted that they may issue additional FAQs from time to time. Our team will keep an eye on new developments.