2025 Names Rule FAQs

The staff of the Division of Investment Management has prepared the following responses related to the Commission’s 2023 adoption of amendments to rule 35d-1 under the Investment Company Act of 1940 (“Investment Company Act” or “Act,” and the rule, the “names rule”), which addresses certain broad categories of investment company names that are likely to mislead investors about an investment company’s investments and risks. The names rule was originally adopted by the Commission in 2001. We refer to the release adopting the 2023 amendments as the “2023 Adopting Release” and the release adopting the original 2001 names rule as the “2001 Adopting Release.”

When the Commission issued the 2023 Adopting Release, it stated in the release that staff would be reviewing its no-action letters and other statements addressing compliance with the names rule to determine which letters and other staff statements, or portions thereof, should be withdrawn in connection with the final amendments. Among the statements that the Commission listed for review is the names rule FAQ document that the staff published in 2001. The Commission stated in the release that portions of this document may be moot, superseded, or otherwise inconsistent with the final amendments and, therefore, may be withdrawn by the staff. The staff has compiled a chart showing the 2001 FAQs that staff has determined to withdraw (for example, because the FAQ addresses circumstances particular to the 2001 adoption of the names rule, or because the 2023 Adopting Release addresses the topic the 2001 FAQ covers). The staff is retaining the balance of the 2001 FAQs, with modifications, as set forth below.

The staff may update this information from time to time to include responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not rules, regulations, or statements of the Commission, and the Commission has neither approved nor disapproved these FAQs or the answers to these FAQs. The FAQs, like all staff statements, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

If you have questions about the application of these rules, please contact the Division of Investment Management Chief Counsel’s Office at 202-551-6825 or IMOCC@sec.gov.

Adoption of 80% Investment Policy

The 2023 names rule as amended, like the original 2001 names rule, requires a fund whose name suggests a focus in a particular type of investment, or in investments in a particular industry or geographic focus, to adopt a policy to invest at least 80% of the value of its assets in the type of investment, or in investments in the industry, country, or geographic region, suggested by its name (an “80% investment policy”). The 2023 amendments broadened the scope of the original names rule’s 80% investment policy requirement to include any fund name with terms suggesting that the fund focuses in investments that have, or investments whose issuers have, particular characteristics. See rule 35d-1(a)(2). The 2023 Adopting Release includes general discussion on investments that may be included in a fund’s “80% basket” (that is, investments that are invested in accordance with the investment focus that the fund’s name suggests).

A fund generally may elect to make its 80% investment policy a fundamental policy (i.e., a policy that may not be changed without shareholder approval) or instead provide shareholders notice at least 60 days prior to any change in the 80% investment policy (a “60-day notice”).

1. Q. If a fund wishes to adopt or revise a fundamental 80% investment policy to comply with rule 35d-1, as amended in 2023, does the fund need to obtain shareholder approval?

   A. The Investment Company Act does not require shareholder approval to adopt a new fundamental policy unless the new fundamental policy deviates from an existing fundamental policy. See section 13(a)(3) of the Investment Company Act (requiring shareholder approval to deviate from a fundamental policy). Therefore, shareholder approval also would not be required where a fund already has a fundamental investment policy and wishes to revise this fundamental policy in light of the 2023 amendments, unless the revision of the policy constitutes a deviation from the existing policy or some other 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 this fundamental policy to reference equity investments with growth characteristics. A fund would need to determine, based on its individual circumstances, whether it would be necessary to seek shareholder approval to adopt a new fundamental investment policy (or revise an existing fundamental policy) in light of the 2023 amendments. A fund also should generally consider whether factors outside the Investment Company Act, such as state law or the fund’s charter or by-laws, would require shareholder approval in order to adopt or revise a fundamental 80% investment policy.

Tax-Exempt Funds

The 2023 names rule as amended, like the original 2001 names rule, requires a fund with a name suggesting that the fund’s distributions are exempt from federal income tax or from both federal and state income tax (a “tax-exempt fund”) to adopt an 80% investment policy. Such a fund must use either an asset test (like other fund names suggesting an investment focus, as described above) or an income test to satisfy the 80% investment policy requirement. The income test requires that a fund invest its assets so that at least 80% of the income that it distributes will be exempt from federal income tax or from both federal and state income tax. An 80% investment policy relating to a tax-exempt fund must be a fundamental policy.

2. Q. How does rule 35d-1 apply to single-state tax-exempt funds? Are single-state tax-exempt funds required to satisfy the 80% investment requirement only with securities of issuers located in the named state?

   A. A fund with a name that suggests that its distributions are exempt from both federal and state income tax, e.g., the Maryland Tax-Exempt Fund, must have a fundamental policy to invest, under normal circumstances, either: (i) at least 80% of the value of its assets in investments the income from which is exempt from both federal income tax and the income tax of the named state, or (ii) its assets so that at least 80% of the income that it distributes will be exempt from both federal income tax and the income tax of the named state. See rule 35d-1(a)(3).

   A single-state tax-exempt fund may include a security of an issuer located outside of the named state in the fund’s 80% basket if the security pays interest that is exempt from both federal income tax and the tax of the named state, provided that the fund discloses in its prospectus that it may invest in tax-exempt securities of issuers located outside of the named state. See 2023 Adopting Release at n.125; 2001 Adopting Release at n.30.

3. Q. Are funds with the term “municipal” in their names treated like tax-exempt funds under rule 35d-1(a)(3)?

   A. Yes. In the staff’s view, the terms “municipal” and “municipal bond” in a fund’s name suggest that the fund’s distributions are exempt from income tax. Therefore, funds that use these terms in their names would be expected to comply with rule 35d-1(a)(3). However, in the staff’s view, funds that use the term “municipal” rather than “tax-exempt” may count securities that generate income subject to the alternative minimum tax toward the 80% investment requirement, while funds that use the term “tax-exempt” may not.

Specific Terms Commonly Used in Fund Names

In the 2023 Adopting Release, the Commission provides details and guidance about the amendments it adopted broadening the scope of the names rule’s 80% investment policy requirement to apply also to fund names that include terms suggesting that the fund focuses in investments that have, or whose issuers have, particular characteristics. The release includes general discussion on the broadened scope, as well as discussion of fund names that do not suggest an investment focus.

4. Q: How does rule 35d-1 apply to a fund that uses the term “high-yield” in its name?

   A. In the staff’s view, the term “high-yield” is generally understood in the financial and investment community to describe corporate bonds with particular characteristics—that is, bonds that are below certain creditworthiness standards (traditionally measured by certain credit ratings). Based on this view, a fund with the term “high-yield” in its name therefore generally would need to adopt an 80% investment policy under rule 35d-1(a)(2).

   In contrast, in the staff’s view, funds that use the term “high-yield” in conjunction with the term “municipal,” “tax-exempt,” or similar in their names have not historically invested at least 80% of their assets in bonds that meet the funds’ high-yield rating criteria. Staff understands that the market for below investment grade municipal bonds is smaller and relatively less liquid than its taxable counterpart, and therefore tax-free high-yield bond funds have historically invested to a greater degree in higher grade bonds than taxable high-yield funds. Although a fund that uses the term “high-yield” in conjunction with the term “municipal,” “tax-exempt,” or similar in its name would need to adopt an 80% policy to invest in “municipal” or “tax-exempt” securities, the staff would not object if, in light of this specific historical practice for high-yield municipal funds, such a fund were to invest less than 80% of the value of its assets in bonds that meet the fund’s high-yield rating criteria. Such a fund would, however, continue to be subject to the prohibition on materially deceptive or misleading names under section 35(d) of the Investment Company Act, and likewise would continue to be subject to the anti-fraud provisions of the Federal securities laws regarding disclosures to investors. This response is consistent with the staff’s long-standing view regarding names that use the term “high-yield” in conjunction with terms such as “municipal” or “tax-exempt,” as reflected in a prior staff FAQ.

5. Q. Does rule 35d-1 apply to a fund that uses the term “tax-sensitive” (or a similar term) in its name?

   A. No. In the staff’s view, the term “tax-sensitive” references overall characteristics of the fund’s portfolio (as do similar terms such as “tax-efficient,” “tax-advantaged,” “tax-managed,” and “tax aware”), and therefore indicates the fund’s objectives without communicating to investors the particular characteristics of the investments that will make up the fund’s portfolio. See 2023 Adopting Release at paragraph accompanying nn.127-129. Therefore, in the staff’s view, the use of the term “tax-sensitive” (or a similar term) in a fund’s name would not require the fund to adopt an 80% investment policy.

   We remind funds, however, that names with terms that do not communicate the particular characteristics of investments composing the fund’s portfolio will continue to be subject to section 35(d)’s prohibition on materially misleading or deceptive names. Funds with these names likewise will continue to be subject to the anti-fraud provisions of the Federal securities laws regarding disclosures to investors.

6. Q. How does rule 35d-1 apply to a fund that uses the term “income” in its name?

   A. In the staff’s view, when the term “income” does not refer to “fixed income” securities, the term “income” in a fund’s name generally suggests that the fund emphasizes the achievement of current income as a portfolio-wide result, and in these circumstances would not, alone, require the fund to adopt an 80% investment policy.

7. Q. A fund that uses the term “money market” in its name must invest solely in eligible securities and meet other investment requirements under rule 2a-7, in order for its name not to be deemed materially deceptive or misleading within the meaning of section 35(d) of the Investment Company Act. Is a fund that uses the term “money market” in its name also required to comply with rule 35d-1?

   A. In the staff’s view, a fund using the term “money market” in its name would need to adopt a policy to invest at least 80% of the value of its assets in the type of money market instruments suggested by its 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. However, in the staff’s view, a generic money market fund, i.e., a money market fund that has a name suggesting that it invests in money market instruments generally (e.g., the “XYZ Money Market Fund”), would not need to specifically adopt a policy to invest at least 80% of the value of its assets in eligible securities since rule 2a-7, in any event, requires the fund to invest solely in eligible securities. See also 2014 Money Market Fund Reform Frequently Asked Questions, FAQs #53 and #54 (addressing particular requirements for a money market fund that includes the term “government” in its name).