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SEC Adopts Fund Name Rule

A rose by any other name? Fund Names must reflect their investments

By John M. Baker, Esq.


The Securities and Exchange Commission adopted new Rule 35d-1 under the Investment Company Act of 1940, generally requiring a fund with a name suggesting that the fund focuses on a particular type of investment to invest at least 80% of its assets accordingly. Release No. IC-24828 (Jan. 17, 2001).

Under SEC staff positions, these funds previously were subject to an informal 65% investment requirement. The new rule, which applies to all registered investment companies, takes effect March 31, 2001, with a compliance date of July 31, 2002.

Rule 35d-1 basically requires funds to invest at least 80% of their assets in the investments suggested by the fund’s name, if the name suggests that the fund focuses its investments in a particular type of investment or investments, in a particular industry or group of industries, in a particular country or geographic region, or in tax-exempt investments. The rule applies to funds that include in their names words such as “stock,” “bond,” “intermediate-term,” “health care,” “foreign,” “Latin America,” or “tax-exempt.”

In the case of country/geographic funds, the fund’s investments must be tied economically to the particular country or geographic region suggested by the name, a more liberal standard than was proposed. The rule does not apply to several vague terms, “balanced,” “index,” “small, mid, or large capitalization,” “international,” or “global,” nor does it apply to types of investment strategies, such as “growth” or “value.” However, compliance with the rule is not a safe harbor; index funds, for example, generally would be expected to invest more than 80% of their assets in investments connoted by the applicable index.

The 80% standard is based on the fund’s net assets plus borrowings for investment purposes. If a fund drops below the 80% standard for reasons outside its control (e.g., as a result of changes in the value of its portfolio holdings), it will not have to sell any investments, but it must make future investments in a manner that will bring the fund into compliance with the 80% requirement.

UITs, which generally cannot alter their investment mix, are grandfathered if their initial deposit was prior to July 31, 2002.

The rule as proposed required funds to adopt fundamental policies to implement the 80% investment requirement. This seemed anomalous: Most funds can change their names by board vote, but fundamental policies can be changed only by a shareholder vote. Under the rule as adopted, a fund may instead adopt a policy that it will provide notice to shareholders at least 60 days prior to any change to its 80% investment policy. Tax-exempt funds still must adopt a fundamental policy.

Rule 35d-1 also allows temporary departures from the 80% requirement, which applies only “under normal circumstances.”

The SEC’s press release, with a link to the adopting release, is available online at http://www.sec.gov/news/mfnames.htm


Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com


Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  


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