On January 8, 2025, the SEC staff published updated frequently asked questions (FAQs) related to Rule 35d-1 under the Investment Company Act of 1940 (known as the Names Rule). The staff issued the updated FAQs, and withdrew certain Names Rule FAQs issued in 2001, in light of the amendments to the Names Rule that the SEC adopted in 2023.  Among other things, the amended Names Rule provides that a fund’s name may not use terminology suggesting that the fund invests its assets in a particular type of investment, industry, group of industries, country, geographic region, or in investments that have, or whose issuers have, particular characteristics, unless the fund adopts a fundamental or nonfundamental policy to invest, under normal circumstances, at least 80% of its assets in the investments suggested by its name (80% Investment Policy). As a reminder, the compliance date for the amended Names Rule is December 10, 2025 for larger entities and June 10, 2026 for smaller entities. The January 2025 FAQs address the following Names Rule topics:

80% Investment Policy.  The staff explained that shareholder approval is not required for a fund to adopt or revise a fundamental policy in order to comply with the amended Names Rule, unless the fund’s new fundamental policy deviates from an existing fundamental policy.

Municipal, Tax-Exempt, and Tax-Sensitive Funds. Funds with names suggesting that the fund’s distributions are exempt from federal income tax, or from both federal and state income tax (e.g., the Maryland Tax-Exempt Fund), are required to adopt a fundamental 80% Investment Policy. These funds must use either an asset test or an income test to satisfy the 80% Investment Policy. A single-state tax-exempt fund may include a security of an issuer located outside of the named state in its 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. The use of the term “tax-sensitive,” “tax-advantaged,” “tax-efficient,” or other similar terms in a fund name does not require the adoption of an 80% Investment Policy, but such funds remain subject to the prohibition in Section 35(d) of the 1940 Act on materially misleading or deceptive names.

The terms “municipal” and “municipal bond” in a fund’s name suggest the fund’s distributions are exempt from income tax and funds with these terms in their names are expected to adopt a corresponding fundamental policy. However, 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.  The amended Names Rule broadened the scope of the 80% Investment Policy requirement to include fund names suggesting a focus on investments or issuers with “particular characteristics” (e.g., a fund name with terms such as “growth” or “value,” or terms indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance factors). In the FAQs, the SEC staff clarified its views as to the application of the amended Names Rule to certain commonly used terms:

• “High-yield” – The term “high-yield” is generally understood to describe corporate bonds that are below certain creditworthiness standards, and use of “high-yield” in a fund’s name therefore generally requires the fund to adopt an 80% Investment Policy. However, if used with the term “municipal,” “tax exempt,” or similar terms, the staff would not object if the fund invested less than 80% of the value of its assets in high-yield bonds. However, the fund would still be required to adopt an 80% Investment Policy to invest in “municipal” or “tax-exempt” securities.
• “Income” – When the term “income” in a fund’s name suggests that the fund emphasizes the achievement of current income as a portfolio-wide result, and not fixed income securities, the fund generally would not be required to adopt an 80% Investment Policy.
• “Money market” – Money market funds with generic names that suggest investments in money market instruments generally (e.g., the XYZ Money Market Fund) do not need to adopt an 80% Investment Policy because Rule 2a-7 under the 1940 Act requires money market funds to invest solely in eligible securities, as defined by that rule. Fund names suggesting investments in specific types of money market instruments (e.g., XYZ U.S. Treasury Money Market Fund) would require the fund to adopt a policy to invest at least 80% of its assets in the specified money market instruments (e.g., U.S. Treasury securities).

The January 2025 Names Rule FAQs are available here.

A chart showing the 2001 Names Rule FAQs that the SEC staff withdrew is available here.