[Federal Register Volume 87, Number 117 (Friday, June 17, 2022)]
[Proposed Rules]
[Pages 36594-36651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-11742]



[[Page 36593]]

Vol. 87

Friday,

No. 117

June 17, 2022

Part II





Securities and Exchange Commission





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17 CFR Parts 230, 232, 239, et al.





Investment Company Names; Proposed Rule

Federal Register / Vol. 87, No. 117 / Friday, June 17, 2022 / 
Proposed Rules

[[Page 36594]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, 270 and 274

[Release No. 33-11067; 34-94981; IC-34593; File No. S7-16-22]
RIN 3235-AM72


Investment Company Names

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is 
proposing to amend the rule under the Investment Company Act of 1940 
(the ``Investment Company Act'' or the ``Act'') that addresses certain 
broad categories of investment company names that are likely to mislead 
investors about an investment company's investments and risks. The 
proposed amendments to this rule are designed to increase investor 
protection by improving and clarifying the requirement for certain 
funds to adopt a policy to invest at least 80% of their assets in 
accordance with the investment focus that the fund's name suggests, 
updating the rule's notice requirements, and establishing recordkeeping 
requirements. The Commission also is proposing enhanced prospectus 
disclosure requirements for terminology used in fund names, and 
additional requirements for funds to report information on Form N-PORT 
regarding compliance with the proposed names-related regulatory 
requirements.

DATES: Comments should be received on or before August 16, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6614130a034b05090b0b030812152615030548010910"><span class="__cf_email__" data-cfemail="394b4c555c145a5654545c574d4a794a5c5a175e564f">[email protected]</span></a>. Please include 
File Number S7-16-22 on the subject line;

Paper Comments

    <bullet> Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-16-22. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's website (http://www.sec.gov/rules/proposed.shtml). 
Comments are also available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Operating conditions may limit access to the Commission's public 
reference room. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Pamela Ellis, Mykaila DeLesDernier, 
Bradley Gude, Senior Counsels; Amanda Hollander Wagner, Branch Chief; 
or Brian McLaughlin Johnson, Assistant Director, at (202) 551-6792, 
Investment Company Regulation Office, Division of Investment 
Management, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public 
comment: amendments to 17 CFR 270.35d-1 (``rule 35d-1'') under the 
Investment Company Act; amendments to Form N-1A [referenced in 17 CFR 
239.15A and 17 CFR 274.11A], Form N-2 [referenced in 17 CFR 239.13 and 
17 CFR 274.11a-1], Form N-8B-2 [referenced in 17 CFR 274.12], and Form 
S-6 [referenced in 17 CFR 239.16] under the Investment Company Act and 
the Securities Act of 1933 (``Securities Act'') [15 U.S.C. 77a et 
seq.]; amendments to Form N-PORT [referenced in 17 CFR 274.150] under 
the Investment Company Act; amendments to 17 CFR 232.11 (``rule 11 of 
Regulation S-T'') and 17 CFR 232.405 (``rule 405 of Regulation S-T'') 
under the Securities Exchange Act of 1934 (``Exchange Act'') [15 U.S.C. 
78a et seq.]; amendments to 17 CFR 230.485 (``rule 485'') under the 
Securities Act; and amendments to 17 CFR 230.497 (``rule 497'') under 
the Securities Act.

Table of Contents

I. Introduction and Background
    A. Overview of Section 35(d) of the Act and the Names Rule
    B. Challenges Regarding Application of the Names Rule and Need 
for Modernization
    C. Overview of Rule Proposal
II. Discussion
    A. 80% Investment Policy Requirement
    1. Names Suggesting an Investment Focus
    2. Temporary Departures From the 80% Investment Requirement
    3. Considerations Regarding Derivatives in Assessing Names Rule 
Compliance
    4. Unlisted Closed-End Funds and BDCs
    5. Effect of Compliance With an 80% Investment Policy
    B. Prospectus Disclosure Defining Terms Used in Fund Name
    C. Plain English/Established Industry Use Requirement
    D. Materially Deceptive and Misleading Use of ESG Terminology in 
Certain Fund Names
    E. Modernizing the Rule's Notice Requirement
    F. N-PORT Reports
    1. Investment Company Act Names Rule Investment Policy
    2. Investments To Be Included in a Fund's 80% Basket
    G. Recordkeeping
    1. Funds Required To Adopt an 80% Investment Policy
    2. Funds That Do Not Adopt an 80% Investment Policy
    H. Unit Investment Trusts
    I. Transition Period and Compliance Date
III. Economic Analysis
    A. Introduction
    B. Broad Economic Considerations
    C. Economic Baseline
    1. Fund Industry Overview
    D. Benefits, Costs, and Effects on Efficiency, Competition and 
Capital Formation
    1. Benefits
    2. Costs
    E. Reasonable Alternatives Considered
    1. Returns-Based Requirement
    2. Permit the Use of Derivatives' Notional Values for Purposes 
of Names Rule Compliance
    3. Modify Requirements for Tagging Prospectus Disclosure
    4. Board Approval or Notification of Temporary Departures
    5. Require a Higher Percentage of Assets Invested in Accordance 
With the Investment Focus
    6. Unlisted Closed-End Funds and BDCs
    F. General Request for Comment
IV. Paperwork Reduction Act Analysis
    A. Introduction
    B. Rule 35d-1
    C. Prospectus Disclosure
    1. Form N-1A
    2. Form N-2
    3. Form N-8B-2
    4. Form S-6
    D. N-PORT Reporting Requirements
    E. Investment Company Interactive Data
    F. Request for Comments
V. Initial Regulatory Flexibility Analysis
    A. Reasons for and Objectives of the Proposed Actions

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    B. Legal Basis
    C. Small Entities Subject to Proposed Rule Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    1. 80% Investment Policy Requirements--Proposed Scope Expansion 
and Other Proposed Amendments
    2. Effect of Compliance With an 80% Investment Policy
    3. Recordkeeping Requirements
    4. Disclosure and Reporting Requirements
    5. Materially Deceptive and Misleading Use of ESG Terminology in 
Certain Fund Names
    6. Exceptions for Certain UITs
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comment
VI. Consideration of Impact on the Economy
VII. Statutory Authority

I. Introduction and Background

    The name of a registered investment company or business development 
company (``BDC'') is a means of communicating information about the 
fund to investors and is also an important marketing tool for the 
fund.\1\ While the Commission has often cautioned against investors 
relying on a fund's name as the sole source of information about the 
fund's investments and risks, it has also recognized that the name of a 
fund may communicate a great deal to an investor.\2\ A fund's name is 
often the first piece of fund information investors see and, while 
investors should go beyond the name itself and look closely at a fund's 
underlying disclosures, a fund's name can have a significant impact on 
their investment decisions. These considerations provided the policy 
basis underlying the Commission's adoption of rule 35d-1 under the Act, 
the ``names rule,'' in 2001.\3\
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    \1\ This release refers to registered investment companies and 
BDCs collectively as ``funds.''
    \2\ See Investment Company Names, Investment Company Act Release 
No. 24828 (Jan. 17, 2001) [66 FR 8509 (Feb. 1, 2001)] (``Names Rule 
Adopting Release''); see also Request for Comments on Fund Names, 
Investment Company Act Release No. 33809 (Mar. 2, 2020) [85 FR 13221 
(Mar. 6, 2020)] (``2020 Request for Comment''), at n.11 and 
accompanying text. The comment letters on the 2020 Request for 
Comment (File No. S7-04-20) are available at https://www.sec.gov/comments/s7-04-20/s70420.htm. All references to comment letters in 
this release are available in this comment file.
    \3\ Names Rule Adopting Release, supra footnote 2.
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    Congress provided the Commission with rulemaking authority to 
address materially deceptive or misleading fund names, recognizing the 
concern that investors may rely inordinately on a fund's name to 
determine its investments and risks.\4\ The names rule, in turn, helps 
ensure that a fund's name does not misrepresent the fund's investments 
and risks. Consequently, the rule helps to ensure that investors' 
assets in funds are invested in accordance with their reasonable 
expectations based on the fund's name.\5\ The role of this rule remains 
important and distinct from other disclosure requirements, in that fund 
names are subject to the unique practical constraint of being concise 
by necessity, but still convey significant information to an investor. 
However, as the fund industry has developed, and practices regarding 
names rule compliance have continued to evolve over the past two 
decades, we believe that improvements to the names rule are appropriate 
for the rule to continue to meet this purpose.\6\ For example, 
interpretive issues as to when a fund is subject to the names rule have 
raised questions about the rule's application with respect to 
particular fund names that could mislead investors about the fund's 
investment focus, such as when a fund's name suggests investment in 
companies that meet certain environmental, social, or governance 
(``ESG'') criteria. Competitive market pressures create incentives for 
asset managers to include terminology in their funds' names designed to 
attract investor assets. We believe it is critical that fund names that 
suggest certain information about a fund's investments and attendant 
risks do so accurately. Under certain circumstances, the current 
structure of the rule also may permit funds to depart from the 
investment focus suggested by their name over time, which can deprive 
investors of the protections of the rule.
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    \4\ See id. at n.3 and accompanying text (``In amending section 
35(d), Congress reaffirmed its concern that investors may focus on 
an investment company's name to determine the company's investments 
and risks, and recognized that investor protection would be improved 
by giving the Commission rulemaking authority to address potentially 
misleading investment company names.'').
    \5\ See id. at text preceding n.48; see also, e.g., Comment 
Letter of the CFA Institute (May 5, 2020) (``CFA Institute Comment 
Letter''); Comment Letter of Chris Barnard (Mar. 9, 2020) (``Barnard 
Comment Letter''); Comment Letter of the University of Miami School 
of Law Investor Rights Clinic (Apr. 27, 2020) (``IRC Comment 
Letter''). But see ICI Comment Letter I (emphasizing that the 
Commission noted when it adopted the names rule that investors 
should not rely on a fund's name as the sole source of information 
about that fund).
    \6\ See Comment Letter of Allianz Global Investors U.S. Holdings 
LLC (May 27, 2020) (``AllianzGI Comment Letter''); see also Comment 
Letter of the Consumer Federation of America (May 12, 2020) (``CFA 
Comment Letter'') (arguing that funds ``clearly understand both how 
important fund names can be in communicating and advertising to 
investors and that fund names can influence investor decisions,'' 
and, as a result, funds ``are very careful to choose names that are 
appealing to investors'').
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    The rule also is not currently well-suited to address ways in which 
the fund industry has evolved since its adoption, both in terms of 
funds' increasing use of derivatives to further their investment 
strategies and investors' increasing election for the electronic 
delivery of fund documents, such as prospectuses and shareholder 
reports. We are proposing to amend the names rule to address these and 
other concerns.

A. Overview of Section 35(d) of the Act and the Names Rule

    Section 35(d) of the Act prohibits a registered investment company 
from adopting as part of its name or title any word or words that the 
Commission finds are materially deceptive or misleading.\7\ This 
section of the Act further authorizes the Commission to define such 
names or titles as are materially deceptive or misleading. Congress 
adopted this provision due to concerns that investors may focus on an 
investment company's name to determine the company's investment 
objectives and level of risk, and recognized that investor protection 
would be improved by giving the Commission rulemaking authority to 
address potentially misleading fund names.\8\
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    \7\ 15 U.S.C. 80a-34(d). BDCs, which are not registered 
investment companies, are subject to the requirements of section 
35(d) pursuant to section 59 of the Act [15 U.S.C. 80a-58].
    \8\ See S. Rep. No. 293, 104th Cong., 2d Sess. 8-9 (1996).
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    The names rule generally requires that if a fund's name suggests a 
focus in a particular type of investment (e.g., ABC Stock Fund, the XYZ 
Bond Fund, or the QRS U.S. Government Fund), or in investments in a 
particular industry (e.g., the ABC Utilities Fund or the XYZ Health 
Care Fund), or geographic focus (e.g., the ABC Japan Fund or XYZ Latin 
America Fund), the fund must 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.\9\ 
The names rule imposes a similar 80% investment policy requirement for 
funds that have names suggesting that a fund's distributions are exempt 
from federal income tax or from both federal and state income tax 
(``tax-exempt funds'').\10\ Under the rule, a

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fund may generally 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.\11\ However, 
an 80% investment policy relating to a tax-exempt fund name must be a 
fundamental policy. Further, unit investment trusts (``UITs'') that 
have made their initial deposit prior to July 31, 2002 are not required 
to comply with the rule's requirements to adopt an 80% investment 
policy.\12\
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    \9\ ``Assets'' is currently defined in the names rule as net 
assets, plus the amount of any borrowings for investment purposes; 
see also section 2(a)(41) of the Act [15 U.S.C 80a-2(a)(41)] 
(defining ``value'').
    \10\ Such a fund must adopt a fundamental policy: (1) to invest 
at least 80% of the value of its assets in investments whose income 
is exempt from federal income tax or from both federal and state 
income tax, or (2) to 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.
    \11\ Under the Act, a fund may not depart from a fundamental 
policy unless it has been authorized by the vote of a majority of 
its outstanding shareholders. 15 U.S.C. 80a-13(a)(3). In this 
release, we refer to a policy that a fund must currently adopt under 
the names rule as an ``80% investment policy'' and the fund's 
investments invested in accordance with this policy, the fund's 
``80% basket.'' We are proposing a parallel definition of ``80% 
basket'' in the proposed amendments to the names rule, and when 
referring to the proposed rule, references to a fund's ``80% 
basket'' refer to the proposed definition of this term. See proposed 
rule 35d-1(g)(1).
    \12\ July 31, 2002 was the compliance date of the rule. See 
Names Rule Adopting Release, supra footnote 2. Based upon a review 
of Morningstar data as of October 2021, 222 currently-active UIT 
series were formed before this date.
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    Under the rule, a fund is required to invest in accordance with its 
80% investment policy ``under normal circumstances.'' In addition, the 
rule provides that a fund must apply its 80% investment policy at the 
time the fund invests its assets. If, subsequent to an investment, the 
fund's assets are no longer invested in accordance with the policy, the 
fund's future investments must be made in a manner that will bring it 
into compliance.
    The rule also includes certain requirements for the notices that 
funds must send prior to a change in an 80% investment policy that is 
not a fundamental policy. These notices are required to be provided in 
plain English in a separate written document. A fund must also include 
a prominent statement reading ``Important Notice Regarding Change in 
Investment Policy,'' or a similar clear and understandable statement, 
in bold-face type.
    In adopting the names rule, the Commission made clear that it is 
not intended to be a safe harbor for materially deceptive or misleading 
names.\13\ The prohibitions of section 35(d) and, indeed, the anti-
fraud provisions of the federal securities laws regarding disclosures 
to investors, continue to apply to funds notwithstanding their 
compliance with the names rule.\14\ A name that would lead a reasonable 
investor to conclude that the fund invests in a manner that is 
inconsistent with the fund's actual or intended investments or the 
risks of those investments would be deceptive or misleading even if the 
fund is in compliance with its 80% investment policy.\15\ In addition, 
a fund must adopt and implement written compliance policies and 
procedures reasonably designed to prevent violations of the federal 
securities laws generally, which would include section 35(d) and the 
names rule.\16\ Fund compliance officers are required to include a 
discussion of any material compliance matter involving the names rule 
in their required annual reports to the board addressing the operation 
of funds' compliance policies and procedures.\17\
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    \13\ See Names Rule Adopting Release, supra footnote 2, at n.16 
and accompanying text.
    \14\ See, e.g., 15 U.S.C. 77q(a) and 17 CFR 240.10b-5(b) 
(prohibiting making untrue statements of material fact or making 
material omissions to obtain money or property in the offer or sale 
of securities or in connection with the purchase or sale of a 
security); 17 CFR 230.156 (prohibiting sales literature that is 
materially misleading in connection with the offer or sale of 
securities issued by an investment company); and 17 CFR 275.206(4)-8 
(prohibiting investment advisers to pooled investment vehicles from 
making untrue statements of material fact or making material 
omissions to an investor or prospective investor in the pooled 
investment vehicle); see also In re Ambassador Capital Management, 
LLC, and Derek H. Oglesby, Initial Decision Rel. No. 672 (Sep. 19, 
2014) (made final in Investment Company Act Release No. 31371 (Dec. 
11, 2014)) (determining an adviser caused violations by a fund of 
sections 34(b) and 35(d) of the Act by causing violations of 17 CFR 
270.2a-7 while still holding the fund out as a money market fund); 
Names Rule Adopting Release, supra footnote 2, at n.44 and 
accompanying text.
    \15\ Names Rule Adopting Release, supra footnote 2, at nn.16 and 
44 and accompanying text; see also In the Matter of the Private 
Investment Fund for Governmental Personnel, Inc., Investment Company 
Act Release No. 2474 (Jan. 18, 1957) (``[The Commission] must take 
into account the effect which the name may have not only on the 
sophisticated and informed investor, but also on the unwary and the 
ignorant. . . . Actual deception of investors need not be shown; it 
is sufficient that the name of the company or its securities be 
found to have a tendency or capacity to deceive or mislead. Nor is 
it necessary that we sample public opinion to determine what the 
name in question may mean to investors. . .'').
    \16\ See 17 CFR 270.38a-1 (``rule 38a-1'').
    \17\ See rule 38a-1(a)(4)(iii).
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B. Challenges Regarding Application of the Names Rule and Need for 
Modernization

    The names rule has not been amended following its adoption in 2001, 
and since that time, the staff, members of the fund industry, and 
investor advocacy groups have identified a number of challenges 
regarding the application of the names rule that could have investor 
protection implications. The Commission published a Request for Comment 
on Fund Names in March 2020, which sought public comment on the 
framework for addressing funds' names, particularly in light of market 
and other developments since the rule's adoption.\18\
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    \18\ 2020 Request for Comment, supra footnote 2.
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    Commenters generally agreed that a fund's name is an important 
piece of information that investors use to select a fund, and that 
asset managers give considerable thought to the fund names that they 
choose in light of their goals in communicating to investors.\19\ They 
also agreed that the names rule provides important investor protections 
and stated that it has been largely effective in regulating misleading 
and deceptive fund names, but some commenters suggested further 
improvements.\20\ Some provided context as to just how much the 
investment management industry has changed in the twenty years since 
the names rule was adopted and suggested updates may be appropriate. 
For example, commenters stated that registered investment companies 
manage considerably more assets than they did in 2001 ($22.8 trillion 
total net assets as of March 2020 compared to $7.2 trillion in 2001) 
and that the variety of fund types and fund strategies has increased 
since 2001, with exchange-traded funds (``ETFs'') and funds of funds 
having grown since then and funds such as emerging market, 
international, and alternative strategy funds having attracted 
substantial amounts of investment.\21\ The Commission staff have also 
observed an increase in filings by funds with investment focuses in ESG 
or ``thematic'' areas such as cybersecurity, blockchain, and artificial 
intelligence.

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Further, as highlighted in the 2020 Request for Comment, since the 
Commission adopted the names rule there has been significant growth in 
``passive management'' funds that seek to replicate the return on a 
particular index.\22\
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    \19\ See, e.g., Comment Letter of Aaron Cantrell, Head of 
Economic Research, Record Currency Management and Isabel Estevez, 
Ph.D. Candidate, University of Cambridge (May 5, 2020) (``Cantrell 
and Estevez Comment Letter''); CFA Comment Letter; ICI Comment 
Letter I; AllianzGI Comment Letter.
    \20\ See, e.g., Comment Letter of Invesco Ltd. (May 5, 2020) 
(``Invesco Comment Letter''); Comment Letter of the Public Investors 
Advocate Bar Association (Apr. 15, 2020) (``PIABA Comment Letter''); 
CFA Institute Comment Letter.
    \21\ See ICI Comment Letter I; see also SIFMA AMG Comment Letter 
(stating that there have been significant evolution and innovation 
in the asset management industry since 2001); Comment Letter of T. 
Rowe Price (May 21, 2020) (``T. Rowe Price Comment Letter'') 
(stating that since the adoption of the names rule, funds have 
``expanded their strategies, increased the use of derivatives and 
new types of financial instruments, and expanded the diversity of 
products available to investors''); and Comment Letter of State 
Street Global Advisors (May 5, 2020) (``SSGA Comment Letter'') 
(``[t]he investment management industry has changed considerably 
since the Names Rule was adopted in 2001'').
    \22\ 2020 Request for Comment, supra footnote 2, at n.22; see 
also Investment Company Institute, 2021 Fact Book: A Review of 
Trends and Activities in the Investment Company Industry, at 48-49, 
available at https://www.ici.org/system/files/2021-05/2021_factbook.pdf (``2021 ICI Fact Book'') (stating that at the end 
of 2020, index mutual funds and index ETFs together had $9.9 
trillion in total net assets and accounted for 40% of assets in 
long-term funds, as compared to 19% at the end of 2010).
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    The current scope of the rule has created interpretive issues. The 
Commission has previously taken the position that fund names that 
incorporate terms such as ``growth'' and ``value'' connote an 
investment objective, strategy, or policy (i.e., ``investment 
strategies'') and are therefore not within the scope of the 80% 
investment policy requirement.\23\ This has resulted in some fund names 
being excluded from this requirement because the name contains a term 
suggesting an investment strategy, even if the name also suggests an 
investment focus to investors. Certain funds with names that may raise 
the same types of concerns as those that the rule's current scope 
directly addresses may therefore not have adopted an 80% investment 
policy.
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    \23\ Names Rule Adopting Release, supra footnote 2, at n.43 and 
accompanying text. (``In addition, the rule does not apply to fund 
names that incorporate terms such as ``growth'' and ``value'' that 
connote types of investment strategies as opposed to types of 
investments.'')
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    The potential investor protection issues that these interpretive 
scoping considerations raise are particularly evident in the treatment 
of funds with names that suggest an investment focus in companies that 
meet certain ESG standards. Investors may reasonably expect funds with 
these names to invest in companies with policies, practices, or 
characteristics that are consistent with these standards, particularly 
when the fund's name contains the term ``ESG'' or similar terminology 
(such as ``sustainable,'' ``green,'' or ``socially responsible'').\24\ 
As discussed in more detail below, this type of terminology may be 
particularly powerful in fund names, as funds can attract significant 
interest and stand out to investors by using these terms in their 
names.\25\ The proposed amendments to the names rule would address fund 
names with ESG and similar terminology by providing that funds whose 
names include these terms are subject to the rule's 80% investment 
policy requirement, and by defining certain uses of ESG terminology in 
fund names as materially deceptive and misleading. This would help to 
prevent potential ``greenwashing'' in fund names by requiring a fund's 
investment activity to support the investment focus its name 
communicates so that investors will not be deceived or misled by the 
fund's name. Interpretive positions taken by funds that these kinds of 
names are not subject to the rule have resulted in investors in these 
funds not receiving these protections.
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    \24\ See Enhanced Disclosures by Certain Investment Advisers and 
Investment Companies about Environmental, Social, and Governance 
Investment Practices, Investment Company Act Release No. 34594 (May 
25, 2022) (``ESG Proposing Release''), published elsewhere in this 
issue of the Federal Register.
    \25\ See infra footnote 124 and accompanying text.
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    The 2020 Request for Comment also asked questions exploring whether 
the names rule is as effective as it could be at addressing changes to 
funds' portfolios over time, for example by asking whether compliance 
with the rule's 80% investment policy requirements should continue to 
be determined as of the time of investment, as opposed to a fund 
maintaining the required level of investment at all times. A fund in 
some circumstances can drift away over time from the type of investment 
focus that the fund's name suggests.\26\ The current names rule may not 
be as effective as it could be at addressing changes in funds over 
time, both due to possible ``drift'' and the current rule's allowing a 
fund to comply with its 80% investment policy only under ``normal 
circumstances.''
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    \26\ This drift, however, currently may be limited in that any 
future investment must be made in a manner that will bring the fund 
into compliance with the 80% investment requirement. See rule 35d-
1(b).
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    The 2020 Request for Comment also raised the issue that, in the 
years following the names rule's adoption in 2001, funds have 
increasingly used derivatives and other financial instruments to 
execute their strategies.\27\ The Commission has interpreted the names 
rule to permit funds to include synthetic instruments, such as 
derivatives, in the fund's 80% basket if the instrument has economic 
characteristics similar to the securities included in the 80% 
basket.\28\ However, the Commission has not specifically addressed how 
to include a derivatives instrument in that calculation. This, in turn, 
may have implications for whether a fund's name accurately reflects the 
economic reality of the fund's sources of returns and risk.
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    \27\ See 2020 Request for Comment, supra footnote 2, at 7-8; see 
also, e.g., Use of Derivatives by Registered Investment Companies 
and Business Development Companies; Required Due Diligence by 
Broker-Dealers and Registered Investment Advisers Regarding Retail 
Customers' Transactions in Certain Leveraged/Inverse Investment 
Vehicles, Investment Company Act Release No. 33704 (Nov. 25, 2019) 
[85 FR 446 (Jan. 24, 2020)] and Use of Derivatives by Registered 
Investment Companies and Business Development Companies, Investment 
Company Act Release No. 34084 (Nov. 2, 2020) [85 FR 83162 (Dec. 21, 
2020)] (``Derivatives Rule Adopting Release'').
    \28\ Names Rule Adopting Release, supra footnote 2, at section 
II.A.1.
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    Lastly, the rule's requirements for delivering notices of changes 
to a fund's investment policy are worded in a way that could suggest 
that funds must deliver these notices in paper. For example, the rule 
includes requirements on the envelope in which the notice is delivered. 
A number of commenters raised this issue given many investors have 
elected to receive fund materials electronically, stating that the rule 
should provide funds with more flexibility on delivery method.\29\ We 
believe that we could provide greater specificity about the application 
of the notice requirement to investors who have elected electronic 
delivery.\30\
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    \29\ See, e.g., Fidelity Comment Letter; Invesco Comment Letter; 
ICI Comment Letter I.
    \30\ See infra footnote 136.
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C. Overview of Rule Proposal

    After consideration of these issues, we are proposing amendments to 
the names rule to modernize and enhance the investor protections that 
it currently provides.
    <bullet> Expansion of Scope. We are proposing to expand the rule's 
80% investment policy requirement beyond its current scope, to apply to 
any fund name with terms suggesting that the fund focuses in 
investments that have, or investments whose issuers have, particular 
characteristics. This would include, for example, fund names with terms 
indicating that the fund's investment decisions incorporate one or more 
ESG factors.
    <bullet> Changes Over Time and Temporary Departures from a Fund's 
80% Investment Policy. To address concerns as to whether the rule 
effectively addresses changes to fund names and portfolios over time 
and about when a fund must be in compliance with its 80% investment 
policy, we are proposing amendments to the current requirement that a 
fund's policy apply at the time of investment, and ``under normal 
circumstances.'' Instead, the proposed amendments specify the 
particular circumstances under which a fund may depart from its 80% 
investment policy, including specific time frames for getting back into 
compliance.

[[Page 36598]]

    <bullet> Derivatives. To address the rule's application to 
derivatives investments, we are proposing to amend it to require funds 
to use a derivatives instrument's notional amount, rather than its 
market value, for the purpose of determining the fund's compliance with 
its 80% investment policy. Also, we are proposing to amend the names 
rule to address the derivatives instruments that a fund may include in 
its 80% basket.
    <bullet> Unlisted Closed-End Funds and BDCs. We are proposing to 
require that a registered closed-end fund or BDC, whose shares are not 
listed on a national securities exchange and that is required to adopt 
an 80% investment policy, must make its 80% investment policy a 
fundamental policy in all cases. As a result, these funds would not be 
permitted to change their 80% investment policies without a shareholder 
vote. This proposed amendment is meant to address investor protection 
concerns regarding funds that can change their 80% investment policies 
without shareholders having the ability to vote on the change or 
readily exit the fund.
    <bullet> Enhanced Prospectus Disclosure. We also are proposing 
amendments to funds' prospectus disclosure requirements that would 
require a fund to define the terms used in its name, including the 
criteria the fund uses to select the investments that the term 
describes.
    <bullet> Plain English Requirements for Terms Used in Fund Names. 
We are proposing effectively to require that any terms used in the 
fund's name that suggest either an investment focus, or that the fund 
is a tax-exempt fund, must be consistent with those terms' plain 
English meaning or established industry use.
    <bullet> Materially Deceptive and Misleading Use of ESG 
Terminology. The use of ESG or similar terminology in a fund's name 
would deceive and mislead investors where the identified ESG factors do 
not play a central role in the fund's strategy. Accordingly, we would 
define the names of ``integration funds'' as materially deceptive or 
misleading if the name indicates that the fund's investment decisions 
incorporate one or more ESG factors. For purposes of this release, an 
integration fund is a fund that considers one or more ESG factors 
alongside other, non-ESG factors in its investment decisions, but such 
ESG factors are generally no more significant than other factors in the 
investment selection process, such that ESG factors may not be 
determinative in deciding to include or exclude any particular 
investment in the portfolio.
    <bullet> Modernization of Notice Requirement. We are further 
proposing to update the names rule's notice requirement to expressly 
address funds that use electronic delivery methods to provide 
information to their shareholders. The proposed amendments also would 
require notices to describe not only a change in the fund's 80% 
investment policy, but also a change to the fund's name that 
accompanies the investment policy change.
    <bullet> Form N-PORT Reporting Requirements. We are proposing 
amendments to Form N-PORT to require greater transparency on how fund 
investment selection methods match the investment focus that the fund's 
name suggests. These proposed amendments would include a new reporting 
item regarding a fund's names rule compliance. They also would include 
a new reporting item requiring a fund subject to the 80% investment 
policy requirement to indicate, with respect to each portfolio 
investment, whether the investment is included in the fund's 80% 
basket.
    <bullet> Recordkeeping. The proposed amendments would require funds 
that must adopt an 80% investment policy to adhere to recordkeeping 
requirements that are designed to provide the Commission and staff, as 
well as the fund's compliance personnel, the ability to evaluate the 
fund's compliance with the rule's requirements.
    Funds that do not adopt an 80% investment policy would be required 
to maintain a written record of their analysis that such a policy is 
not required under the names rule.

II. Discussion

A. 80% Investment Policy Requirement

1. Names Suggesting an Investment Focus
    We are proposing to broaden the scope of the names rule's current 
80% investment policy requirement also to apply to fund names that 
include terms suggesting that the fund focuses in investments that 
have, or whose issuers have, particular characteristics.\31\ The 
proposed amendments provide as examples fund names with terms such as 
``growth'' or ``value,'' or terms indicating that the fund's investment 
decisions incorporate one or more ESG factors.\32\ This would be in 
addition to fund names that currently require an 80% investment policy, 
which are funds whose names suggest a focus in a particular type of 
investments or industry, or in particular countries or geographic 
regions, or those that suggest certain tax treatment.
---------------------------------------------------------------------------

    \31\ We are also proposing to add BDCs to the definition of 
``fund'' in the rule. See proposed rule 35d-1(g)(5) (defining 
``fund'').
    \32\ Proposed rule 35d-1(a)(2). The term ``ESG'' encompasses 
terms such as ``socially responsible investing,'' ``sustainable,'' 
``green,'' ``ethical,'' ``impact,'' or ``good governance'' to the 
extent they describe environmental, social, and/or governance 
factors that may be considered when making an investment decision.
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    This scope expansion is designed to help ensure that fund names 
that communicate to investors that the fund focuses its investments in 
a particular way are addressed by the rule. The names rule is designed 
to ensure that a fund's investment activity supports the investment 
focus its name communicates and, thus, the investor expectations the 
name creates.\33\ The proposed scope expansion recognizes that even 
where a fund's name could be construed as referring to an investment 
strategy, it nevertheless can also connote an investment focus, and we 
believe this connotation is likely to be materially deceptive and 
misleading unless supported by an 80% investment policy.\34\ That is, a 
fund name might connote a particular investment focus and result in 
reasonable investor expectations regardless of whether the fund's name 
describes a strategy as opposed to a type of investment.\35\ Further, 
as we note below, academic research indicates that a significant number 
of funds follow an investment strategy that does not align with the 
investment strategy identified in the fund's name and, thus, we believe 
that the proposed scope expansion would

[[Page 36599]]

better define and help prevent materially deceptive and misleading fund 
names in light of the investor protection concerns that this practice 
raises.\36\
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    \33\ As used in this release, consistent with proposed rule 35d-
1(a)(2), ``investment focus'' means a focus in a particular type of 
investment or investments, a particular industry or group of 
industries, particular countries or geographic regions, or 
investments that have, or whose issuers have, particular 
characteristics. As discussed in more detail below, under the 
proposed amendments, where a fund's name suggests an investment 
focus that has multiple elements, the fund's 80% investment policy 
must address each element.
    \34\ See supra paragraph accompanying footnote 23.
    \35\ Distinguishing whether a term connotes a ``strategy'' 
versus a ``type of investment'' can be a subjective determination, 
prone to second guessing, and the categories of ``strategy'' versus 
``type of investments'' are not mutually exclusive. Interpretive 
questions caused by these issues draw Commission resources to 
address. For example, the Division of Investment Management's 
Disclosure Review and Accounting Office staff spends a significant 
amount of time and attention on names rule compliance issues. We 
also believe that the proposal would address concerns raised by 
commenters regarding inconsistent treatment across funds in 
interpreting ``strategy'' by expanding the rule's coverage, 
rendering moot the need to determine whether a fund name describes a 
type of investment versus an investment strategy. See, e.g., SIFMA 
AMG Comment Letter; T. Rowe Price Comment Letter.
    \36\ See infra footnote 165 and accompanying text.
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    Investors' expectations as to the composition of a fund's portfolio 
can result even when investment-focus-suggesting terms used in a fund's 
name may have more than one reasonable definition. For example, terms 
like ``green'' or ``sustainable'' may be more subjective than a term 
like ``large cap equity'' and thus not always viewed as referring to a 
``type'' of investment. But these terms still communicate to investors 
that the fund will concentrate in investments that the fund considers 
``green'' or ``sustainable.'' Current fund practices are mixed on how 
funds understand the scope of the names rule, in that some funds 
consider certain terminology in their names to require an 80% 
investment policy under the rule, while others do not.\37\
---------------------------------------------------------------------------

    \37\ See ICI Comment Letter I.
---------------------------------------------------------------------------

    Some commenters responding to the 2020 Request for Comment 
supported an approach similar to our proposal.\38\ Some of these 
commenters asserted that many investors often rely on fund names, 
rather than disclosures such as those concerning the fund's objective, 
strategies, and risks, when making an investment decision and that fund 
managers purposefully adopt names designed to draw interest in their 
fund.\39\ Some also stated that funds with certain names not currently 
required to adopt an 80% investment policy can often connote an 
investment focus to investors and, therefore, can have the effect of 
misleading or deceiving investors.\40\ Commenters similarly said the 
inclusion of ``buzzwords'' in funds' names can ``give the illusion of 
safety or preservation of capital as objectives.'' \41\ One commenter 
also stated that investors do not make a distinction between 
``strategies'' and ``types of investments'' when making an investment 
decision and, instead, will assume that the fund will invest in the 
ways suggested by the name.\42\
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    \38\ See, e.g., Crowley Comment Letter; Silver Comment Letter; 
CFA Comment Letter.
    \39\ See IRC Comment Letter; Silver Comment Letter; CFA Comment 
Letter.
    \40\ See PIABA Comment Letter (``PIABA contends that the Names 
Rule should apply to the investment strategy of a fund, particularly 
where the investment strategy entails a high degree of risk. The 
terms ``growth'' and ``value'' should not [be] used to mislead 
investors as to aggressive, high risk funds.''); CFA Comment Letter; 
see also CFA Institute Comment Letter (stating that the rule is 
limited in its effectiveness but that it should not be expanded to 
cover strategies).
    \41\ See Silver Comment Letter; see also PIABA Comment Letter 
(discussing funds--registered funds as well as hedge funds--that 
have been marketed using language such as ``high-grade'' although 
the funds employ risky (including leveraged) investment strategies); 
CFA Comment Letter.
    \42\ See CFA Institute Comment Letter.
---------------------------------------------------------------------------

    Other commenters objected to any expansion of the rule to require 
an 80% investment policy for fund names that suggest an investment 
strategy.\43\ These commenters' concerns generally centered around 
perceived complexity and subjectivity in determining what assets are 
appropriate for the 80% basket. Specifically, these commenters argued 
that investment strategies are too subjective to be quantifiably 
measured in an asset-based test like the 80% investment policy 
requirement and that there can often be many investment methods to 
achieve the same strategy.\44\ A number of commenters raised these 
points specifically in discussing an approach that would require funds 
with ESG terminology in their names to adopt an 80% investment 
policy.\45\ Some commenters also stated that application of the 80% 
investment policy requirement to a strategy could lead to 
standardization in funds' investment portfolios that is not market-
driven and limit fund flexibility to change strategies in response to 
market changes or events.\46\ For these reasons, a number of commenters 
suggested that fund disclosure would be a more appropriate tool for 
investors to educate themselves about the strategy better, rather than 
requiring funds whose names describe a strategy to adopt an 80% 
investment policy.\47\
---------------------------------------------------------------------------

    \43\ See, e.g., SIFMA AMG Comment Letter; Comment Letter of 
Capital Research and Management Company (May 5, 2020) (``Capital 
Group Comment Letter''); ICI Comment Letter I. But see, e.g., CFA 
Comment Letter; Practus Comment Letter; PIABA Comment Letter; MSCI 
Comment Letter (arguing that names suggesting strategies should be 
subject to the 80% investment policy requirement).
    \44\ See, e.g., Nia Impact Capital Comment Letter (stating that 
the terms ``sustainable'' and ``ESG'' are ``still quite subjective 
in nature''); SIFMA AMG Comment Letter; T. Rowe Price Comment 
Letter; see also CFA Comment Letter (arguing that while the rule 
should apply to strategies, a different approach than an 80% 
investment policy should be taken).
    \45\ See, e.g., Cantrell & Estevez Comment Letter; Credit Suisse 
Comment Letter; Invesco Comment Letter. Some commenters also 
recommended avoiding prescriptive definitions of terms like ``ESG'' 
and sustainable.'' See, e.g., BlackRock Comment Letter; Cantrell & 
Estevez Comment Letter; Ceres Comment Letter. But see, e.g., 
Beirbaum Comment Letter; Global Affairs Associates Comment Letter; 
Janain Comment Letter (each maintaining that funds that include ESG 
terms or similar terminology in their names should be subject to the 
requirement to adopt an 80% investment policy).
    \46\ See Capital Group Comment Letter; ICI Comment Letter I; 
Invesco Comment Letter; SIFMA AMG Comment Letter.
    \47\ See SIFMA AMG Comment Letter; Capital Group Comment Letter; 
T. Rowe Price Comment Letter.
---------------------------------------------------------------------------

    As discussed above, we believe that fund names included in the 
proposed expanded scope--such as names with terms like ``growth,'' 
``value,'' or ``sustainable'' where a fund may not have adopted an 80% 
investment policy under the current rule--communicate to investors that 
the fund will concentrate in investments that the fund believes have 
those particular characteristics. The proposed amendment also would 
apply to other fund names that historically may have not required an 
80% investment policy (depending on the context), such as names that 
include terms like ``global,'' ``international,'' ``income,'' or 
``intermediate term (or similar) bond.'' \48\
---------------------------------------------------------------------------

    \48\ See Names Rule Adopting Release, supra footnote 2, at n.42 
and Division of Investment Management, Frequently Asked Questions 
about Rule 35d-1(Investment Company Names) (available at https://www.sec.gov/divisions/investment/guidance/rule35d-1faq.htm) at 
Questions 8, 9, and 11. These FAQs represent the views of the staff 
of the Division of Investment Management. They are not a rule, 
regulation, or statement of the Commission. The Commission has 
neither approved nor disapproved the FAQs' content. 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.
---------------------------------------------------------------------------

    Conversely, there would continue to be fund names that would not 
require the fund to adopt an 80% investment policy because the names 
would not connote an investment focus under the proposal. For example, 
these would include names that reference characteristics of a fund's 
portfolio as a whole, or that reference elements of an investment 
thesis without specificity as to the particular characteristics of the 
component portfolio investments. We do not believe that such names 
suggest that the fund focuses its investments in any of the ways 
covered under the proposed expanded scope, though such names would 
continue to be subject to section 35(d)'s prohibition on materially 
misleading or deceptive names, and funds with these names would 
continue to be subject to the anti-fraud provisions of the federal 
securities laws regarding disclosures to investors. These names would 
include, for instance, names that suggest characteristics of the fund's 
overall portfolio, such as a name indicating the fund seeks to achieve 
a certain portfolio ``duration'' or that the fund is ``balanced.'' \49\ 
They also include

[[Page 36600]]

names that reference a particular investment technique, such as ``long/
short.'' We also believe that names that suggest a possible result to 
be achieved, such as ``real return,'' or a name that references a 
retirement target date, similarly do not suggest a focus in a 
particular type of investment or investments that have particular 
characteristics. In these cases the name indicates the fund's 
objectives but without specifying the fund's investments or intended 
investments. Regardless of whether a fund is required to adopt an 80% 
investment policy under the rule, a fund must, consistent with rule 
38a-1, adopt and implement written policies and procedures reasonably 
designed to prevent violations of the federal securities laws, which 
include section 35(d) and the names rule.\50\
---------------------------------------------------------------------------

    \49\ To the extent that a term used in a fund name could 
reasonably be understood to describe the characteristics of the 
portfolio as well as, or alternatively, the characteristics of the 
component portfolio investments--for example, the term ``global''--
we believe such a name would suggest an investment focus under the 
proposed amendments. Nevertheless, as discussed in more detail 
below, a ``global'' fund could use any reasonable definition of 
``global'' as we are not proposing to mandate any particular test 
for what this term means.
    \50\ See supra footnote 16 and accompanying text.
---------------------------------------------------------------------------

    Where a fund's name suggests an investment focus that has multiple 
elements, the fund's 80% investment policy must address all of the 
elements in the name. Take, for example, the fund name ``ABC Wind and 
Solar Power Fund.'' The fund's investment policy could provide that 
each security included in the 80% basket must be in both the wind and 
solar industries, or instead that 80% of the value of the fund's assets 
will be invested in a mix of investments, with some solar investments, 
some wind investments, and some investments in both industries. 
Similarly, the ``XYZ Preferred Securities and Income Fund'' could adopt 
a policy to invest at least 80% of the value of its assets in preferred 
securities and securities that meet the fund's standards for being 
income-producing. A fund's 80% investment policy must address each 
element in the fund name that suggests an investment focus, but permits 
the fund to take a reasonable approach in specifying how the fund's 
investments will incorporate each such element in the name. For 
example, the ``XYZ Environmental, Social, and Governance Fund'' must 
adopt an 80% investment policy to address all three of those elements, 
and we recognize that there are multiple reasonable ways the policy 
could address these elements. Any fund that has a name that suggests an 
investment focus would be required to adopt an 80% investment policy 
even if the fund's name also contains a term that does not suggest an 
investment focus. For example, the ``XYZ Technology and Real Return 
Fund'' would be required to adopt an 80% investment policy to invest 
80% of the value of its assets in the technology sector despite the 
phrase ``real return'' also appearing in the name.
    In some cases, what would be appropriate to include in the fund's 
80% basket would be context-specific. For example, we understand that 
funds currently do not include the value of short positions, including 
short-exposure derivatives, related to the investment focus suggested 
by a fund's name in their 80% baskets, absent some terminology in the 
fund's name such as ``inverse,'' ``hedged,'' or ``long/short'' that 
suggests to investors that short activity is or may be part of the 
fund's investment approach (e.g., the ``XYZ Long/Short Equity 
Fund'').\51\ We request comment below on funds' current practices 
regarding including or excluding short positions in their 80% baskets 
and whether any changes in this area would be appropriate.
---------------------------------------------------------------------------

    \51\ This hypothetical fund would be subject to the 80% 
investment requirement because of the inclusion of the term 
``equity,'' which suggests a type of investment, and not because of 
the term ``long/short,'' which does not suggest an investment focus.
---------------------------------------------------------------------------

    Consistent with the current names rule, funds would be able to 
define terms used in their names in a reasonable way, but, in a change 
from the current rule, would be subject to the proposed requirement 
that any terms used in the fund's name that suggest an investment focus 
must be consistent with those terms' plain English meaning or 
established industry use.\52\ What constitutes ``reasonable'' in this 
context could vary depending on the fund name, but requires a 
meaningful nexus between the given investment and the focus suggested 
by the name. For instance, when the investment focus relates to an 
industry, there are different approaches a fund could take to determine 
if a given security is tied to the economic fortunes and risks 
associated with the named industry. For example, we believe it would be 
reasonable for a fund to define securities in a given industry as 
securities issued by companies that derive more than 50% of their 
revenue or income from, or own significant assets in, the industry. In 
such cases, there may be instances where the percentage could be 
smaller, such as where a large company is a dominant firm in a given 
industry (e.g., the firm is an acknowledged leader in the industry). A 
fund's compliance policies and procedures could address its processes 
to allocate portfolio companies in its 80% basket, for example, by 
reference to a specific test based on the source of the companies' 
revenue.
---------------------------------------------------------------------------

    \52\ Cf. Names Rule Adopting Release, supra footnote 2, at n.43 
(``As a general matter, an investment company may use any reasonable 
definition of the terms used in its name and should define the terms 
used in its name in discussing its investment objectives and 
strategies in the prospectus.'').
---------------------------------------------------------------------------

    We understand that some funds also use text analytics to assign 
issuers to industries based on the frequency of particular terms in an 
issuer's disclosures. For example, if an issuer's public disclosure 
documents repeatedly use a term like ``blockchain,'' some funds would 
assign the issuer to the blockchain or fintech industry without further 
analysis. Although text analysis may be a helpful component of a fund's 
analysis, we do not believe it is reasonable to conclude that an issuer 
is in a given industry solely because the issuer's disclosure documents 
frequently include words associated with the industry.
    Further, we believe it would generally be reasonable for a fund of 
funds or other acquiring fund to include the entire value of its 
investment in an appropriate acquired fund when calculating compliance 
with the 80% investment requirement without looking through to the 
acquired fund's underlying investments. For example, a fund of funds 
with the name ``XYZ Industrials Fund'' with an 80% investment policy to 
invest in the industrials sector could count the entire value of its 
investments in the ``ABC Automotive Fund'' when calculating compliance 
with the 80% investment requirement, provided that the ABC Automotive 
Fund has an 80% investment policy to invest in its subsection of the 
industrials sector.
    We request comment on the proposed requirement for funds with names 
that suggest an investment focus to adopt and implement an 80% 
investment policy.
    1. Should we expand the requirement for certain funds to adopt an 
80% investment policy, as proposed, to cover names that include terms 
suggesting an investment focus in investments or issuers that have 
particular characteristics? Is it clear what types of names would 
subject a fund to the expanded scope of this requirement under the 
proposed rule? Should we only require certain fund names that suggest 
an investment focus, such as those that ``reasonably suggest'' an 
investment focus, to adopt an 80% investment policy? Would the proposed 
amendments address all types of names that connote an investment focus 
to investors, or otherwise create investor expectations regarding the 
composition of the fund's portfolio? Conversely, are there certain 
names that would be

[[Page 36601]]

included under the expanded scope for which investors would not have 
these types of expectations?
    2. Is it appropriate to retain, as proposed, the requirement for 
fund names that suggest a focus in a particular type of investment or 
investments, investments in a particular industry or group of 
industries, or particular countries or geographic regions to adopt an 
80% investment policy? Should we eliminate or add to these types of 
names in the rule text, given the proposed expanded scope of the 
requirement (i.e., including within the scope names that include terms 
suggesting a focus in investments or issuers that have particular 
characteristics)?
    3. Should we, as proposed, adopt a scoping requirement that does 
not distinguish between types of investments and investment strategies? 
Do investors make a distinction between investment strategies and types 
of investments when assessing fund names in making an investment 
decision?
    4. Should the names rule's 80% investment policy requirement apply, 
as proposed, to fund names with terms such as ``ESG'' and 
``sustainable'' that reflect certain qualitative characteristics of an 
investment? Why or why not? Are investors relying on these terms as 
indications of the kinds of companies in which the fund invests or does 
not invest? Would this be the case even to the extent that funds with 
ESG and similar terminology in their names may use disparate means to 
select their portfolio investments? Should there be any additional 
requirements for funds that use ESG or similar terminology in their 
names?
    5. As an alternative to basing the calculation of the 80% basket on 
the fund's assets, should we instead use a different method of 
calculation? As discussed in more detail below, we considered, as a 
reasonable alternative to the proposal, whether to require funds' 
historical returns to exhibit minimum exposures to certain risk factors 
in lieu of the percentage of assets test. Should we instead adopt this 
sort of method of calculation that assesses the returns that a fund's 
investments contribute to the fund's overall performance, or that 
requires a fund with a name suggesting a particular investment focus to 
exhibit minimum exposures to certain risk factors that correlate with 
the investment focus its name suggests?
    6. Will funds be able to reasonably determine what investments 
qualify for their 80% baskets under the proposed rule? What steps and 
tools will funds use to make these determinations? If not, what steps 
should we take to clarify this, particularly given the proposed 
expanded scope of the 80% investment policy requirement? Is it likely 
that funds with similar names will come to different reasonable 
determinations as to what investments qualify for inclusion in their 
80% baskets? If so, will investors be confused by these names?
    7. Should funds with names with multiple elements be required to 
address all of those elements? Should this be required at all times or, 
if not, what limits, if any, should there be regarding fund names with 
multiple elements in light of the prohibition against materially 
deceptive or misleading names under the Act? Should a fund whose name 
includes multiple elements be required to invest some specific minimum 
percentage (e.g., 5%, 10%, 25%) in each element?
    8. Is there any particular topic or issue that funds encounter in 
complying with the 80% investment policy currently, or that they would 
encounter in complying with the proposed amendments to the 80% 
investment policy requirement, that should be addressed by Commission 
guidance? For example, would funds benefit from guidance about what 
procedures might be reasonable for a fund whose name indicates a focus 
in a particular industry to select its 80% basket investments?
    9. As discussed above, we understand that, absent a term in a 
fund's name such as ``inverse,'' funds do not currently include short 
positions in the fund's 80% basket. Should the Commission address by 
guidance or a provision in the names rule the inclusion of short 
positions in a fund's 80% basket related to the fund's investment 
focus, and if so, what practices with respect to the inclusion or 
exclusion of short positions would be appropriate in light of section 
35(d) and the policy goals of the names rule's 80% investment policy 
requirement? For example, assume a fund with ``equity'' in its name and 
nothing in the name suggesting that the fund also engages in short 
sales, such as the phrase ``long/short.'' If the fund had $100 and 
invested it all in equity securities, then were to sell short equity 
securities with a value of $50, how should that short sale affect the 
fund's compliance with its 80% investment policy? Should the short sale 
reduce the value of the equity investments included in the 80% basket, 
and are there specific circumstances where a short sale should not 
reduce the value of the fund's 80% basket securities? How should we 
address short sales where the returns of the assets sold short are 
correlated with returns of securities (or the asset class) in the 
fund's 80% basket, but the assets sold short are not identical to any 
of the securities in the 80% basket (or are not in the same asset class 
as the securities in the 80% basket)? If the short sale should reduce 
the value of the equity investment in the 80% basket in the example 
above, what reduction would be appropriate--e.g., should the reduction 
be $50, the value of the equity securities sold short? \53\
---------------------------------------------------------------------------

    \53\ See infra section II.A.3 (addressing the valuation of 
derivatives instruments for the purpose of determining a fund's 
compliance with its 80% investment policy).
---------------------------------------------------------------------------

    10. Should we provide a specific provision in the rule requiring 
funds with ESG (or similar terminology) in their names only to 
attribute a particular type of investment towards their 80% basket, or 
guidance that addresses this? Why or why not? Are there other types of 
guidance regarding ESG investing and the names rule that we should 
provide?
    11. Should we adopt any specific requirements with regards to the 
portion of the fund's assets not included in the 80% basket? For fund 
names that suggest an investment focus that has multiple elements, 
should we adopt any specific requirements, such as a specific minimum 
percentage (e.g., 20%, 25%, etc.) of assets invested, with regards to 
how each element must be accounted for in the fund's 80% investment 
policy?
    12. Are there any other particular types of fund names we have not 
specifically addressed above, for which we should require a specific 
treatment under the names rule as we propose to amend it? Should those 
particular names be subject to the requirement to adopt an 80% 
investment policy or not?
    13. Should we codify any of the guidance provided above? For 
example, should we add an exception to the rule that permits funds of 
funds, and other acquiring funds, to include the entire value of their 
investment in an appropriate acquired fund in calculating their 80% 
basket without looking through to the acquired fund's underlying 
investments?
    14. With respect to certain name terms that could connote both an 
investment focus and the characteristics of the fund's overall 
portfolio (e.g., ``global''), should we, as proposed, require funds 
with names including these terms to adopt an 80% investment policy? If 
not, how should we differentiate when these terms are being used to 
suggest an investment focus and when they are not?
    15. Consistent with the current names rule, the proposed amendments 
would

[[Page 36602]]

generally apply to money market funds. 17 CFR 270.2a-7 (``rule 2a-7'') 
also requires funds that use the term ``money market'' in their names 
to comply with the requirements of that rule. Are the requirements of 
rule 2a-7 sufficient to prevent materially misleading or deceptive 
money market funds names, or should we continue to apply the names rule 
to those funds?
2. Temporary Departures From the 80% Investment Requirement
    The proposed amendments would permit a fund to depart temporarily 
from the requirement to invest at least 80% of the value of its assets 
in accordance with the investment focus or tax treatment its name 
suggests (``80% investment requirement'') only under certain specified 
circumstances.\54\ These temporary departures would be permitted only: 
(1) as a result of market fluctuations, or other circumstances where 
the temporary departure is not caused by the fund's purchase or sale of 
a security or the fund's entering into or exiting an investment; (2) to 
address unusually large cash inflows or unusually large redemptions; 
(3) to take a position in cash and cash equivalents or government 
securities to avoid a loss in response to adverse market, economic, 
political, or other conditions; or (4) to reposition or liquidate a 
fund's assets in connection with a reorganization, to launch the fund, 
or when notice of a change in the fund's 80% investment policy has been 
provided to fund shareholders at least 60 days before the change 
pursuant to the rule.\55\ Under each of these circumstances except fund 
launches (where accompanying temporary departures could not exceed a 
period of 180 consecutive days), reorganizations (for which the 
proposed rule does not specify a required time frame for accompanying 
temporary departures), or where the 60-day notice has been provided to 
shareholders, a fund would have to bring its investments back into 
compliance with the 80% investment requirement within 30 consecutive 
days.\56\ In all cases, a fund would have to come back into compliance 
as soon as reasonably practicable.\57\
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    \54\ The proposed temporary departure provision would be 
applicable not only to funds whose names suggest a particular 
investment focus, but also to tax-exempt funds that are required to 
invest their assets in accordance with the provisions of proposed 
rule 35d-1(a)(3)(i).
    \55\ ``Reorganization'' is defined in section 2(a)(33) of the 
Act and includes actions such as voluntary liquidations.
    \56\ Proposed rule 35d-1(b)(1) and (g)(7) (defining ``launch'' 
as a period, not to exceed 180 consecutive days, starting from the 
date the fund commences operations).
    \57\ ``As soon as reasonably practicable'' would not strictly 
mean ``as soon as possible'' in all cases and is intended to allow 
for consideration by the adviser of how to return to compliance in a 
manner that best serves the interest of the fund and its 
shareholders (but in no case longer than the proposed 30-day limit 
where applicable). For example, a fund need not return to compliance 
within 2 days, even if doing so is technically possible, if such an 
approach would harm the fund or its shareholders by, for instance, 
causing the fund to purchase illiquid assets at a premium.
---------------------------------------------------------------------------

    In contrast, the names rule currently provides that a fund's 80% 
investment policy applies ``under normal circumstances,'' leaving it to 
funds to determine what constitutes something other than a normal 
circumstance. This aspect of the current rule was designed to provide 
funds flexibility to manage their portfolios while requiring that they 
normally invest 80% of their assets consistent with their 80% 
investment policy.\58\ In addition, under the current rule, compliance 
with the 80% investment requirement is determined at the time a fund 
invests its assets. This provision was designed to avoid requiring a 
fund to rebalance its investments if the fund's portfolio were no 
longer invested in accordance with the fund's 80% investment policy as 
a result of, for example, market movements or an influx of cash from 
new investors.\59\ The rule currently requires that if, subsequent to 
an investment, the 80% investment requirements of the rule are no 
longer met, the fund's future investments must be made in a manner that 
will bring the fund into compliance with those requirements.
---------------------------------------------------------------------------

    \58\ See Names Rule Adopting Release, supra footnote 2, at 
nn.37-40 and accompanying text.
    \59\ See Investment Company Names, Investment Company Act 
Release No. 22530 (Feb. 27, 1997) [62 FR 10955 (Mar. 10, 1997)] at 
n.28 and accompanying text.
---------------------------------------------------------------------------

    The new approach we are proposing is designed to permit appropriate 
flexibility to depart temporarily from the 80% investment requirement 
in particular, time-limited circumstances when doing so would be 
beneficial to the fund and its shareholders, while providing additional 
parameters designed to prevent a fund from investing inconsistently 
with its 80% investment policy for an extended period of time. The new 
approach continues to address, for instance, certain circumstances in a 
fund's life cycle in which it might not be invested fully in its 80% 
basket, as well as circumstances in which external events could cause 
the portfolio to ``drift'' in a way that causes the fund to depart 
temporarily from the 80% investment requirement. For example, a new 
fund may need a reasonable amount of time after commencing operations 
to comply with the 80% investment requirement, or a fund with ``small 
cap'' in its name may see certain of its investments grow such that 
they are no longer ``small cap'' and need to re-invest in relative 
short order.\60\ An investor choosing to invest in a fund with a name 
conveying a particular investment focus may expect that the fund will 
not stray from this investment focus for a protracted period of time in 
these and similar examples. While the current rule includes a 
requirement that a fund must make future investments in a manner to 
bring the fund into compliance with the 80% investment requirement, 
this provision does not address situations where the fund is not 
investing its assets in a given period of time.
---------------------------------------------------------------------------

    \60\ See also Names Rule Adopting Release, supra footnote 2, at 
n.39 and accompanying text.
---------------------------------------------------------------------------

    Moreover, the parameters we are including in the proposal reflect 
our belief that investors' expectations for funds' investment focuses 
may not depend on whether market events negatively affect the 
investment in the fund's portfolio. For example, investors increasingly 
seek out funds that are structured as passive investment vehicles, such 
as index-based mutual funds and ETFs, in order to obtain specific types 
of investment exposure for their portfolios.\61\ These investors are 
specifically seeking a return tied to the investment focus suggested in 
the fund's name.\62\ These investors may expect the fund to invest in a 
manner that is consistent with its stated investment focus with the 
understanding that investors may rebalance their own portfolios if 
desired rather than expecting the fund to do so. As another example, 
consistency in investment companies' investments with their names and 
investors' reasonable expectations may be particularly important to 
retirement plan and other investors who place great emphasis on 
allocating their investment company holdings in well-defined types of 
investments, such as stocks, bonds, and

[[Page 36603]]

money market instruments.\63\ As a result, consistency with the 
investment focus suggested by the fund's name would seem to be a 
primary concern for these investors.
---------------------------------------------------------------------------

    \61\ Based on data obtained from Morningstar Direct, in 2001 
there were approximately 432 mutual fund and ETF index funds. As of 
the end of 2019, there were approximately 2,311 index funds. 2020 
Request for Comment, supra footnote 2, at n.22. At the end of 2020, 
index mutual funds and index ETFs together had $9.9 trillion in 
total net assets and accounted for 40% of assets in long-term funds, 
as compared to 19% at the end of 2010. See 2021 ICI Fact Book.
    \62\ See CFA Comment Letter (stating that when funds deviate 
from their 80% investment policy for extended periods of time, this 
can affect asset allocation programs some investors use to determine 
which funds to buy or sell by changing the nature of the 
investment).
    \63\ See id.; see also Names Rule Adopting Release, supra 
footnote 2, at n.8 and accompanying text.
---------------------------------------------------------------------------

    To address these concerns, the proposed rule amendments specify 
that a fund departing from the 80% investment requirement must bring 
its investments back into compliance as soon as reasonably practicable, 
and that the maximum amount of time for the departure would be 30 
consecutive days, other than in the case of a fund launch (which would 
be limited to 180 consecutive days starting from the day the fund 
commences operations) or a reorganization (for which the proposed rule 
does not specify a required time frame for accompanying temporary 
departures). We are proposing this ``as soon as reasonably 
practicable'' standard because we anticipate that most temporary 
departures would last substantially less than 30 days, though this 
could depend on the specific facts and circumstances. We recognize that 
some investors may prefer for a fund to be permitted to depart from its 
investment focus for longer than 30 days to avoid any losses that the 
fund may incur to come back into compliance within that time period. We 
believe, however, that, at some point, departures may begin to change 
the nature of the fund fundamentally, which would undermine investor 
expectations created by the fund's name.\64\ The proposed time limits 
are designed to prevent such a fundamental change.
---------------------------------------------------------------------------

    \64\ See Janain Comment Letter (recommending limiting the amount 
of time funds can engage in temporary defensive positions as they 
believe that some funds have taken liberties and that ``[a]t some 
point, temporary becomes normal''); see also CFA Comment Letter 
(highlighting concerns about ``drift''); Crowley Comment Letter 
(expressing concerns about extended departures from the 80% 
investment requirement).
---------------------------------------------------------------------------

    A shorter required time period to come back into compliance, for 
example seven days, would ensure a fund rapidly rebalances its 
portfolio, but could result in forced sales at depressed prices or in a 
tax-disadvantaged manner, to the detriment of investors.\65\ As another 
example, purchasing less liquid securities in a compressed timeframe in 
order to comply with the fund's 80% investment policy could drive up 
the price for those securities, also potentially adversely affecting 
investors. While there is still the possibility that these adverse 
effects could occur with the proposed, longer periods, we believe that 
it is a lessened concern in those time frames given the increased 
flexibility that a longer period of time would provide to rebalance the 
portfolio and for any market-wide issue to resolve.
---------------------------------------------------------------------------

    \65\ Some commenters highlighted these sorts of challenges while 
expressing concerns regarding changing the rule to include a 
maintenance test for the 80% investment requirement. See, e.g., 
BlackRock Comment Letter; Capital Group Comment Letter; ICI Comment 
Letter I.
---------------------------------------------------------------------------

    We are proposing to give fund launches a longer period, 180 
consecutive days, in recognition of the likelihood that it can take 
longer for funds to find investments during their start-up, 
particularly for funds that invest in securities whose supply is 
limited.\66\ We acknowledge that establishing a set time frame to 
return to the 80% investment requirement may result in operational 
changes for some funds, in order to assess the new time limits on 
temporary departures relative to the current rule's requirement to 
assess compliance with the 80% investment requirement at the time of 
investment. However, we anticipate many funds, particularly open-end 
funds, already assess their names rule compliance daily or intra-daily 
(for example, those that trade portfolio assets daily). Therefore we 
anticipate that for many funds, the proposed new approach, which would 
require compliance with the 80% investment requirement except under the 
rule's specified limited circumstances, would not result in significant 
operational changes although we acknowledge that may not be the case 
for all funds.
---------------------------------------------------------------------------

    \66\ See also Names Rule Adopting Release, supra footnote 2, at 
n.39 and accompanying text.
---------------------------------------------------------------------------

    While we continue to believe that there are circumstances where a 
fund's temporary departure from the 80% investment requirement would be 
appropriate, we believe that specifying these circumstances in the 
rule, as opposed to a more principles-based approach, would help ensure 
that these departures are temporary in nature and limited in scope.\67\ 
Thus, in place of the rule's current standard that a fund's 80% 
investment policy applies ``under normal circumstances,'' we are 
proposing four specific exceptions that address circumstances where 
such departures would be limited in time, have investor protection 
benefits, and/or involve circumstances where an investor is unlikely to 
be materially misled or deceived.
---------------------------------------------------------------------------

    \67\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment 
Letter; T. Rowe Price Comment Letter.
---------------------------------------------------------------------------

    First, the proposed rule would permit temporary departures that 
occur as a result of market fluctuations, or other circumstances where 
the temporary departure is not caused by the fund's purchase or sale of 
a security or the fund's entering into or exiting an investment. This 
recognizes that a fund may not be in compliance with the 80% investment 
requirement for a short period of time while the fund addresses such an 
event. For example, the investments in a fund's 80% basket may decline 
in value such that they fall below 80% of the fund's assets. Further, 
the underlying index of an index fund could rebalance, which may cause 
the fund to have less than 80% of its assets invested in the 
reconstituted index until the fund has the opportunity to realign its 
investments.
    The proposed rule also would permit funds experiencing unusually 
large cash inflows or outflows in response to redemption requests to 
depart temporarily from the 80% investment requirement. This would 
provide a fund the opportunity to depart temporarily from the fund's 
80% investment requirement in order to invest the incoming cash, or 
sell investments to meet the outflow, in an orderly way. Similarly, the 
proposed rule would permit temporary departures for funds to take 
temporary defensive positions in cash, cash equivalents, or government 
securities to react to adverse conditions.\68\ These generally reflect 
prior Commission statements regarding some circumstances in which 
departures from the 80% investment requirement would be appropriate 
under the current rule.\69\
---------------------------------------------------------------------------

    \68\ See, e.g., Registration Form Used by Open-End Management 
Investment Companies, Investment Company Act Release No. 23064 (Mar. 
13, 1998) [63 FR 13916 (Mar. 23, 1998)]. The proposed provision 
permitting temporary departures to avoid losses in response to 
adverse market, economic, political, or other conditions in the 
names rule reflects the formulation of temporary defensive positions 
from Form N-1A. See Form N-1A, Instruction 6 to Item 9(b)(1). As a 
result, funds should understand this provision as consistent with 
this disclosure requirement and any related disclosure the fund 
provides. Further, we believe that context dictates that ``other 
conditions'' is not all-encompassing, but rather would be other 
conditions similar to an adverse market, economic, or political 
condition.
    \69\ See Names Rule Adopting Release, supra footnote 2, at 
section II.A.4 (describing ways in which funds might use the ``under 
normal circumstances'' standard to engage in temporary departures).
---------------------------------------------------------------------------

    We are also proposing to permit funds temporarily to invest less 
than 80% of their assets in the 80% basket to reposition or liquidate 
assets in connection with a reorganization or to launch the fund. For 
fund launches, the temporary period would not be permitted to exceed 
180 consecutive days starting from the day the fund commences 
operations. Both reorganizations and launches may result in a fund 
holding assets in a way that is inconsistent with its 80% investment

[[Page 36604]]

policy in order to complete the action. For example, at start-up it may 
take time for a new fund to find and purchase available investments 
consistent with the fund's investment focus and hold cash in the 
interim. In the case of a merger, a target fund may need to rebalance 
its portfolio to more closely mirror the investments held by the 
acquiring fund.
    Unlike the other circumstances in which the proposed rule 
amendments would permit temporary departures, the proposed rule 
amendments would not limit the time of departures associated with fund 
reorganizations or where the fund has provided notice it intends to 
change its 80% investment policy, and additionally the time for 
departures associated with fund launches could last for 180 consecutive 
days from the date the fund commences operations. Planned 
reorganizations may take longer to complete than 30 days or even 180 
days. Moreover, the planned action will be disclosed and the 
reorganization is likely to be a permanent change to the nature of the 
investor's investment.\70\ Similarly, a change to a fund's 80% 
investment policy is a permanent change to the fund's investments, 
about which funds notify investors pursuant to the provisions of the 
rule. Thus, we do not believe that changes in the fund's investment 
portfolio to support the upcoming reorganization would generally be 
inconsistent with investors' reasonable expectations. As a result, we 
do not believe that an express time limit is necessary for departures 
from the 80% investment requirement made in connection with these 
actions. Such departures, like all of the proposed departures, would 
still be required to be resolved as soon as reasonably practicable.
---------------------------------------------------------------------------

    \70\ For example, when the board of an open-end fund determines 
to approve a reorganization, the fund would supplement its 
prospectus.
---------------------------------------------------------------------------

    In the case of the launch of a new fund, it may be better for 
investors if the fund takes additional time to invest in a manner 
consistent with the fund's 80% investment policy in order to avoid the 
potential for adverse impacts on the price of a targeted investment, to 
scale up an investment, or to find a better investment that corresponds 
to the investment focus relative to what is currently available. 
Nonetheless, we believe that, consistent with current guidance, such a 
period should not exceed 180 consecutive days.\71\ The proposed 
amendments therefore would not permit any fund to exceed 180 
consecutive days to invest its assets consistent with the 80% 
investment requirements when launching a fund.\72\ Further, in effect, 
the proposed amendments would generally require open-end funds to be 
fully invested within a much shorter time than 180 days, consistent 
with the proposed requirement to do so ``as soon as reasonably 
practicable.'' These funds should be able to fully invest in their 
investment focus relatively quickly because they invest in relatively 
liquid assets and because they receive cash from share purchases on an 
ongoing basis. Accordingly, if a new open-end fund were to acquire 
assets at the time of launch that largely mirrored the assets in 
another pre-existing fund in the fund family, but with a different name 
that reflects a different set of investment parameters that would be 
applied to that portfolio in the future, the manager should generally 
adjust the new fund's portfolio to the new parameters in a much shorter 
time than 180 days in accordance with an 80% investment policy based on 
the investment focus the fund's name suggests.
---------------------------------------------------------------------------

    \71\ See Names Rule Adopting Release, supra footnote 2, at n.39 
and accompanying text.
    \72\ Cf. id. at n.40 (stating that, in very limited 
circumstances, it may be appropriate for a closed-end fund that 
invests in securities whose supply is limited to take longer than 
six months to invest offering proceeds).
---------------------------------------------------------------------------

    We request comment on the proposed treatment of temporary 
departures from the 80% investment requirement.
    16. To what extent do funds currently ``drift'' away from the 
investment focus suggested by their name? If they do, to what extent is 
this attributable to the provisions of the current names rule, such as 
the time of investment test? In general, how effective is this 
provision, and the ``under normal circumstances'' provision, at 
addressing materially deceptive or misleading names over time?
    17. Should we limit the exceptions for market fluctuations, 
unusually large cash flows, and temporary defensive positions to 30 
days as proposed or some other amount of time? Does the proposed 30-day 
limit raise any interpretive questions or potential compliance concerns 
the Commission should address in the rule text or as guidance? Are we 
correct in our belief that it will be unusual for funds to need to 
engage in these activities past that period? At what point can it be 
reasonably said that the nature of the fund has changed in these 
circumstances?
    18. Should funds be limited, as proposed, to taking positions in 
cash and cash equivalents or government securities outside of their 80% 
investment policies in the case of a temporary defensive position? Are 
there other investments that funds use to protect the fund in the case 
of adverse market, economic, political, or other conditions? For 
example, should the rule allow funds to invest in securities that are 
similar to these investments? What kinds of investments do funds hold 
currently when taking defensive positions?
    19. Is the requirement to bring a fund back into compliance with 
the 80% investment requirement as soon as reasonably practicable 
appropriate? Is it sufficient to protect against concerns about 
portfolio drift?
    20. Is ``as soon as reasonably practicable'' readily understood? 
Would funds benefit from additional guidance on what would (or would 
not) satisfy this standard? How long would it typically take for a fund 
to come back into compliance with its 80% investment policy where a 
fund asset has increased or decreased in value?
    21. Under the proposed amendments, the 30-day period runs from the 
time the fund invests less than 80% of the value of its assets in 
accordance with its 80% investment policy. Should the rule instead 
specify that it run from the beginning of one of the precipitating sets 
of circumstances that the rule describes?
    22. Under what circumstances do funds currently depart from the 80% 
investment requirement? Are there any circumstances not covered by the 
proposed rule amendments that an investor would expect? For example, 
should we also exempt departures relating to a name or investment 
policy change? If so, how long do these actions typically take? Should 
we limit such departures to 30 days? To what extent do these actions 
typically fall within the definition of ``reorganization'' under the 
Act, for example, by resulting in the sale of 75% or more in value of 
the assets of a fund?
    23. Instead of specifying the circumstances in which a fund may 
depart from the 80% investment requirement, should we retain the 
current provision that an 80% investment policy applies under normal 
circumstances but specify that, in any event, departures may not 
persist for more than 30 days? Would investor expectations be met under 
these circumstances?
    24. Instead of limiting temporary departures (except in the context 
of fund reorganizations or launches) to 30 days, should the rule 
instead provide that, if a temporary departure persists past 30 days, 
the fund's board must approve, or be informed in writing about, the 
temporary departure? If we

[[Page 36605]]

were to require board approval, should we require that a majority of 
the independent directors also approve of the departure? Should the 
approval or written report be required to be given by, or provided to, 
the board immediately, or no later than its next regularly scheduled 
board meeting? To the extent that the rule were to include board 
reporting, should we also require the report to include a 
recommendation from the fund's adviser about whether to rebalance the 
fund's holdings over a longer period of time, or to initiate a name 
change? Should we include a recordkeeping requirement for the report? 
Should we also require reporting to the Commission on a non-public 
basis regarding a departure that lasts longer than 30 days, the reasons 
for the departure, and the adviser's plan to resolve the departure, 
with a follow-up report to the Commission once the departure has been 
resolved? Should we require a fund to notify the board about temporary 
departures even if they do not persist beyond 30 days? For example, 
while funds would be required to include a discussion of material 
compliance matters involving the names rule in their annual reports 
required under rule 38a-1, should we further require that these 
reports, or board reports in connection with regularly scheduled board 
meetings, identify the number of and reason for temporary departures 
during the period covered by the report? \73\
---------------------------------------------------------------------------

    \73\ See supra footnote 17.
---------------------------------------------------------------------------

    25. Does the proposed 30-day limitation create any compliance 
issues with other provisions of the federal securities laws? For 
example, how would a fund address a situation where, in order to meet 
the 30-day limit, it had to invest more than 15% of its net assets in 
illiquid investments, contrary to 17 CFR 270.22e-4 (``rule 22e-4,'' or 
the ``liquidity rule'')? Should we permit temporary departures to 
exceed the 30- or 180-day limits where meeting the 80% investment 
requirement would conflict with the requirements of the liquidity rule, 
and if so, how should we address any attendant investor protection 
concerns? Are there any circumstances when the investments suggested by 
a fund's name become illiquid for more than 30 days?
    26. Should we provide a specific time limit on temporary departures 
relating to fund reorganizations? If so, how long should it be?
    27. Similarly, should we provide a specific time limit on the 
temporary departure where the fund has provided notice to shareholders 
under the rule? If so, should it be 60 days consistent with the rule's 
notice requirements or some other time? Should we extend a similar 
provision to funds with redeemable securities that have suspended 
redemptions under section 22(e) of the Act, or under analogous 
circumstances, such as market closures, for funds that do not issue 
redeemable securities?
    28. Is 180 consecutive days the appropriate time to permit 
temporary departures relating to fund launches? If not, what would be a 
more appropriate time? Should we generally provide different time 
frames depending on the type of fund? For example, should we require a 
shorter period than 180 days for launches of open-end funds, which 
typically invest in relatively liquid assets and which receive cash 
from share purchases on an ongoing basis, to avoid harm to early 
investors in those funds? Is the proposed definition of ``launch'' 
appropriate, or would a different definition (e.g., the date that a 
fund's registration statement becomes effective) be more appropriate?
    29. To what extent do portfolio managers keep funds close to the 
80% investment requirement currently, or do they typically retain some 
buffer above that amount?
    30. How often do different types of funds currently assess 
compliance with an 80% investment policy? Are we correct in our 
assessment that many funds already review their names rule compliance 
daily or on an intraday basis? How does this compliance assessment take 
into account whether characteristics of an investment may have changed 
(e.g., changes in market capitalization of equity holdings, or changes 
with respect to whether a particular holding continues to be an 
investment in a particular industry)? To the extent that certain funds 
generally assess compliance at least daily, does the proposed 
alternative approach to the current time of investment test increase 
investor protection, both for these funds specifically and across the 
fund industry?
    31. Should we make any changes to the proposed temporary departure 
provisions to more specifically address tax-exempt funds? For example, 
should the provisions' 30-day limit specifically address tax-exempt 
funds that adopt a policy to invest their assets so that at least 80% 
of the income they distribute is tax-exempt, given that income 
distributions can be less frequent than monthly? How often do such 
funds engage in temporary departures under the current rule?
3. Considerations Regarding Derivatives in Assessing Names Rule 
Compliance
    We are proposing to address both the valuation of derivatives 
instruments for purposes of determining compliance with its 80% 
investment policy, as well the derivatives that a fund may include in 
its 80% basket. Specifically, the proposed amendments would require 
that, in calculating its assets for purposes of names rule compliance, 
a fund must value each derivatives instrument using its notional 
amount, with certain adjustments discussed below, and reduce the value 
of its assets by excluding cash and cash equivalents up to the notional 
amounts of the derivatives instrument(s).\74\ The proposed amendments 
also would specify that, in addition to any derivatives instrument that 
a fund includes in its 80% basket because the derivatives instrument 
provides investment exposure to the investments suggested by the fund's 
name, the fund may include in its 80% basket a derivatives instrument 
that provides investment exposure to one or more of the market risk 
factors associated with the investments suggested by the fund's 
name.\75\ Accordingly, when a fund determines its compliance with its 
80% investment policy, all derivatives instruments would be included in 
the denominator in the calculation, as well as any derivatives in the 
fund's 80% basket, i.e., the numerator in the calculation. We designed 
these proposed amendments to reflect the investment exposure 
derivatives investments create better and to increase comparability, as 
some funds currently value derivatives instruments using their notional 
amounts for purposes of determining their compliance with the 80% test 
while other funds use market values.\76\ The amendments are designed 
both to allow funds to use names that may more effectively communicate 
their investments and risks to investors and reduce the risk that a 
fund may use derivatives to invest in a manner inconsistent with the 
investment focus suggested by the fund's name.
---------------------------------------------------------------------------

    \74\ See proposed rule 35d-1(g)(2).
    \75\ See proposed rule 35d-1(b)(2).
    \76\ See, e.g., Capital Markets Comment Letter (stating that 
``[i]n practice, however, funds have been inconsistent in how 
derivative investments apply towards the 80% investment requirement: 
while some funds assert that a derivative's notional value is more 
appropriate than its market value for purposes of complying with the 
80% investment policy, many funds employ a derivative's market value 
for the asset-based test'').
---------------------------------------------------------------------------

    Funds currently are permitted to include synthetic instruments, 
such as derivatives instruments, in the fund's 80% basket if the 
synthetic instrument

[[Page 36606]]

has economic characteristics similar to the securities included in the 
80% basket.\77\ A fund, therefore, currently could include derivatives 
with these characteristics along with cash market investments in 
assessing whether 80% of the value of its assets is invested in 
accordance with the investment focus that the fund's name suggests. A 
derivatives instrument's ``value,'' as defined in the Act, however, may 
bear no relation to the investment exposure created by the derivatives 
instrument.\78\ For example, a total return swap on a market index 
generally will have a zero market value at inception, and will change 
in market value based on any appreciation or depreciation in the index, 
not on the fund's investment exposure. A fund entering into a swap or 
other derivative referencing a market index with a notional amount of 
$1 million would achieve the same economic exposure as investing $1 
million in the underlying securities directly, but the swap's market 
value therefore generally would be far smaller than $1 million and 
would not reflect the swap's investment exposure.
---------------------------------------------------------------------------

    \77\ Names Rule Adopting Release, supra footnote 2, at 8511, 
n.13 (stating that the rule's reference to ``investments,'' rather 
than ``securities'' as proposed, would permit a fund in appropriate 
circumstances to include a synthetic instrument in the 80% basket if 
it has economic characteristics similar to the securities included 
in that basket).
    \78\ 15 U.S.C 2(a)(41)(B) (defining ``value,'' in part, as the 
market value of securities for which market quotations are readily 
available and, for all other investments, as fair value as 
determined in good faith by the board of directors).
---------------------------------------------------------------------------

    Further, using a derivatives instrument's market value for purposes 
of assessing names rule compliance could prevent a fund from using a 
name that effectively communicates its investments. Take, for example, 
a fund with the term ``emerging market debt'' in its name. While the 
fund could directly own emerging market debt securities, this could be 
inefficient due to transaction and custody costs, foreign regulatory 
requirements, and reduced liquidity. It may be most efficient for the 
fund to enter into a total return swap that provides economic exposure 
to the emerging market debt securities. However, the swap's market 
value may be a small percentage of the fund's net assets such that the 
fund's emerging market debt investments would not be sufficient to 
comply with the fund's 80% investment policy.
    Moreover, using derivatives instruments' market values for purposes 
of assessing names rule compliance could result in a fund being in 
compliance with the fund's 80% investment policy despite the fund 
having significant exposure to investments that are not suggested by 
the fund's name. For example, a fund with emerging market debt in its 
name could invest 80% of its assets in emerging market debt, but also 
could use derivatives to obtain substantial investment exposure to U.S. 
equities. The fund might satisfy its 80% investment policy using the 
derivatives' market values for this purpose because the market value of 
a fund's derivatives investment can be small and unrelated to its 
investment exposure, as discussed above. But this fund's name could be 
deceptive and misleading if the performance of U.S. equities and not 
emerging market debt were the primary driver of the fund's risk and 
returns.
Use of Derivatives' Notional Amounts
    The names rule is designed to ensure that a fund's investment 
activity supports the investment focus its name communicates, and for 
funds that use derivatives instruments, the investment exposure of 
those derivatives instruments is generally better reflected by a 
derivatives instrument's notional amount than by its market value. For 
most types of derivatives instruments, the notional amount generally 
serves as a measure of a fund's investment exposure to the underlying 
reference asset or metric. A total return swap, for example, can 
provide a return that is the economic equivalent of a direct investment 
in the derivative's reference asset. Accordingly, we are proposing that 
for purposes of determining a fund's compliance with its 80% investment 
policy, the fund must value a derivatives instrument using its notional 
amount with certain adjustments.\79\
---------------------------------------------------------------------------

    \79\ A fund's use of notional amounts when determining the value 
of the fund's assets in the 80% basket would not affect the fund's 
valuation practices under rule 2a-5 under the Act [17 CFR 270.2a-5].
---------------------------------------------------------------------------

    In calculating notional amounts for these purposes, a fund would be 
required to convert interest rate derivatives to their 10-year bond 
equivalents and to delta adjust the notional amounts of options 
contracts. The proposed requirement to convert interest rate 
derivatives to 10-year bond equivalents is designed to result in 
adjusted notional amounts that better represent a fund's exposure to 
interest rate changes.\80\ We believe that, absent this adjustment, 
short-term interest rate derivatives can produce large unadjusted 
notional amounts that may not correspond to large exposures to interest 
rate changes.\81\ Further, the proposed requirement to delta adjust 
options is designed to provide for a more tailored notional amount that 
better reflects the exposure that an option creates to the underlying 
reference asset.\82\ We believe that requiring these tailoring 
adjustments is appropriate for purposes of the names rule in order for 
a fund's 80% investment policy to best reflect the fund's investment 
exposure, which in turn would help ensure that the investment focus a 
fund's name communicates is not materially deceptive or misleading. 
Requiring these adjustments would prevent a fund, for example, from 
including a deep out-of-the money option in its 80% basket to comply 
with its 80% investment policy. In that case, the option's unadjusted 
notional amount would not represent the exposure that the option 
creates to the underlying reference asset at that time.
---------------------------------------------------------------------------

    \80\ See Derivatives Rule Adopting Release, supra footnote 27, 
at section II.E.1.
    \81\ Id.
    \82\ Id.
---------------------------------------------------------------------------

Scope of the Proposed Approach
    Our proposed approach would apply to all of a fund's derivatives 
instruments. That is, when assessing compliance with a fund's 80% 
investment policy, the fund would be required to value all of its 
derivatives positions using notional amounts. The proposed approach 
would apply to both the numerator and the denominator in the 
calculation that the fund would use to determine compliance with its 
80% investment policy.\83\
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    \83\ Our proposed approach to value derivatives instruments 
using their notional amounts does not distinguish between 
derivatives instruments that are assets versus derivatives that are 
liabilities of the fund. For example, assume a fund enters into a 
total return swap based on an index with a notional amount of $100 
million, and that index declines a very small amount. The total 
return swap would be a liability of the fund until the fund 
extinguishes that liability through the payment of variation margin. 
The notional amount of the swap would still reflect the magnitude of 
the fund's investment exposure notwithstanding the fund's then-
current loss on the investment. For this reason, the proposal would 
require funds, in measuring their assets for purposes of names rule 
compliance, to include the notional amount of any derivatives 
instrument, regardless of whether it is an asset or liability of the 
fund.
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Deduction From Assets of Cash and Cash Equivalents Up to Notional 
Amounts
    Funds that use derivatives instruments to gain exposure to the 
markets in which they invest may maintain portions of their assets in 
cash and cash equivalents. For purposes of determining such a fund's 
compliance with its 80% investment policy, our proposed approach would 
require the deduction of cash and cash equivalents from assets (i.e., 
the denominator in the

[[Page 36607]]

80% calculation) up to the notional amounts of the fund's derivatives 
instruments.\84\ This aspect of the proposed approach is designed to 
remove from the calculation cash and cash equivalents, which do not 
themselves provide market exposure, where they effectively function as 
low-risk collateral for the derivatives instruments whose notional 
amounts already are included in the denominator and thus including this 
collateral would effectively ``double-count'' the fund's exposure.\85\ 
That is, where a fund holds derivatives and cash and cash equivalents, 
the fund is obtaining its investment exposure through the derivatives, 
not the cash and cash equivalents, and including both the derivatives 
measured at their notional amounts and the value of the cash and cash 
equivalents would overstate the scale of the fund's market exposure 
obtained through the derivatives instruments. If a fund held 
derivatives and cash market securities, like investments in equity 
securities or bonds, both the notional amounts of the derivatives and 
the value of the securities would be required to be included because 
the fund would be obtaining market exposure through both kinds of 
investments.
---------------------------------------------------------------------------

    \84\ See proposed rule 35d-1(g)(2).
    \85\ Cf. Invesco Comment Letter (recommending that a fund 
electing to include derivatives in its 80% investment policy be 
required to deduct the value of cash and cash equivalents when 
determining the denominator for its 80% test).
---------------------------------------------------------------------------

    Using an example, assume an equity fund enters into an equity swap 
with a notional amount of $80 and holds $80 in U.S. Treasury bills and 
$20 in other securities.\86\ Assume the swap has a market value of $0. 
If the equity fund were to include the notional amount of the swap in 
numerator and in the denominator when determining the fund's compliance 
with its 80% investment policy without excluding the U.S. Treasury 
bills, the fund would not be in compliance with the 80% investment 
requirement ($80 swap notional amount/$180 = 44%). This would be the 
case even though, economically, the fund is achieving an investment 
exposure akin to investing $80 in equity securities directly (i.e., the 
swap could be viewed as a synthetic position in equity securities). If 
the equity fund were to deduct the $80 in U.S. Treasury bills from the 
denominator when determining the fund's compliance with its 80% 
investment policy, the fund would satisfy that requirement ($80 swap 
notional amount/$100 = 80%). By way of contrast, however, assume that 
the fund invests the $80 in corporate debt instead. Now, the fund would 
fail the 80% investment requirement: $80 swap notional amount/$180, 
composed of $80 swap notional + $80 corporate debt + $20 other 
investments = 44%. The equity fund would not predominately have the 
equity exposure that its name would suggest.
---------------------------------------------------------------------------

    \86\ See, e.g., Derivatives Rule Adopting Release, supra 
footnote 27, at text accompanying n.749 (stating that ``[t]he 
Commission has also stated that items commonly considered to be cash 
equivalents include Treasury bills, agency securities, bank 
deposits, commercial paper, and shares of money market funds'').
---------------------------------------------------------------------------

Derivatives Instruments Included in the 80% Basket
    We recognize that, in addition to using derivatives as direct 
substitutes for cash market investments, some funds use derivatives 
instruments to hedge exposures or to obtain exposure to market risk 
factors associated with the fund's investments (for example, interest 
rate risk, credit spread risk, and foreign currency risk). Those 
instruments may have very high notional amounts. For example, a foreign 
equity or bond fund may hold substantial currency forwards or swaps to 
hedge foreign currency risk. If the rule did not allow funds to treat 
the notional amounts of those derivatives instruments as investments 
that reflect the fund's investment focus, the notional amounts of those 
derivatives instruments could cause a fund to fall out of compliance 
with its 80% investment policy. For example, if ABC Foreign Equity Fund 
invested $100 in foreign equity securities, $100 in currency forwards, 
and held no other assets, the fund would not satisfy its 80% investment 
policy if the currency forwards were not included in the fund's 80% 
basket ($100 in foreign equity securities/$100 in foreign equity 
securities + $100 currency forwards = 50%).
    Thus, in addition to any derivatives instrument that the fund 
includes in its 80% basket because it provides investment exposure to 
the investments suggested by the fund's name, our proposed approach 
would permit a fund to include in its 80% basket a derivatives 
instrument that provides investment exposure to one or more of the 
market risk factors associated with the investments suggested by the 
fund's name. As a result, the derivatives instruments included in a 
fund's 80% basket would either be functioning as a substitute for 
direct investments in the securities suggested by the fund's name or 
used to facilitate the fund's investment in those securities by 
increasing or decreasing the fund's exposure to risk factors associated 
with those securities. We believe that our proposed approach would help 
ensure that the fund's use of derivatives would not be inconsistent 
with investors' reasonable expectations of the fund's investment 
activity.
    As illustrated in the example above regarding ABC Foreign Equity 
Fund, a foreign equity fund may hedge currency risks by entering in 
currency forwards with high notional amounts. If these notional amounts 
were not included in the fund's 80% basket, the fund might not be able 
to comply with its 80% investment policy even though the currency 
forwards relate to the foreign equity securities suggested by the 
fund's name. Accordingly, we believe it would be reasonable for a fund 
to include a derivatives instrument in its 80% basket where the 
derivatives instrument provides investment exposure to one or more of 
the market risk factors associated with the investments suggested by 
the fund's name. As another example, the XYZ Corporate Bond Fund, whose 
portfolio includes corporate bonds as well as interest rate swaps to 
manage the portfolio's overall duration, could include the interest 
rate derivatives in its 80% basket.
Comments Received
    Several commenters responding to the 2020 Request for Comment 
addressed the valuation of derivatives in measuring a fund's compliance 
with its 80% investment policy. Many commenters urged the Commission to 
permit funds to use notional amounts to value derivatives instruments 
because a derivatives instrument's market value may bear little 
relation to the fund's investment exposure to the kinds of investments 
suggested by the fund's name.\87\ Further, one commenter suggested 
amendments to the names rule that generally would require a fund that 
includes derivatives in its 80% basket to use the notional value of 
derivatives instruments, adjusted as this proposal reflects, when 
measuring its compliance with its 80% investment policy.\88\ We agree 
with commenters

[[Page 36608]]

that notional amounts better reflect the fund's investment exposure. 
For the reasons discussed above, our proposed approach would require a 
fund to use the notional amounts of its derivatives instruments when 
measuring the fund's compliance with its 80% investment policy.
---------------------------------------------------------------------------

    \87\ See, e.g., BlackRock Comment Letter; Capital Group Comment 
Letter; ICI Comment Letter I; T. Rowe Price Comment Letter.
    \88\ See Invesco Comment Letter (suggesting that a fund should 
generally value a derivatives instrument included in its 80% basket 
using the derivatives instrument's notional value, ``gross up'' the 
denominator in the 80% test to include these derivatives' notional 
amounts, and suggesting adjustments for interest rate derivatives 
and involving the ``delta adjustments'' of the notional value of 
options positions; also suggesting that the fund deduct the value of 
cash and cash equivalents when determining the denominator for its 
compliance with the 80% investment policy requirement); see also 
BlackRock Comment Letter (requesting clarification that the market 
value of cash and cash equivalents should be deemed an eligible 
asset that is included in a fund's 80% basket and considered part of 
the derivatives exposure in determining compliance with a fund's 80% 
investment policy).
---------------------------------------------------------------------------

    In contrast, other commenters suggested that a fund's derivatives 
investments generally should be valued at market value for these 
purposes.\89\ Some commenters stated that this approach better 
indicates price sensitivity, the risks to a fund's portfolio, and 
comparability across funds.\90\ A derivative's market value reflects 
profits and losses that the fund has incurred on any given date, and we 
agree that the concerns that commenters discuss are important for funds 
to consider as part of their valuation and risk management processes. 
However, we believe these topics are less relevant to the names rule's 
policy goal of ensuring that a fund's investments, and the sources of 
the fund's returns, are in line with the investment focus that the 
fund's name reflects. This is because, as discussed above, a fund's 
gains and losses on a derivatives investment do not reflect the 
investment exposure the derivatives create. We also believe that 
transparency regarding a fund's compliance with its 80% investment 
policy and the investments a fund includes in its 80% basket are 
important. Our proposal would provide transparency, which in turn would 
permit additional comparability, in the proposed Form N-PORT reporting 
requirements that would require funds to identify each investment that 
is included their 80% baskets.\91\ Current Form N-PORT reporting 
requirements would continue to provide transparency regarding the 
market value of each of these investments.
---------------------------------------------------------------------------

    \89\ See, e.g., Council of Institutional Investors Comment 
Letter; Nuckolls Comment Letter.
    \90\ Id.
    \91\ See infra section II.F; see also proposed Item C.2.e of 
Form N-PORT.
---------------------------------------------------------------------------

    Another commenter addressed the use of derivatives instruments more 
generally. This commenter suggested that the Commission ``limit'' an 
approach that would permit funds to use notional values for purposes of 
names rule compliance, stating that derivatives instruments have risks 
that differentiate them from cash market holdings.\92\ That commenter 
also stated that it would be misleading or deceptive for a fund to gain 
significant exposure through a derivative to a particular asset class 
but use a name that reflects exposure to a different asset class.\93\ 
Alternatively, a commenter suggested that a fund's name should reflect 
the use of derivatives when a fund uses derivatives frequently or when 
the fund uses derivatives for frequent, non-tactical uses and creates 
exposures equal to or greater than one-third of the total exposures for 
all investment vehicles in the fund's portfolio.\94\
---------------------------------------------------------------------------

    \92\ Consumer Federation of America Comment Letter.
    \93\ Id.
    \94\ CFA Institute Comment Letter.
---------------------------------------------------------------------------

    We agree that funds' use of derivatives presents unique risks. 
After the compliance date of rule 18f-4 (17 CFR 270.18f-4), funds that 
enter into derivatives under that rule will be required to satisfy that 
rule's conditions.\95\ We do not believe that a fund's name generally 
would provide such specific information about fund risks--such as 
differences in risks between derivatives and cash-market investments--
which instead must be disclosed in a fund's prospectus. Particularly 
where a fund name refers to asset classes like ``equity'' or 
``credit,'' investors might not form specific expectations about how 
the fund would obtain that investment exposure--in contrast to fund 
names that refer to categories of instruments like ``stock'' that may 
result in these types of investor expectations.
---------------------------------------------------------------------------

    \95\ See Derivatives Rule Adopting Release, supra footnote 27.
---------------------------------------------------------------------------

    However, we do agree that it could be misleading or deceptive for a 
fund to gain significant exposure through a derivatives instrument to a 
particular asset class but use a name that reflects exposure to a 
different asset class. Our proposed approach is designed to address 
this concern, in requiring a fund to value all of its derivatives 
instruments using their notional amounts for purposes of determining 
names rule compliance as this would better reflect the investment 
exposure of all of the fund's derivatives investments.
    We request comment on our proposed approach with regard to the 
valuation of derivatives instruments when assessing the fund's 
compliance with its 80% investment policy, as well as the derivatives 
that a fund may include in its 80% basket:
    32. Is it appropriate to require a fund to use a derivatives 
instrument's notional amount, with certain adjustments, and to reduce 
the value of its assets for this purpose by excluding any cash and cash 
equivalents up to the notional amount of the derivatives instrument, as 
proposed? Are there circumstances in which the use of market values 
would be more appropriate, and if so, what are these circumstances? 
Should we restrict the use of notional amounts in cases where investors 
place importance on the fund holding the underlying assets, as opposed 
to cases where investors place importance on the exposures that the 
fund's investments create? How would we identify those cases? For 
example, should we limit the extent to which an ESG-focused fund, or 
some subset of ESG-focused funds, may use derivatives' notional 
amounts? Alternatively, rather than focusing on the fund's financial 
exposure, should we, for example, focus on measures of risk? If so, 
which risk measures would be most effective for this purpose and why?
    33. Is it appropriate to require a fund to convert the notional 
amounts of interest rate derivatives into 10-year bond equivalents and 
to delta adjust the notional amounts of options contracts for purposes 
of determining compliance with the 80% investment policy, as proposed? 
Are there compliance or other challenges associated with the proposed 
approach for interest rate derivatives and options contracts? Are there 
additional adjustments that should be made for purposes of assessing a 
fund's compliance with its 80% investment policy? Should we permit 
these adjustments rather than require them? Is it sufficiently clear 
that funds would eliminate from the calculation closed-out derivatives 
positions, that is, derivatives that were closed out with the same 
counterparty and result in no credit or market exposure to the fund, or 
should the rule address these positions? What positions do funds treat 
as closed-out currently when determining compliance with the names 
rule?
    34. For purposes of determining a fund's compliance with its 80% 
investment policy, we are proposing that the fund reduce the value of 
its assets by excluding any cash and cash equivalents up to the 
notional amount of the derivatives instruments. Is this reduction 
appropriate? Does this exclusion of cash and cash equivalents up to the 
notional amount of the derivatives instruments reduce the value of the 
fund's assets by too much or too little? Are there other low-risk 
collateral investments that may be used for cash management, such as 
short-term bonds, that also should be excluded for this purpose? Should 
only assets that may be used as collateral for

[[Page 36609]]

derivatives instruments be excluded for this purpose? If so, how should 
we determine if those assets may be used as collateral for derivatives 
instruments? Alternatively, rather than excluding cash and cash 
equivalents from the value of assets, should we permit a fund to 
include in its 80% basket cash and cash equivalents used as collateral 
for derivatives instruments that provide synthetic exposure to the type 
of investment(s) in which the fund's name suggests a focus?
    35. As proposed, the derivatives valuation approach would apply not 
only to non-tax-exempt funds that are required to adopt an 80% 
investment policy, but also to funds that have adopted a policy to 
invest at least 80% of the value of their assets in investments the 
income from which is exempt, as applicable, from federal income tax or 
from both federal or state income tax. We are not aware of 
circumstances in which the returns of a derivatives instrument 
referencing a tax-free security are themselves tax-free. Are there such 
circumstances? If not, should we specifically exclude tax-exempt funds 
from the requirement to use derivative instruments' notional amounts 
for purposes of determining their assets under the names rule?
    36. Should we permit, rather than require as proposed, a fund to 
use notional amounts of derivatives instruments for purposes of 
determining the fund's compliance with its 80% investment policy? If 
so, are there any limits that the rule should include--or guidance the 
Commission should provide--on funds' ability to use notional amounts 
for these purposes, or to switch between notional and market values? 
For example, should a fund that chooses to use notional amounts to 
value derivatives instruments for purposes of determining names rule 
compliance, but then later chooses to use their market value for these 
purposes, be required to provide prior notice to investors, for 
example, 60 days before the change were effected? Would investors find 
such information helpful? Should the fund's board be informed of, or 
approve, such a change?
    37. Would permitting the use of notional amounts, rather than 
requiring this approach, as proposed, result in a fund valuing similar 
derivatives instruments differently for purposes of complying with the 
fund's 80% investment policy? Should a fund be permitted to value 
similar derivatives instruments differently for purposes of complying 
with the fund's 80% investment policy as long as the fund discloses 
that difference in its prospectus? Would an investor find that 
disclosure helpful?
    38. Are there operational or interpretive challenges associated 
with the proposed approach to addressing derivatives instruments in the 
names rule, and if so, what are these and how should the Commission's 
rules and/or guidance address those challenges?
    39. If a fund were to use derivatives instruments to obtain 
exposure to short positions in one or more reference assets, the 
proposed amendments would require a fund to use these derivatives 
instruments' notional amounts for purposes of determining compliance 
with its 80% investment policy. These investments therefore would be 
valued at their notional amounts in the denominator in all cases, and 
at their notional amounts in the numerator where the fund includes 
investments that provide short exposure in the numerator. Is this 
treatment appropriate, or would the use of market values for short 
positions in the context of assessing names rule compliance be more 
appropriate? If funds currently subject to the 80% investment policy 
requirement include short positions in their 80% baskets, how are these 
positions valued for these purposes (e.g., using the value of the short 
position, the value of the asset sold short, or if the fund obtains 
short exposure using derivatives, the derivatives' notional amounts)? 
Should the names rule address the valuation of physical short sales, 
and if so, how should these be valued for purposes of assessing names 
rule compliance? Should we provide in the rule that, for purpose of the 
names rule, a short sale's value is the value of the security or other 
asset sold short? Would that provide reasonably comparable treatment 
for physical short sales and derivatives that provide short investment 
exposure? Should the rule prohibit a fund from including derivatives 
instruments in its 80% basket when those instruments provide inverse 
exposure to the investments suggested by the fund's name?
    40. In addition to any derivatives instrument that the fund 
includes in its 80% basket because it provides investment exposure to 
the investments suggested by the fund's name, we are proposing to 
permit a fund to include in its 80% basket derivatives instruments that 
provide investment exposure to one or more of the market risk factors 
associated with the investments suggested by the fund's name. What 
types of funds, and derivatives use, would be implicated by our 
proposed approach? Would this proposed approach raise investor 
protection issues? Alternatively, should we require, rather than 
permit, a fund to include in its 80% basket derivatives instruments 
that provide investment exposure to one or more of the market risk 
factors associated with those investments? Are there circumstances in 
which exposure to associated risk factors provided by the derivatives 
instruments may be contrary to, or otherwise different from, the 
investments suggested by the fund's name and should not be permitted?
    41. Are there limits to the derivatives instruments that a fund 
should be permitted to include in its 80% basket because they provide 
investment exposure to one or more of the market risk factors 
associated with the investments suggested by a fund's name? For 
example, should the rule permit a fund only to include derivatives 
instruments in its 80% basket when they hedge currency or interest rate 
risks associated with one or more specific investments that the fund 
holds in its 80% basket?
    42. A fund's name generally does not provide investors with 
specific information about fund risks, such as differences in risks 
between derivatives and cash-market investments--which instead must be 
disclosed in a fund's prospectus. However, where a fund's name refers 
to certain asset classes, for example ``stocks'' and ``bonds,'' do 
investors form specific expectations about how the fund would obtain 
that investment exposure? In those cases, should we prohibit a fund 
from including derivatives in its 80% basket on the basis that 
investors expect the fund to invest directly in those kinds of 
securities in the cash markets? Alternatively, should we require a fund 
that includes derivatives instruments in the fund's 80% basket to 
include ``derivatives'' (or similar terminology) in its name? Are there 
other cases where we should require a fund that includes derivatives 
instruments in the fund's 80% basket to include this type of 
terminology in its name?
    43. In addition to derivatives, are there other asset types or 
instruments that would benefit from more clarification about how they 
should be valued for purposes of determining compliance with the fund's 
80% investment policy?
4. Unlisted Closed-End Funds and BDCs
    We are proposing to require that a fund's 80% investment policy 
must always be a fundamental investment policy if the fund is a 
registered closed-end investment company or BDC that does not have 
shares that are listed on a national securities exchange (together,

[[Page 36610]]

``unlisted closed-end funds and BDCs'').\96\ A ``fundamental investment 
policy'' under the proposed rule amendments would be a policy adopted 
under section 8(b)(3) of the Act or, if the fund is a BDC, a policy 
that is changeable only if authorized by the vote of a majority of the 
outstanding voting securities of the fund.\97\ As a result, unlisted 
closed-end funds and BDCs would not be permitted to change their 80% 
investment policies without shareholder approval.
---------------------------------------------------------------------------

    \96\ See proposed rule 35d-1(a)(2)(ii).
    \97\ Proposed rule 35d-1(g)(6). Section 8(b)(3) of the Act 
requires a registered investment company to recite all of its 
policies that it deems matters of fundamental policy in its 
registration statement. For a registered investment company, section 
13(a)(1) of the Act requires a vote of a majority of its outstanding 
voting securities for changes to policies adopted under section 
8(b)(3). The proposed amendments would only permit BDCs to change 
such policies if authorized by the vote of a majority of the 
outstanding voting securities of the BDC.
---------------------------------------------------------------------------

    Under the current rule, unless a fund's name suggests that it is a 
tax-exempt fund, an unlisted closed-end fund's or BDC's 80% investment 
policy must either be a fundamental policy or subject to a requirement 
in the rule to provide shareholders 60-days' advance notice of any 
change in the policy. The Commission permitted funds to provide 
shareholders advance notice, in lieu of adopting a fundamental policy, 
because the advance notice would provide shareholders sufficient time 
to decide whether to redeem their shares in the event that the 
investment company decides to pursue a strategy involving a different 
investment focus.\98\ Unlisted closed-end funds and BDCs, however, do 
not issue redeemable shares or list their shares on a national 
securities exchange. A shareholder in an unlisted closed-end fund or 
BDC generally will have no ready recourse, such as the ability to 
redeem or quickly sell their shares, if the fund were to change its 
investment policy and the investment focus that the fund's name 
indicates.\99\ We therefore do not believe that advance notice is 
effective in the case of unlisted closed-end funds and BDCs because 
their shareholders generally cannot use the time provided by the notice 
to exit their investments if they do not wish to remain invested after 
the change in the fund's investment policy. For example, absent this 
proposed change, these funds could launch with one name and 
corresponding 80% investment policy but then change that policy with 
little to no recourse for their shareholders. The proposal would 
address this by ensuring that investors in unlisted closed-end funds 
and BDCs would be able to vote on a change in investment policy in 
light of their limited options to exit their investments if the change 
were made.
---------------------------------------------------------------------------

    \98\ Names Rule Adopting Release, supra footnote 2, at n.19 and 
accompanying text.
    \99\ While unlisted closed-end funds and BDCs often offer a 
periodic issuer repurchase tender offer, these can be discretionary 
on behalf of the issuer or adviser, only offered at specific 
intervals (e.g., quarterly), and limited to a certain percentage or 
amount to repurchase, such as participation in the issuer's dividend 
re-investment program. See, e.g., FS Energy and Power Fund, SEC 
Staff No-Action Letter (Jan. 10, 2012), available at https://www.sec.gov/divisions/marketreg/mr-noaction/2012/fsenergy-011012.pdf 
(discussing one such BDC's repurchase program). These share 
repurchases can take an extended period of time, and shareholders 
may be unable to fully divest their shares.
---------------------------------------------------------------------------

    We request comment on the proposed requirement for unlisted closed-
end funds and BDCs that any 80% investment policy they adopt in 
compliance with the names rule must be a fundamental investment policy.
    44. Should we expand this requirement to any other type of fund? 
For example, secondary-market liquidity for some listed closed-end 
funds and BDCs may not be sufficient for shareholders to exit their 
investments within the 60-day notice period without needing to sell at 
a price that represents a significant discount from net asset value 
either because of the introduction of significant new sell-side 
interest or because of an existing discount in the market. Should we 
require that any 80% investment policy that these funds adopt also be a 
fundamental investment policy?
    45. Are there any unlisted closed-end funds or BDCs for which our 
proposed approach may be less necessary to address investor protection 
considerations? For example, are there any unlisted closed-end funds or 
BDCs that offer shareholders liquidity through discretionary repurchase 
programs sufficient to allow shareholders to tender all of their shares 
within the 60-day notice period?
    46. As an alternative to this requirement, should we require longer 
advance notice than 60 days for these funds? If so, what length of time 
would be necessary for shareholders to exit their investments? Further, 
should we not require fundamental policies of unlisted interval funds 
that provide advance notice and make a discretionary repurchase offer 
under 17 CFR 270.23c-3(c) for their outstanding shares? Would the 
current regulatory limits on interval funds' repurchases affect the 
investor protection considerations of this alternative approach?
    47. Should potential barriers to exit be the primary consideration 
underlying whether we require funds' names rule investment policies to 
be fundamental investment policies? For example, should we only require 
unlisted closed-end funds or BDCs to adopt their names rule investment 
policies as fundamental investment policies, and remove the current 
requirement for tax-exempt funds' names rule investment policies to be 
fundamental investment policies?
    48. Should we require any other protections for investors in 
unlisted closed-end funds and BDCs? For example, should we mandate that 
these funds must make an issuer tender offer or a repurchase offer when 
they change an 80% investment policy and are not already required to 
redeem their shares? Should we offer this as an alternative in the 
names rule to the proposed fundamental policy requirement? If so, how 
much should we require these funds to offer to repurchase, for example, 
100% or some other percentage?
5. Effect of Compliance With an 80% Investment Policy
    We are proposing a new provision in the names rule providing that a 
fund's name may be materially deceptive or misleading under section 
35(d) even if the fund adopts an 80% investment policy and otherwise 
complies with the rule's requirement to adopt and implement the 
policy.\100\ The Commission has previously stated that the names rule's 
80% investment policy requirement is not intended to create a safe 
harbor for fund names, and we are proposing to codify this view to make 
clear that a fund name may be materially deceptive or misleading even 
where the fund complies with its 80% investment policy.\101\
---------------------------------------------------------------------------

    \100\ Proposed rule 35d-1(c).
    \101\ Names Rule Adopting Release, supra footnote 2 (``We note, 
however, that the 80% investment requirement is not intended to 
create a safe harbor for investment company names. A name may be 
materially deceptive and misleading even if the investment company 
meets the 80% requirement.'').
---------------------------------------------------------------------------

    The rule requires, and proposed rule amendments would continue to 
require, a fund to invest at least 80% of its assets consistent with 
its name, but do not prescribe how the fund invests the remaining 20%. 
A fund's name could be materially deceptive or misleading for purposes 
of section 35(d) if, for example, a fund complies with its 80% 
investment policy but makes a substantial investment that is 
antithetical to the fund's investment focus (e.g., a ``fossil fuel-
free'' fund making a substantial investment in an issuer with fossil 
fuel reserves). Similarly, a fund's name could be materially deceptive 
or misleading for purposes of section 35(d) if the fund invests in a 
way such that the source of

[[Page 36611]]

a substantial portion of the fund's risk or returns is different from 
that which an investor reasonably would expect based on the fund's 
name, regardless of the fund's compliance with the requirements of the 
names rule (e.g., a short-term bond fund using the 20% basket to invest 
in highly volatile equity securities that introduce significant 
volatility into a fund that investors would expect to have lower levels 
of volatility associated with short-term bonds). In discussing fund 
names that may be materially deceptive and misleading notwithstanding 
the fund's compliance with its 80% investment policy, the Commission 
previously stated that index funds generally would be expected to 
invest more than 80% of the value of their assets in investments 
connoted by the applicable index.\102\ As noted in the 2020 Request for 
Comment, a fund may be invested 80% or more in an index included in the 
fund's name, but that underlying index may have components that are 
contradictory to the index's name. In such circumstances, even though 
the fund meets the names rule requirements by its investments in the 
index, the name could still be materially misleading or deceptive.\103\ 
As a final example, a fund that is perpetually out of compliance with 
the 80% investment requirement on account of temporary departures may 
have a name that is materially deceptive or misleading under section 
35(d) even if each temporary departure is permissible under the rule.
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    \102\ See Names Rule Adopting Release, supra footnote 2, at 
section II.A.1 (also stating that a UIT with a name indicating that 
its distributions are tax-exempt may have a misleading name even if 
it invests 80% of its assets in tax-exempt investments).
    \103\ See also, e.g., IRC Comment Letter; Silent Majority 
Comment Letter; PIABA Comment Letter (recommending treating names of 
indexes used in fund names the same as fund names themselves). But 
see BlackRock Comment Letter; Invesco Comment Letter; SIFMA AMG 
Comment Letter (recommending the Commission clarify that index funds 
can meet their 80% investment policies if they invest 80% of the 
value of their assets in the constituents of the underlying index).
---------------------------------------------------------------------------

    We request comment on the proposed provision stating that technical 
compliance with an 80% investment policy does not cure a fund name that 
is otherwise materially deceptive or misleading.
    49. Should we codify in the rule, as proposed, the position that 
the names rule's 80% investment policy requirement is not intended to 
create a safe harbor for fund names? Is the proposed provision clear?
    50. Under what circumstances would a fund's name be misleading or 
deceptive under section 35(d) even where the fund complies with its 80% 
investment policy? Should we identify any of these circumstances in the 
rule? For example, when a fund uses terminology such as ``XYX-free'' in 
its name, or any similar terminology suggesting exclusionary screens in 
its investment selection process, would the fund's name be materially 
deceptive or misleading if the fund's portfolio were to include 
investments, in any amount, that contradict this terminology? As 
another example, should the rule define a fund's name as materially 
deceptive or misleading if the name includes the term ``XYX Index,'' 
where the fund's 80% basket investments include components of the XYZ 
Index, but those component securities themselves are not closely tied 
to the type of investments suggested by the ``XYZ'' term in the fund's 
name? Conversely, should the rule specify that a fund's 80% investment 
policy meets the requirements of the rule if the fund invests 80% or 
more of the value of its assets in the components of the underlying 
index, regardless of whether that index has components that are not 
closely tied to the type of investments suggested by the ``XYZ'' term 
in the fund's name?
    51. Should the rule require certain funds, such as index funds, to 
invest a greater percentage of their assets in the investments 
suggested by the fund's name (e.g., 95%)? As another example, should 
ESG-focused funds be subject to a greater percentage (e.g., 95%) than 
the proposed 80%? Why or why not?

B. Prospectus Disclosure Defining Terms Used in Fund Name

    We are proposing amendments to funds' registration forms--
specifically, Form N-1A, Form N-2, Form N-8B-2, and Form S-6--that 
would require each fund that is required to adopt and implement an 80% 
investment policy to include disclosure in its prospectus that defines 
the terms used in its name, including the specific criteria the fund 
uses to select the investments that the term describes, if any.\104\ We 
are also proposing a requirement that funds must tag new information 
that would be included using a structured data language (specifically 
Inline eXtensible Business Reporting Language or ``Inline XBRL'').\105\ 
For purposes of the proposed disclosure requirements, ``terms'' would 
mean any word or phrase used in a fund's name, other than any trade 
name of the fund or its adviser, related to the fund's investment focus 
or strategies. However, words like ``fund'' or ``portfolio'' in a 
fund's name do not describe an investment focus or strategy and would 
not need to be defined. The proposed amendments are designed to help 
investors better understand how the fund's investment strategies 
correspond with the investment focus that the fund's name suggests, as 
well as to provide additional information about how the fund's 
management seeks to achieve the fund's objective.
---------------------------------------------------------------------------

    \104\ See proposed instruction to Item 4(a)(1) of Form N-1A; 
proposed instruction to Item 8(2) of Form N-2; and proposed 
instruction to Item 11 of Form N-8B-2.
    \105\ See General Instruction C.3.(g) of Form N-1A; General 
Instruction I of Form N-2; proposed General Instruction 2.(l) of 
Form N-8B-2; and proposed General Instruction 5 of Form S-6; see 
also infra footnote 114.
---------------------------------------------------------------------------

    Neither the names rule nor funds' registration forms currently 
incorporate a general requirement for a fund that is subject to the 
names rule to include disclosure in its prospectus defining the terms 
used in the fund's name. However, the names rule does currently include 
this requirement for funds with names suggesting investment in 
particular countries or geographic regions.\106\ These funds must 
disclose in their prospectuses the specific criteria used by the fund 
to select these investments.
---------------------------------------------------------------------------

    \106\ See rule 35d-1(a)(3)(ii).
---------------------------------------------------------------------------

    Similarly, in adopting the names rule, the Commission stated that a 
fund that is subject to the rule's 80% investment policy requirement 
should disclose this policy as one of its principal investment 
strategies in its prospectus.\107\ Further, the Commission also stated 
that, generally, a fund may use any reasonable definition of the terms 
used in its name and should define the terms used in its name in 
discussing its investment objectives and strategies in the 
prospectus.\108\ Therefore, although there is not currently a general 
requirement for funds to define the terms used in their names, we 
understand that it is currently common practice for funds to include 
prospectus disclosure that describes their 80% investment policies and 
that defines any terms that their names include. The amendments we are 
proposing would codify certain best practices of some funds that 
currently provide disclosure defining terms used in a fund's name.\109\

[[Page 36612]]

The proposed disclosure requirement would not, however, otherwise alter 
or address disclosure that funds currently provide, for example in 
response to prospectus disclosure requirements regarding the fund's 
investment policies.
---------------------------------------------------------------------------

    \107\ See Names Rule Adopting Release, supra footnote 2, at 
n.15.
    \108\ See id. at n.43; see also section 8(b) of the Act 
(requiring a registered investment company's registration statement 
to contain certain information, including a recital of its 
investment policies).
    \109\ Codifying these practices might especially be helpful for 
a fund that relies on rule 498 under the Securities Act of 1933 to 
send a summary prospectus, since such a fund would include only 
content that the form requirements specifically require or permit to 
be included in the summary prospectus. The proposal would amend Item 
4 of Form N-1A, which is one of the items that is required to be 
included in a summary prospectus that an open-end fund uses. See 
rule 498(b)(2) under the Securities Act of 1933 [17 CFR 
230.498(b)(2)]; see also Enhanced Disclosure and New Prospectus 
Delivery Option for Registered Open-End Management Investment 
Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) 
[74 FR 4546 (Jan. 26, 2009)] (permitting the use of a summary 
prospectus by registered open-end management investment companies).
---------------------------------------------------------------------------

    Understanding how terms used in a fund's name are understood by the 
fund's investment manager is key information that an investor needs to 
make an investment decision, as this will help the investor understand 
whether the investment focus the name suggests is consistent with the 
investor's investment goals and risk tolerance. There are many types of 
fund names for which understanding additional detail about how these 
terms are defined would provide greater clarity to an investor about 
the investment focus that the name suggests. We are therefore proposing 
to replace the specific disclosure requirement for fund names focusing 
on particular countries or geographic regions with the general 
requirement to define terms used in the fund's name whenever the fund's 
name suggests an investment focus requiring an 80% investment policy.
    Funds have flexibility to use reasonable definitions of the terms 
that their names use. A fund's use of reasonable definitions of the 
terms used in the fund's name may not, however, under the proposed rule 
otherwise change the meaning of these terms to be inconsistent with 
their plain English meaning or established industry use.\110\ As 
discussed above, definitions should have a meaningful nexus between the 
term used in the fund's name and the fund's investment focus.\111\ 
However, there could be multiple reasonable definitions of the same 
term that multiple funds use in their names, so understanding 
additional detail about these definitions would help investors better 
distinguish among funds.\112\ For example, multiple funds may include 
the term ``large-cap'' in their name to indicate that they invest in 
``large-capitalization'' stock. There could be multiple reasonable 
definitions of the term ``large cap,'' however, because these funds may 
have different ways of analyzing pertinent references (including, for 
example, common indices, classifications used by rating organizations, 
and definitions used in financial publications).
---------------------------------------------------------------------------

    \110\ See proposed rule 35d-1(a)(2)(iii) and 35d-1(a)(3)(ii); 
see also infra section II.C (discussion of the proposed requirement 
that terms used in a fund's name be consistent with those terms' 
plain English meaning or established industry use).
    \111\ See supra discussion accompanying footnote 52. Commission 
staff could request information from the fund regarding the fund's 
basis for determining that the fund name is sufficiently consistent 
with the definitions provided, just as staff currently may request 
information from a fund to support its disclosure reflecting the 
fund's compliance with various provisions of the Act and rules 
thereunder.
    \112\ See supra section II.A.1 discussing how a fund may make 
determinations for what investments are appropriate for the 80% 
basket.
---------------------------------------------------------------------------

    We are proposing to require that all funds that would be subject to 
the proposed new prospectus disclosure requirements would have to tag 
the information we are proposing to require funds disclose on their 
registration forms in a structured, machine-readable data 
language.\113\ The proposed requirements would include block text 
tagging of narrative information about a fund's 80% investment policy 
and the terms used in its name, including the specific criteria the 
fund uses to select the investments that the term describes, if any. 
Specifically, we are proposing to require funds to tag the disclosures 
in Inline XBRL in accordance with Rule 405 of Regulation S-T (17 CFR 
232.405) and the EDGAR Filer Manual.\114\
---------------------------------------------------------------------------

    \113\ Many funds are already required to tag certain 
registration statement disclosure items using Inline XBRL. See infra 
footnote 115. However, UITs that register on Form N-8B-2 and file 
post-effective amendments on Form S-6 are not currently subject to 
any tagging requirements. The costs of these requirements for funds 
that are currently subject to tagging requirements and those that 
newly would be required to tag certain disclosure items are 
discussed in the Economic Analysis and the Paperwork Reduction Act 
Analysis sections below. See infra discussion in sections III.D.2 
and IV.E.
    \114\ This proposed tagging requirement would be implemented by 
including cross-references to rule 405 of Regulation S-T in each 
applicable fund registration form (and, as applicable, updating 
references to those fund registration forms in rule 11 and rule 405 
in those fund registration forms that currently require certain 
information to be tagged in Inline XBRL--that is, Form N-1A and Form 
N-2), by revising rule 405(b) of Regulation S-T to include the 
proposed names rule disclosures, and by proposing conforming 
amendments to rule 485 and rule 497 under the Securities Act. 
Pursuant to rule 301 of Regulation S-T, the EDGAR Filer Manual is 
incorporated by reference into the Commission's rules. In 
conjunction with the EDGAR Filer Manual, Regulation S-T governs the 
electronic submission of documents filed with the Commission. Rule 
405 of Regulation S-T specifically governs the scope and manner of 
disclosure tagging requirements for operating companies and 
investment companies, including the requirement in rule 405(a)(3) to 
use Inline XBRL as the specific structured data language to use for 
tagging the disclosures.
---------------------------------------------------------------------------

    Many funds are already required to tag certain registration 
statement disclosure items using Inline XBRL.\115\ Requiring Inline 
XBRL tagging of names rule disclosure for all funds that would be 
subject to this disclosure requirement would benefit investors, other 
market participants, and the Commission by making the disclosures more 
readily available and easily accessible for aggregation, comparison, 
filtering, and other analysis, as compared to requiring a non-machine-
readable data language such as ASCII or HTML. This would enable 
automated extraction and analysis of granular data about how funds are 
defining the terms used in their names, allowing investors and other 
market participants to more efficiently perform large-scale analysis 
and comparison across funds and time periods. An Inline XBRL 
requirement would facilitate other analytical benefits, such as more 
easily extracting and searching disclosures about funds' names and 
their 80% investment policies (rather than having to manually run 
searches for these disclosures through entire documents), and 
automatically comparing these disclosures against prior periods. We 
believe requiring structured data for the new names-related disclosure 
for all funds that would be subject to these disclosure requirements 
would make this disclosure more readily available, accessible, and 
comparable for investors, other market participants, and the 
Commission.
---------------------------------------------------------------------------

    \115\ The Commission has adopted rules requiring funds 
registering on Forms N-1A and N-2 to submit certain information 
using Inline XBRL format. See, e.g., Interactive Data to Improve 
Financial Reporting, Release No. 33-9002 (Jan. 30, 2009) [74 FR 6776 
(Feb. 10, 2009)] as corrected by Release No. 33-9002A (Apr. 1, 2009) 
[74 FR 15666 (Apr. 7, 2009)] (requiring, among other things, open-
end funds to provide risk/return summary information from their 
prospectuses in XBRL format); Inline XBRL Filing of Tagged Data, 
Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)]; 
Securities Offering Reform for Closed-End Investment Companies, 
Release No. 33-10771 (Apr. 8, 2020) [85 FR 33290 (Jun. 1, 2020)]; 
Filing Fee Disclosure and Payment Methods Modernization, Release No. 
33-10997 (Oct. 13, 2021) [86 FR 70166 (Dec. 9, 2021)].
---------------------------------------------------------------------------

    We request comment on the proposed amendments to prospectus 
disclosure requirements regarding funds' definition of the terms used 
in their names.
    52. Are the proposed new instructions in the applicable fund 
registration forms requiring funds to define the terms used in their 
names appropriate and clear? Would the proposed amendments help meet 
the needs of investors to better understand how the fund's investment 
strategies correspond with the investment focus that the fund's name 
suggests as well as provide additional information about how the fund's

[[Page 36613]]

management seeks to achieve the fund's objective?
    53. Should the proposed prospectus disclosure requirements be 
applicable, as proposed, to registrants on Form N-1A, Form N-2, Form N-
8B-2, and Form S-6? If some types of funds should be exempt, have 
different disclosure requirements, or not be subject to the proposed 
structured data requirement, which and why?
    54. Would it be helpful and appropriate to revise the proposed 
instruction to expressly provide that a fund must use a reasonable 
definition of the terms used in its name?
    55. Is the definition of ``terms'' in the proposed instructions 
sufficiently clear? Should these proposed instructions use another word 
instead of ``terms'' or define the word ``terms'' differently? If so, 
what should this alternate definition be and how should we define it?
    56. Should we require all funds that would be subject to the 
proposed new prospectus disclosure requirements to tag the newly-
required information in Inline XBRL, as proposed? Why or why not?
    57. Should we require funds to use a different structured data 
language to tag the proposed disclosure on fund names? Why or why not? 
If so, what structured data language should we require?

C. Plain English/Established Industry Use Requirement

    For funds that are required to adopt an 80% investment policy, we 
are proposing to require that any terms used in the fund's name that 
suggest either an investment focus, or that such fund is a tax-exempt 
fund, must be consistent with those terms' plain English meaning or 
established industry use.\116\ This requirement is designed to provide 
investors with a better understanding of the fund and its investment 
objectives by effectively requiring a fund's name to be consistent with 
a reasonable investor's likely understanding of the investment focus or 
tax status that the fund's name suggests.
---------------------------------------------------------------------------

    \116\ See proposed rule 35d-1(a)(2)(iii) and 35d-1(a)(3)(ii).
---------------------------------------------------------------------------

    The proposed plain English or established industry use requirement 
would address concerns that a fund sponsor may subvert an investor's 
reasonable expectations of a fund's investment focus by using 
terminology in the fund's name in a manner that is inconsistent with 
the plain English or established industry use. The proposed amendments 
similarly reflect our belief that a name's meaning should not be 
permitted to be materially altered by fund disclosure. For example a 
fund that calls itself a ``solar energy fund'' would not be able to use 
disclosure to qualify the name in the prospectus by stating that the 
fund's 80% basket includes investments in the securities of any type of 
alternative energy company. While we understand that certain terms may 
be defined in multiple reasonable ways, we believe that defining a 
given term in a fund's name in a way that is inconsistent with those 
terms' plain English meaning or established industry use is misleading 
for investors. The proposed amendments would define these names as 
materially deceptive or misleading even if the fund's prospectus 
disclosure defines a given term in the name to match the fund's 
investments.
    We received comments on the 2020 Request for Comment that 
identified this issue and stated that funds should not be able to use 
disclosure to ``cure'' misleading names.\117\ Under the proposed 
amendments, disclosure would not be permitted to ``fix'' or ``remedy'' 
a misleading name that uses terms in a way that is inconsistent with 
their plain English meaning or established industry use, and therefore 
contrary to reasonable expectations. This is consistent with section 
35(d), which addresses fund names specifically and without regard to 
other disclosure. It also is consistent with the Commission's belief 
that a fund's name may communicate a great deal to an investor, even 
though investors should not rely on the name as the sole source of 
information about the fund's investments and risks.
---------------------------------------------------------------------------

    \117\ See, e.g., Consumer Federation Comment Letter; Duffy 
Comment Letter; McPhee, Jason K. Comment Letter.
---------------------------------------------------------------------------

    We seek comment on the proposed plain English and established 
industry use requirement:
    58. Should the names rule include the proposed requirement that 
terms used in a fund's name must be consistent with the terms' plain 
English meaning or established industry use?
    59. Is the proposed requirement clear? Is Commission guidance 
needed to clarify the requirement? If so, what guidance would be 
helpful? Are there standards that should be considered with respect to 
what is plain English and/or established industry use?
    60. Are there any terms that could be consistent with established 
industry use that would not be consistent with those terms' plain 
English meaning or the understanding of a reasonable investor? If so, 
what terms, and how should we address these?
    61. Would current funds be required to change their names or 
disclosure if the plain English/established industry use requirement is 
adopted as proposed?
    62. Would the proposed plain English requirement encourage funds to 
select names (or cause them to have to change their names to new names) 
that could be less informative to investors? For example, would the 
proposed requirement result in overly-broad or neutral names that may 
be less helpful to investors?

D. Materially Deceptive and Misleading Use of ESG Terminology in 
Certain Fund Names

    As approaches to ESG investing vary, and investment products that 
incorporate one or more ESG factors vary in the extent to which ESG 
factors are considered versus other factors, the use of ESG or similar 
terminology in fund names would deceive and mislead investors where the 
identified ESG factors do not play a central role in the fund's 
strategy. Accordingly, our proposed amendments would address what we 
refer to in this release as ``integration funds,'' and would define the 
names of ``integration funds'' as materially deceptive and misleading 
if the name includes terms suggesting that the fund's investment 
decisions incorporate one or more ESG factors.
    As used in this release, integration funds are funds that consider 
one or more ESG factors alongside other, non-ESG factors in the fund's 
investment decisions but those ESG factors are generally no more 
significant than other factors in the investment selection process, 
such that ESG factors may not be determinative in deciding to include 
or exclude any particular investment in the portfolio.\118\ Such funds 
may select investments because those investments met other criteria 
applied by the fund's adviser (e.g., investments selected on the basis 
of macroeconomic trends or company-specific factors like a price-to-
earnings ratio). The proposed approach to integration funds targets 
misleading

[[Page 36614]]

fund names; and relatedly it is designed to promote ``truth in 
advertising'' in fund names by making clear that we believe it would be 
misleading for a fund for which ESG factors are generally no more 
significant than other factors in the investment selection process to 
include ESG terminology in its name, as this has the potential to 
overstate the importance of the ESG factors in the fund's selection of 
its portfolio investments.
---------------------------------------------------------------------------

    \118\ See proposed rule 35d-1(d); see also ESG Proposing 
Release, supra footnote 24; ``Funds' Use of ESG Integration and 
Sustainable Investing Strategies: An Introduction,'' Investment 
Company Institute (July 2020) at 4 (discussing integration 
strategies as funds that ``integrate ESG factors into their 
traditional investment process as a way to seek financial returns'') 
available at https://www.ici.org/system/files/attachments/20_ppr_esg_integration.pdf; Morningstar Comment Letter (stating that 
Morningstar draws a distinction between ``sustainable investment'' 
and ``ESG Consideration'' funds where ESG Consideration funds are 
``otherwise conventional, actively managed funds that have added 
environmental, social, and governance criteria to their prospectuses 
but do not make the claim that they invest only in full-fledged 
sustainable investments (meaning they do not meet the criteria for 
any of the [sustainable investment categories of focus, impact, and 
sustainable sector])'').
---------------------------------------------------------------------------

    Many commenters responding to our 2020 Request for Comment 
discussed the role of the names rule in addressing concerns about funds 
whose names include ESG terms or similar terminology.\119\ A number of 
commenters noted the growth of funds with ESG terminology in their 
names and expressed concerns about ``greenwashing.'' \120\ Some 
commenters, in particular, urged that a fund should not be permitted to 
use ``ESG'' or ``sustainable'' in its name if ESG inputs are merely one 
factor among many driving an investment decision, as this could mislead 
investors.\121\
---------------------------------------------------------------------------

    \119\ Over 35 comment letters addressed these issues, including: 
BlackRock Comment Letter; Consumer Federation of America Comment 
Letter; Comment Letter of Federated Hermes (May 6, 2020) 
(``Federated Hermes I Comment Letter''); Morningstar Comment Letter; 
Principles for Responsible Investing Comment Letter; SIFMA AMG 
Comment Letter.
    \120\ See, e.g., Capital Group Comment Letter (noting that the 
2020 Request for Comment includes an estimate that, as of December 
31, 2019, nearly 300 funds included the terms ``ESG,'' ``clean,'' 
``environmental,'' ``impact,'' ``responsible,'' ``social'' or 
``sustainable'' in their names); Morningstar Comment Letter 
(discussing the growth of ESG); Practus Comment Letter (noting that 
``some observers predict that the style could command half of all 
assets under management in 2025'' and expressing concerns about 
``greenwashing''); Principles for Responsible Investment Comment 
Letter; SIFMA AMG Comment Letter; Sustainable Research and Analysis 
Comment Letter (discussing the growth of ESG).
    \121\ See Abdullah Comment Letter.
---------------------------------------------------------------------------

    We agree. Where a fund considers one or more ESG factors alongside 
other, non-ESG factors in its investment decisions but ESG factors are 
generally no more significant than other factors in the investment 
selection process, such that those ESG factors may not be determinative 
in deciding to include or exclude any particular investment in the 
portfolio, including ESG terminology in the fund's name would mislead 
investors by suggesting that the ESG factors play a more prominent 
role.\122\ For example, consider a fund with ``sustainable'' in its 
name that selects investments based on the adviser's holistic analysis 
of a company, including conventional financial metrics as well as the 
extent to which the company has good labor and environmental practices. 
No one factor, including sustainability considerations, is more 
significant than other factors in the investment selection process. As 
a result, the fund may invest in companies that do not meet the 
adviser's own criteria for labor or environmental practices, if the 
adviser determines to make the investment on the basis of other, non-
sustainability considerations. The fund's name would be materially 
deceptive and misleading because the use of the term ``sustainable'' in 
its name connotes an emphasis on ``sustainability'' considerations that 
is not consistent with the fund's investment strategy.
---------------------------------------------------------------------------

    \122\ See, e.g., Consumer Federation of America Comment Letter 
(quoting George Serafeim, a Harvard Business School professor, who 
has stated that there are ``now stronger incentives for asset 
managers to greenwash,'' and that ``there is a false sense of 
security or satisfaction if an investor buys an ESG product that 
might not be what the investor thinks it is'').
---------------------------------------------------------------------------

    While the 80% investment policy requirement is an effective way of 
generally addressing the consistency of a fund's investment portfolio 
with the investment focus its name suggests, adopting an 80% investment 
policy would not address the specific concern that the use of ESG terms 
in an integration fund's name overstates the emphasis of ESG 
considerations in selecting that fund's portfolio investments. Adopting 
an 80% investment policy where the 80% investment basket investments 
were selected considering ESG factors as one factor among many would 
not address the overemphasis concern. In the ``sustainable'' fund 
example above, if the fund's investments may be selected without regard 
to their satisfaction of the adviser's sustainability criteria--and may 
score poorly on such criteria because they are only one factor--this 
would be misleading under section 35(d) regardless of whether the 
investments were consistent with any 80% investment policy under the 
rule. Because funds' names necessitate brevity, the inclusion of ESG 
terminology in their names would be materially deceptive and misleading 
unless a fund prioritizes those ESG considerations that their names 
suggest, as contrasted to funds that analyze ESG factors only as part 
of a broader investment selection process.\123\ While we understand 
that many integration fund managers thoughtfully consider ESG factors 
as one of multiple components of their investment processes, we believe 
it would be materially deceptive or misleading for the names of those 
funds to indicate to investors that consideration of ESG factors is a 
central part of their investment processes, particularly in light of 
information suggesting that the use of ESG terminology in fund names is 
effective in attracting inflows.\124\
---------------------------------------------------------------------------

    \123\ See, e.g., Practus Comment Letter; Principles for 
Responsible Investment Comment Letter.
    \124\ See, e.g., Letter from Morningstar to Chair Gary Gensler 
(Jun. 9, 2021) attaching ``Sustainable Funds U.S. Landscape Report--
More funds, more flows, and impressive returns in 2020,'' 
Morningstar Manager Research (Feb. 10, 2021) available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf; 
see also ``ESG in 2021 So Far: An Update,'' M. Gerber, G. Norman, 
and S. Toms, Harvard Law School Forum on Corporate Governance (Sept. 
18, 2021) available at http://corpgov.law.harvard.edu/2021/09/18/esg-in-2021-so-far-an-update/; ``ESG assets may hit $53 trillion by 
2025, a third of global AUM,'' Bloomberg Intelligence (Feb. 23, 
2021) available at https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/.
---------------------------------------------------------------------------

    We request comment on our proposed amendments to address 
integration funds with ESG terminology in their names:
    63. Should we, as proposed, define a fund name as materially 
deceptive and misleading when the fund is an integration fund that uses 
ESG terms in its name? Are there circumstances in which an integration 
fund's use of an ESG term in its name would not be materially deceptive 
and misleading?
    64. Should a fund be able to use an ESG term in its name as long as 
the fund also identifies itself in its name as an integration fund 
(e.g., ``XYZ ESG Integration Fund''), and the fund meets the definition 
of ``integration fund'' that this release describes? \125\ Is the term 
``integration'' sufficiently understood by investors such that its 
inclusion in a fund name would not make the name materially deceptive 
and misleading? Are there other, similar terms or phrasing that 
generally would be better understood than the term ``integration?'' 
Could there be a benefit to permitting a fund to use ``ESG 
integration'' or similar terms in its name? Would an integration fund 
that uses these terms in its name be able to satisfy the 80% investment 
policy requirement, and would adopting an 80% investment policy address 
the consistency of an integration fund's investment portfolio with the 
investment focus its name suggests? If not, is there a way to adapt the 
80% investment policy requirement for integration funds to address the 
investor protection concerns about the potential overstatement of the 
consideration of ESG factors that our proposed approach addresses? 
Alternatively, should an integration fund be exempt from the 80% 
investment policy requirement?

[[Page 36615]]

Would such an exemption raise investor protection issues?
---------------------------------------------------------------------------

    \125\ See supra footnote 118 and accompanying text.
---------------------------------------------------------------------------

    65. Should we further limit the extent to which funds may use 
specific ESG-related terms in their names, for example permitting the 
use of certain terms only if a fund has a certain investment focus? For 
example, notwithstanding the principle that a fund may use any 
reasonable definition of the terms used in its name, should we require 
that a fund with the terms ``zero'' carbon in its name to have an 
investment policy that requires investments in companies with no or low 
carbon emissions, or should we permit the fund's investment policy to 
include investments in companies that are transitioning away from 
certain practices while they are still involved in that activity? If 
so, what terms should we mandate for what types of investment focus?

E. Modernizing the Rule's Notice Requirement

    The proposed amendments to the names rule, like the current rule, 
would require that unless the 80% investment policy is a fundamental 
policy of the fund, notice must be provided to fund shareholders of any 
change in the fund's 80% investment policy.\126\ The proposed 
amendments would incorporate some modifications to the current notice 
requirement that are designed to better address the needs of 
shareholders who have elected electronic delivery and to incorporate 
additional specificity about the content and delivery of the notice. 
The Commission has historically acted to modernize the manner in which 
information is disclosed to the public and provided to investors in 
order to keep up with changes in the industry and technology. As an 
additional modification, the proposed amendments would require notices 
to describe not only a change in the fund's 80% investment policy, but 
also a change to the fund's name that accompanies the investment policy 
change.
---------------------------------------------------------------------------

    \126\ Proposed rule 35d-1(e).
---------------------------------------------------------------------------

    As discussed above, the names rule currently requires funds that 
are subject to the 80% investment policy requirement, other than tax-
exempt funds, either to adopt and implement a fundamental investment 
policy, or to adopt an 80% investment policy that is not a fundamental 
policy if they also provide shareholders notice of a change to the 
policy at least 60 days before the change occurs.\127\ The notice 
alternative requires that the notice be separate from other fund-
related communications and identified as involving a change in the 
fund's investment policy. These requirements are designed to focus 
investors' attention on the upcoming change so that they can determine 
whether to redeem or otherwise exit their investments before the change 
occurs. A number of commenters who addressed the notice alternative in 
response to the 2020 Request for Comment suggested allowing funds to 
post notification of a change to the policy on their websites.\128\ 
Delivery of the notices directly to shareholders, rather than 
permitting funds to post these notices to a website or a similar 
alternative in which shareholders do not directly receive notices, 
increases the likelihood that investors would see and read it, and this 
goal is particularly important given the strong link between a fund's 
name and a shareholder's expectations about the fund's investment 
focus, its portfolio holdings, and its risks and returns.
---------------------------------------------------------------------------

    \127\ The staff has observed that most funds choose the 60-day 
notice requirement alternative as opposed to adopting an 80% 
investment policy that is a fundamental policy. See 2020 Request for 
Comment, supra footnote 2 at n.8.
    \128\ See e.g., Fidelity Comment Letter; Comment Letter of T. 
Rowe Price (May 21, 2020).
---------------------------------------------------------------------------

    We are proposing to retain the notice alternative to provide 
eligible funds flexibility to respond efficiently to market events or 
new regulatory requirements, and we believe that this flexibility is 
appropriate where there are not significant barriers for shareholders 
to exit the fund if they decide to do so upon receiving the required 
notice.\129\ For example, if the Commission were to adopt final rule 
amendments defining the names of certain ESG integration funds as 
materially deceptive and misleading as discussed above, the proposed 
notice alternative would allow affected funds to respond to the 
requirement--by changing their name or investment policy--after sending 
appropriate notice to shareholders. Most commenters who addressed this 
aspect of the current rule in response to the 2020 Request for Comment 
generally supported the fact that the names rule includes a notice 
alternative, but many commenters requested modernization of the notice 
requirement, given advancements in technology and changes in 
shareholder preferences since the names rule was adopted.\130\ In light 
of these comments and our experience administering the current rule, we 
are proposing amendments to the current notice requirement to provide 
greater clarity and facilitate compliance.
---------------------------------------------------------------------------

    \129\ See Names Rule Adopting Release, supra footnote 2 at 
II.A.(1); see also supra section II.A.4 (discussing shareholders of 
unlisted closed-end funds and BDCs having higher barriers to exit 
these types of funds).
    \130\ See e.g., Invesco Comment Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

    Like the current rule, the proposed amendments would require that 
the notice be provided at least 60 days prior to the change the notice 
describes. We believe that 60 days is sufficient time for shareholders 
to decide whether to redeem their shares. The proposed amendments, like 
the current rule, also would require the notice to be provided in plain 
English and separately from any other documents.\131\ While the 
proposed requirement that the notice be provided ``separately from any 
other document'' is worded differently than in the current rule, it is 
functionally the same as the current rule's requirement.\132\ This 
proposed rewording is designed to provide clarity regarding what it 
means for the notice to be provided separately from any other documents 
(i.e., the notice cannot be built into the fund's prospectus or into 
other required shareholder communications). Further, the proposed 
amendments would specifically state that if the notice is delivered in 
paper form, it may be provided in the same envelope as other written 
documents. This proposed amendment is designed to clarify the current 
rule's provisions that address when and how the notice can be provided 
with other written documents, but not to alter these current provisions 
substantively. We understand that staff have often received questions 
about the meaning of the current requirement to provide the notice ``in 
a separate written document.'' We believe the clarification would help 
facilitate compliance with the notice requirement.
---------------------------------------------------------------------------

    \131\ Proposed rule 35d-1(e)(1).
    \132\ See rule 35d-1(c)(1) (``the notice will be provided in 
plain English in a separate written document'').
---------------------------------------------------------------------------

    Similar in part to the current notice requirement, the proposed 
amendments would require that the notice contain the following 
prominent statement or similar clear and understandable statement, in 
bold-face type: ``Important Notice Regarding Change in Investment 
Policy [and Name].'' \133\ The prominent statement would alert 
shareholders that the notice contains information about the change in 
the fund's investment policy. In a change from the current requirement, 
however, the required prominent statement would have to reference the 
fact of the name change, as applicable.\134\ This requirement is

[[Page 36616]]

designed to put investors on alert that, going forward, the fund that 
is described in various regulatory materials and other fund and 
intermediary communications is the same fund in which they are 
currently invested.
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    \133\ Proposed rule 35d-1(e)(2).
    \134\ The current prominent statement requirement does not 
include a reference to the fund's name. See rule 35d-1(c)(2). We are 
proposing a conforming change to the reference to the notice 
requirement in paragraph (a)(2)(ii) of the names rule, which as 
proposed would require notice of ``any change in the policy 
described in paragraph (a)(2)(i) of this section, and any change in 
the fund's name that accompanies the change'' (emphasis added).
---------------------------------------------------------------------------

    The proposed amendments incorporate changes to provide specificity 
with respect to notices that may be delivered electronically. Under the 
current notice requirement, the mandated statement is required to 
appear on the envelope in which the notice is delivered, or if the 
notice is delivered separately from other communications to investors, 
the statement must appear either on the notice or on the envelope.\135\ 
The Commission's current guidance regarding electronic delivery does 
not prohibit names rule notices from being delivered 
electronically.\136\ Some commenters who addressed this aspect of the 
current rule in response to the 2020 Request for Comment questioned the 
relevance of the requirement that the notice appear on the envelope in 
light of funds' increasing use of electronic delivery methods for 
regulatory materials.\137\ Under the proposed amendments, for any 
notice that is provided in paper form, the required statement also 
would appear on the envelope in which the notice is delivered.\138\ 
This proposed expansion of the current requirement (which only requires 
the statement to appear on the envelope when the envelope includes 
other materials) is designed to help draw shareholders' attention to an 
important document that provides them information about the change in 
the fund's investment policy. This could help shareholders decide 
whether to redeem their shares or remain invested in the fund.
---------------------------------------------------------------------------

    \135\ Rule 35d-1(c)(3).
    \136\ See Use of Electronic Media for Delivery Purposes, 
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458 
(Oct. 13, 1995)] (providing Commission views on the use of 
electronic media to deliver information to investors, with a focus 
on electronic delivery of prospectuses, annual reports, and proxy 
solicitation materials); Use of Electronic Media, Investment Company 
Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] 
(providing updated interpretive guidance on the use of electronic 
media to deliver documents on matters such as telephonic and global 
consent, issuer liability for website content, and legal principles 
that should be considered in conducting online offerings). Although 
paper is the default format for delivery of prospectuses and certain 
other required disclosures such as the proposed notice, the 
Commission has provided guidance noting that electronic delivery may 
be used to satisfy prospectus and certain other required disclosure 
delivery requirements if: (1) the investor has notice of the 
availability of the information; (2) the use of the medium is not so 
burdensome that intended recipients cannot effectively access the 
information being provided; and (3) the issuer has evidence of 
delivery.
    \137\ See e.g., ICI Comment Letter; T. Rowe Price Comment 
Letter.
    \138\ Proposed rule 35d-1(e)(2)(i).
---------------------------------------------------------------------------

    If the notice is provided electronically, the proposed amendments 
would require the statement to appear on the subject line of the email 
communication that includes the notice.\139\ This new requirement is 
designed to highlight the purpose of the electronic notice to 
shareholders, in the same way that the current requirement for a 
statement to appear on the delivery envelope highlights the purpose of 
the included paper notice. This proposed amendment is designed to 
clarify the application of the rule's requirements to electronic 
notices, which in turn will help ensure that investors who have opted 
into electronic delivery will receive the notices the names rule 
requires in the format that they prefer.
---------------------------------------------------------------------------

    \139\ Proposed rule 35d-1(e)(2)(ii). The proposed amendments 
specifying that the statement must appear on the subject line of the 
email notice also would permit ``an equivalent indication of the 
subject of the communication in other forms of electronic media.'' 
This is designed to help the proposed requirement remain evergreen 
in the face of evolving technology and methods of communication.
---------------------------------------------------------------------------

    Finally, the proposed amendments would require additional 
specificity with respect to the content that the notices include. The 
proposed amendments would require that the notice describe, as 
applicable, the fund's 80% investment policy, the nature of the change 
to the 80% investment policy, the fund's old and new names, and the 
effective date of any investment policy and/or name changes.\140\ These 
proposed requirements are designed to codify certain best practices of 
some funds, help facilitate funds' compliance with the notice 
requirement, and increase consistency in the content that notices 
include in order to provide the information that fund shareholders need 
to decide whether to stay invested in a fund whose investment policy is 
changing.
---------------------------------------------------------------------------

    \140\ Proposed rule 35d-1(e)(3).
---------------------------------------------------------------------------

    We request comment on the proposed amendments to the names rule's 
notice requirement, including the following items:
    66. Are the proposed amendments to the current notice requirement 
appropriate? Is it appropriate to require notices to describe not only 
a change in the fund's 80% investment policy, but also a change to the 
fund's name that accompanies the investment policy change?
    67. The proposed amendments, consistent with the current rule, 
would require that the notice be provided at least 60 days prior to the 
change the notice describes. Does 60 days remain a sufficient time 
period for shareholders who purchased shares in a fund to decide to 
redeem their shares? Should the rule allow for shorter or a longer 
period?
    68. Should we continue to require that the notice be provided 
separately from other documents? Are there instances in which 
shareholders would benefit from the notice being built into any other 
shareholder communications? For example, would there be a shareholder 
benefit--or conversely a detriment to shareholder understanding--if the 
notice were built into the fund's prospectus?
    69. Should we continue to require the notice to include a prominent 
statement regarding the purpose of the notice? Should we allow funds 
some flexibility to determine a similar alternate statement that would 
inform shareholders of a change to a fund's 80% investment policy (and 
related change to the fund's name), as proposed? Should there be 
additional content in the notice regarding instances when a fund 
substantially changes it strategy without a shareholder vote? Should 
the notice include any factors that the board considered, such as 
whether the change is likely to be consistent with reasonable investor 
expectations, whether it would result in cost savings that would 
benefit existing shareholders, whether it would have tax implications 
to the fund and shareholders, and/or whether the fund's shares are 
freely redeemable or have limitations attached to redemptions? Would an 
explanation of material factors that the board considered in approving 
the 80% policy be useful to shareholders? What information would be 
helpful to investors to consider whether to hold or sell their shares 
in a fund when a fund substantially changes its investment strategy?
    70. Should we require this prominent statement also to appear on 
the envelope in which the notice is delivered? The proposed rule would 
expand the current requirement for the statement to appear on the 
envelope, which applies only where the notice is delivered in the same 
envelope as other communications to investors. Is this proposed 
expansion appropriate? Why or why not?
    71. For funds that deliver the notice electronically, the proposed 
rule would include a new requirement that the

[[Page 36617]]

statement appear in the email subject line. Is this new requirement 
appropriate? The proposed rule would permit funds that deliver the 
notice electronically to include an equivalent indication of the 
subject of the communication in other forms of electronic media. Would 
this flexibility help the proposed requirement to remain evergreen in 
the face of evolving technology and methods of communication? Why or 
why not? Are there any further requirements that would be appropriate 
to facilitate the accessibility of electronic notices, such as stating 
that the required statement in the subject line must appear in all 
capital letters, or a required font size for electronic notices?
    72. The proposed rule would allow investors who have opted into 
electronic delivery to receive the notices electronically. Should we 
also allow funds to satisfy this requirement by making the notices 
accessible on a website? What potential benefits for shareholders could 
this website-based approach to notices entail? Conversely, would 
shareholders not receive adequate notice of investment policy changes 
if the Commission were to adopt such a website-based approach?
    73. Are the proposed requirements for additional specificity, with 
respect to the content that the notices include, appropriate? Would 
prescribing the minimum disclosure required in the notice help funds 
understand how to comply with the notice alternative? Should we require 
funds to include in the notice definitions of the terms used in the new 
name? Would prescribing the minimum disclosure required in the notice 
help investors receive the information that they need to make an 
informed decision about whether to remain invested in a fund whose 
investment policy is changing? Should we prescribe any additional or 
different content in the notices? If so, what content?

F. N-PORT Reports

1. Investment Company Act Names Rule Investment Policy
    We are proposing to amend Form N-PORT to include a new reporting 
item for registered investment companies, other than money market 
funds, regarding the 80% investment policy that a fund would adopt in 
compliance with the names rule.\141\ Such registered investment 
companies, other than money market funds, that are required to adopt an 
80% investment policy would be required to report on Form N-PORT: (1) 
the value of the fund's 80% basket, as a percentage of the value of the 
fund's assets, and (2) if applicable, the number of days that the value 
of the fund's 80% basket fell below 80% of the value of the fund's 
assets during the reporting period.\142\ Such a fund would be required 
to provide the names rule compliance information as of the end of the 
reporting period.\143\ We believe it is appropriate that this 
information be made available publicly. This information would be 
publicly available for the third month of each fund's quarter. We 
believe that the proposed amendments to Form N-PORT would provide 
market-wide insight with respect to those registered investment 
companies, other than money market funds, that are subject to the 80% 
investment policy requirements for the Commission, its staff, and 
market participants.
---------------------------------------------------------------------------

    \141\ See proposed Item B.9 of Form N-PORT; see also proposed 
new instruction to Item B.9 of Form N-PORT clarifying that when 
responding to proposed Item B.9, the percentages that the fund 
reports in response to Item B.9.a and assesses for purposes of 
reporting in response to Item B.9.b must reflect the notional 
amounts of funds' derivatives investments with certain adjustments 
(because the proposed amendments to the names rule would require 
that, for purposes of determining compliance with the 80% investment 
policy, funds must value each derivatives instrument using its 
notional amount, with certain adjustments). All registered 
management investment companies, other than registered money market 
funds and small business investment companies, are required to 
electronically file with the Commission, on a quarterly basis, 
monthly portfolio investment information on Form N-PORT, as of the 
end of each month. See Investment Company Reporting Modernization, 
Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 
81870 (Nov. 18, 2016)]. As BDCs are not subject to Form N-PORT 
reporting requirements, they would not be subject to the proposed 
amendments to Form N-PORT.
    \142\ Tax-exempt funds would have to report the number of days 
that the value of the fund's investments as described in proposed 
rule 35d-1(a)(3)(i)(A) fell below 80% of the value of the fund's 
assets during the reporting period (or, if the fund has adopted a 
policy as described in proposed rule 35d-1(a)(3)(i)(B), the number 
of days that less than 80% of the income that the fund distributed 
was exempt, as applicable, from federal income tax or from both 
federal and state income tax).
    \143\ See proposed Item B.9 of Form N-PORT. This timing reflects 
the form's requirement to report information about funds' portfolio 
holdings as of the last business day, or last calendar day, of each 
month. See General Instruction A to Form N-PORT.
---------------------------------------------------------------------------

    This proposed reporting requirement would provide information to 
the Commission, as well as to market participants, about the percentage 
of such a fund's assets that are invested in the 80% basket.\144\ We 
believe that the proposed reporting requirement would increase the 
effectiveness of the Commission's oversight of such funds' compliance 
with the names rule. This information also may allow investors in such 
funds to make investment choices that are more consistent with their 
investment preferences. For example, multiple funds could have similar 
names indicating each fund focuses its investments in the same type of 
asset. One of these funds may invest 81% of the fund's assets in 
investments consistent with the fund's investment focus, whereas 
another fund may invest 95%. Both of these funds would be in compliance 
with the 80% investment policy requirement.\145\ Some investors may 
prefer a fund that invests as high a percentage of the fund's assets 
consistent with the fund's investment focus as possible, whereas others 
may prefer that the fund's manager exercise more discretion in 
investing assets beyond the 80% investment policy. This proposed 
reporting requirement would allow investors to compare and consider 
potential distinctions among such funds with similar names.
---------------------------------------------------------------------------

    \144\ To the extent a fund's name suggests an investment focus 
that has multiple elements, and therefore must adopt an 80% 
investment policy that addresses each element of that investment 
focus, the fund would report a single percentage that reflects its 
multi-element investment focus. See supra paragraph following 
footnote 49.
    \145\ See also proposed rule 35d-1(c) (a fund's name may be 
materially deceptive or misleading notwithstanding the fund's 
technical compliance with its 80% investment policy); supra section 
II.A.5.
---------------------------------------------------------------------------

    The proposed amendments to Form N-PORT would also require that a 
fund indicate, if applicable, the number of days that the value of the 
fund's 80% basket fell below 80% of the value of the fund's total 
assets during the reporting period. As discussed above, a fund's 
investments may fall below this 80% threshold for a number of reasons, 
and permitted temporary departures under the proposal may occur under a 
variety of circumstances, including because of market fluctuations or 
other reasons beyond the fund's direct control. Information about these 
temporary departures is important to the Commission and its staff to 
assess overall compliance with the names rule. This proposed reporting 
requirement may also be helpful to investors. Some investors may prefer 
to invest in a fund that does not often invest below the 80% threshold, 
and this information may ultimately affect their investment choices. 
The proposed requirement is designed to provide the Commission and its 
staff, as well as investors, with important insight into the frequency 
and extent to which such a fund's 80% basket investments fall below 80% 
of the fund's total assets.
    The Commission is not proposing a new reporting requirement for 
money market funds or BDCs, and we are requesting comment on this 
approach. BDCs are required to submit financial

[[Page 36618]]

statement information using Inline XBRL data language, and money market 
funds report portfolio information on Form N-MFP. These respective 
reporting requirements provide tools to analyze these funds' portfolio 
holdings and could be used to assess their portfolios in light of any 
requirement for these funds to adopt 80% investment policies under the 
names rule. For example, the requirement in Form N-MFP Item C.6 to 
indicate the category of investment for each portfolio security that a 
money market fund holds would provide transparency that would permit 
analysis of the percentage of the money market fund's holdings that are 
invested in accordance with the investment focus that the fund's name 
suggests. In addition, our rules subject money market funds and BDCs to 
certain portfolio composition requirements.\146\ BDCs, for example, are 
required to invest 70% of their assets in ``eligible portfolio 
companies,'' as defined in Commission rules.\147\ These portfolio 
composition requirements provide an additional layer of Commission 
regulation over the portfolios of money market funds and BDCs. We do 
not currently believe additional reporting requirements, similar to the 
proposed Form N-PORT amendments, are necessary for money market funds 
and BDCs given the current reporting and portfolio composition 
requirements for these funds.
---------------------------------------------------------------------------

    \146\ See rule 2a-7 under the Act (specifying the portfolio 
composition requirements for money market funds).
    \147\ See section 55(a) of the Act; rule 2a-46 under the Act (17 
CFR 270.2a-46); rule 55a-1 under the Act (17 CFR 270.55a-1).
---------------------------------------------------------------------------

    We seek comment on the proposed amendments to Form N-PORT requiring 
registered investment companies, other than money market funds, to 
report certain information regarding their compliance with the names 
rule:
    74. Is the proposed requirement that funds report the value of the 
fund's 80% basket, as a percentage of the value of the fund's assets, 
appropriate? Should we modify the proposed reporting requirement in any 
way? If so, how?
    75. Is the proposed requirement that funds report the number of 
days that the value of the fund's 80% basket have dropped below the 80% 
threshold during the reporting period reasonable? Should the look-back 
period for this reporting requirement be three months instead of the 
proposed one-month reporting period? Would this proposed requirement be 
appropriate for tax-exempt funds, for example those that distribute 
income only quarterly or annually, and if not, how should we modify the 
proposed requirement? Should we modify the proposed reporting 
requirement in any other way? If so, how?
    76. Our proposal would make this new Form N-PORT item public. Is 
there any reason why this information should not be publicly available?
    77. In addition to or as a substitute for this proposed Form N-PORT 
reporting requirement, should we require funds to report confidentially 
to the Commission, for example on Form N-RN, if the value of the fund's 
80% basket falls below 80% of the fund's total assets? If so, why would 
that information be necessary to provide to the Commission? If not, why 
not?
    78. Would any of the proposed Form N-PORT reporting requirements be 
more appropriately structured as annual Form N-CEN reporting 
requirements?
    79. Should we require BDCs to report any or all of the information 
that we are proposing to require registered investment companies to 
report on Form N-PORT, for example in their annual reports or on Form 
8-K?
    80. Should we require money market funds to report the information 
that we are proposing to require other registered investment companies 
to report on Form N-PORT, for example on Form N-MFP?
2. Investments To Be Included in a Fund's 80% Basket
    We are proposing a new Form N-PORT reporting item requiring a 
registered investment company, other than a money market fund, subject 
to the 80% investment policy requirement to indicate, with respect to 
each portfolio investment, whether the investment is included in the 
fund's 80% basket.\148\ A fund would be required to provide this 
information, along with the information it reports for each of its 
portfolio investments on Form N-PORT, as of the end of the reporting 
period. This information would be publicly available for the third 
month of each fund's quarter. We believe that this information would 
enhance the Commission's ability effectively to oversee and assess the 
activities of registered investment companies, other than money market 
funds, in order to better carry out its regulatory functions, and also 
to provide investors as well as the Commission and its staff insight 
into the types of investments the fund includes in the 80% basket.
---------------------------------------------------------------------------

    \148\ See proposed Item C.2 of Form N-PORT.
---------------------------------------------------------------------------

    The proposed requirement for a fund to report whether each 
investment is included in the 80% basket would help the Commission 
evaluate compliance with the proposed amendments. We believe that the 
proposed amendments to Form N-PORT would provide information that would 
increase investor understanding of a particular fund's investment 
focus, which would assist investors in making investment choices that 
better match their investment preferences. We recognize that funds with 
similar names and investment focuses may reasonably make different 
determinations regarding whether an investment is appropriately within 
the 80% basket. To the extent that investors expect a fund to invest 
with a particular investment focus that is consistent with the fund's 
name, the proposed Form N-PORT reporting requirement would provide 
investors with important information regarding how the fund implements 
that investment focus. For example, for some investors, there may be 
important investment distinctions among similarly named funds, or in 
how a given fund implements its investment focus over time.
    Some funds may have an investment focus where the selection of 80% 
basket investments involves some degree of subjectivity. The proposed 
reporting requirement provides transparency that would help investors 
and other market participants, as well as Commission staff, understand 
what qualities a fund's advisory personnel may consider a specific 
portfolio investment to demonstrate consistent with the fund's 80% 
investment policy. Market participants would also better be able to 
view, across funds with similar investment focuses, whether these funds 
may be characterizing particular investments similarly. For example, 
investors interested in funds with an ESG investment focus would better 
be able to compare across funds with similar names to determine whether 
specific investments are characterized similarly or differently, and 
therefore better be able to invest according to their specific 
preferences.
    We seek comment on the proposed amendments to Form N-PORT requiring 
funds to report, for each portfolio investment, whether that investment 
is included in the fund's 80% basket:
    81. Is this proposed requirement appropriate? Should we modify the 
proposed reporting requirement in any way? If so, how?
    82. Should we expand the proposed requirement to require a fund to 
indicate on Form N-PORT, for derivatives instruments that the fund 
includes in its 80% basket, whether these derivatives are included 
because they provide investment exposure to one or more of the market 
risk factors

[[Page 36619]]

associated with the investments suggested by the fund's name?
    83. Our proposal would make public the information that a fund 
would report in response to this new Form N-PORT item for the third 
month of each fund's quarter. Is there any reason why this information 
should not be publicly available?

G. Recordkeeping

    The proposed amendments would require funds to maintain certain 
records depending on whether the fund would be required to adopt an 80% 
investment policy.\149\ Funds subject to that requirement would be 
required to maintain certain records documenting their compliance with 
the rule. Conversely, funds that do not adopt an 80% investment policy 
would be required to maintain a written record of their analysis that 
the 80% investment policy is not required under the rule.
---------------------------------------------------------------------------

    \149\ Proposed rule 35d-1(b)(3).
---------------------------------------------------------------------------

1. Funds Required To Adopt an 80% Investment Policy
    The proposed recordkeeping requirements for funds that are required 
to adopt an 80% investment policy are designed to provide our staff, 
and a fund's compliance personnel, the ability to evaluate the fund's 
compliance with the proposed amendments.\150\ These would be new 
requirements, as neither the current rule nor the general recordkeeping 
rule under the Act includes a recordkeeping provision specific to the 
names rule compliance-related topics the proposed amendments would 
address.\151\
---------------------------------------------------------------------------

    \150\ See proposed rule 35d-1(b)(3).
    \151\ See rule 31a-1 under the Act (17 CFR 31a-1) (``rule 31a-
1'').
---------------------------------------------------------------------------

    The proposed amendments would require a fund that is required to 
adopt an 80% investment policy to maintain written records documenting 
its compliance under the 80% investment policy provisions of the rule. 
Specifically, the written records documenting the fund's compliance 
that these funds would be required to maintain would include:
    <bullet> The fund's record of which investments are included in the 
fund's 80% basket (generally defined as investments that are invested 
in accordance with the investment focus the fund's name suggests or, as 
applicable, consistent with the tax treatment suggested by a tax-exempt 
fund's name) and the basis for including each such investment in the 
80% basket;
    <bullet> The value of the fund's 80% basket, as a percentage of the 
value of the fund's assets;
    <bullet> The reasons for any departures from the 80% investment 
policy;
    <bullet> The dates of any departures from the 80% investment 
policy; and
    <bullet> Any notice sent to the fund's shareholders pursuant to the 
rule.\152\
---------------------------------------------------------------------------

    \152\ Proposed rule 35d-1(e); see also proposed rule 35d-1(g)(1) 
(defining ``80% basket''). The proposed new Form N-PORT reporting 
requirements would not satisfy the record-keeping requirements of 
proposed rule 35d-1(b)(3). Form N-PORT would reflects a snapshot of 
the fund's investments at the end of the reporting period. The 
proposed recordkeeping requirement, however, reflects the fund's 
ongoing names rule compliance activity.
---------------------------------------------------------------------------

    These records must be maintained for at least six years following 
the creation of each required record (or, in the case of notices, 
following the date the notice was sent), the first two years in an 
easily accessible place.\153\ We believe that the frequency with which 
these records would be made would vary based on the specific activities 
and compliance needs of the fund. We believe that many funds would make 
certain of these records daily in order to reflect ongoing investment 
activity. We anticipate that the vast majority of records would be 
automated. Some records, however, would not lend themselves to 
automation--for example, records documenting the reasons for any 
departures from the 80% investment policy--and would need to be created 
on an as-needed basis.\154\
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    \153\ See supra paragraph accompanying footnote 66 discussing 
the time period in which the 80% policy must be assessed.
    \154\ Records of the fund's analysis that such a policy is not 
required under the names rule, as described in section II.G.2 infra, 
similarly would need to be created on an as-needed basis.
---------------------------------------------------------------------------

    These records would allow our staff to understand and evaluate a 
fund's operation of its investment policy better and whether the fund 
is adhering to the proposed amendments. These records also would allow 
our staff to better identify and assess violations. We also believe 
that this recordkeeping requirement would increase the effectiveness of 
the Commission's oversight of the fund industry, which will, in turn, 
benefit investors.
    The proposed amendment would not prescribe the particular form of 
documentation required to be maintained but would instead provide 
flexibility in how a fund documents the information delineated in the 
recordkeeping requirement. The fund should, however, generally maintain 
appropriate documentation that would be sufficient for a third party to 
verify the matter covered by each record.
    The proposed six-year retention period is designed to be generally 
consistent with other recordkeeping retention periods provided in rules 
under the Act.\155\ We believe general consistency with other retention 
periods would lessen the compliance burden of the proposed new 
requirement for funds required to maintain these records. However, we 
believe the compliance burden of the new recordkeeping requirements 
would be incremental for a fund that is currently required to adopt an 
80% investment policy. Funds that are subject to the current names rule 
likely keep such records, even absent the proposed requirement to do 
so, in order to support their ongoing compliance with the rule's 
requirements.
---------------------------------------------------------------------------

    \155\ See rule 31a-1; see also e.g., rule 38a-1(d) and rule 22e-
4 (both rules incorporating retention periods of five years).
---------------------------------------------------------------------------

    We request comment on the proposed recordkeeping provision for 
funds that are required to adopt an 80% investment policy.
    84. Is the proposed recordkeeping requirement appropriate? Why or 
why not? Is the accompanying Commission guidance regarding the required 
written records appropriate and understandable? If not, what additional 
guidance should we give?
    85. Are there additional types of records that we should require 
for funds that are required to adopt an 80% investment policy? If so, 
which records and why?
    86. Should the proposed rule prescribe the particular form of 
documentation required to be maintained under this new requirement? Why 
or why not?
    87. Are the proposed retention periods sufficient to evidence 
compliance? Why or why not? Should we require a longer (e.g., eight 
years) or shorter (e.g., four years) retention period?
    88. Should the proposed recordkeeping requirement also include a 
requirement that the fund document an assessment(s) of any continued or 
ongoing departures from the 80% policy, beyond the proposed requirement 
(for example, if the departure were to persist beyond a particular time 
period, a requirement to document the continued need for the 
departure)? Would requiring such assessment(s) of a fund's departure 
from the 80% policy help ensure that the fund comes back into 
compliance quickly, consistent with the proposed ``as soon as 
reasonably practicable'' standard?
    89. For those funds that are currently subject to the names rule's 
80% investment policy requirement, what records do those funds 
generally keep regarding their compliance with the rule

[[Page 36620]]

and the 80% investment policy they adopted under the rule? Who at the 
fund currently creates and/or maintains these records? How do these 
records differ from those being proposed? When creating and maintaining 
the records that would be required by the proposed amendments, what 
personnel do funds believe would be necessary?
2. Funds That Do Not Adopt an 80% Investment Policy
    The proposed amendments would require a fund that does not adopt an 
80% investment policy to maintain a written record of the fund's 
analysis that such a policy is not required under the names rule. Such 
funds must maintain this record, in an easily accessible place, for a 
period of not less than six years following the fund's last use of its 
name. The investor protection that the rule's investment policy 
requirement provides is critical to help ensure that funds' investments 
correspond with the investment focus that their names suggest to 
investors.\156\ As we stated above, however, we recognize that certain 
names do not suggest an investment focus and therefore would not 
require the fund to adopt an 80% investment policy under the proposed 
amendments. At the same time, there can be incentives for asset 
managers to determine that certain funds are not subject to the names 
rule's 80% investment policy requirement in order to preserve 
management flexibility, even where the fund's name may suggest a 
particular investment focus.
---------------------------------------------------------------------------

    \156\ See generally, e.g., PIABA Comment Letter; CFA Comment 
Letter; Crowley Comment Letter.
---------------------------------------------------------------------------

    Accordingly, we are proposing to require funds that do not adopt an 
80% investment policy under the rule to maintain a written record of 
the fund's analysis that an 80% investment policy is not required.\157\ 
This proposed provision is designed to prevent materially misleading or 
deceptive names by assisting our staff and fund compliance personnel in 
their oversight of the application of the names rule by providing our 
staff, and a fund's compliance personnel, the ability to evaluate the 
fund's analysis. This provision also would assist in funds' compliance 
practices, as fund boards generally should consider names rule 
compliance, including the requirement for certain funds to adopt an 80% 
investment policy, in approving their funds' policies and procedures 
under rule 38a-1(a)(2).\158\
---------------------------------------------------------------------------

    \157\ Proposed rule 35d-1(b)(3).
    \158\ See also supra footnotes 16 and 50 and accompanying text.
---------------------------------------------------------------------------

    We request comment on the proposed recordkeeping requirement for 
funds that do not adopt an 80% investment policy.
    90. Is the proposed recordkeeping requirement for funds that do not 
adopt an 80% investment policy likely to provide meaningful protection 
to investors? Are there any other records we should require of these 
funds?
    91. What information do commenters anticipate would be included in 
the proposed written record? Is there any specific information that we 
should require in the written record, or is the proposed general 
written record requirement appropriate in light of the breadth of fund 
strategies and names?
    92. Is six years from the fund's last use of its name the 
appropriate period to retain this record? Should we instead require 
that this record be kept for six years from the first use of the name, 
or for some other period? Should we require such records be kept in an 
easily accessible place indefinitely or for a limited time and, if the 
latter, for how long?
    93. Should we require that funds not required to adopt an 80% 
investment policy make a finding or determination to that effect prior 
to first use of the fund's name and require a designated party, such as 
the fund's board or chief compliance officer, to make this finding or 
determination? Should we require the fund's board to approve that 
finding or determination if the board is not making it in the first 
instance? If we were to take this approach, should we require funds 
with names currently in use to engage in this activity as well?

H. Unit Investment Trusts

    The proposed rule amendments would include certain exceptions for 
unit investment trusts (``UITs'') that have made their initial deposit 
of securities prior to the effective date of any final rule amendments 
the Commission adopts. Specifically, these UITs would be excepted from 
the requirements to adopt an 80% investment policy and the 
recordkeeping requirements, including recordkeeping for funds which do 
not adopt an 80% investment policy, unless the UIT has already 
adopted--or was required to adopt at the time of the initial deposit--
an 80% investment policy under the current rule.\159\
---------------------------------------------------------------------------

    \159\ Proposed rule 35d-1(f).
---------------------------------------------------------------------------

    The proposed approach is generally consistent with the treatment of 
UITs under the current rule. UITs are passively managed vehicles that 
operate pursuant to a trust indenture or a similar document and have 
fixed portfolios that would make it difficult to adjust their 
portfolios to comply with the rule's portfolio composition 
requirements.\160\ Changes to an UIT's operational documents can be 
expensive and time-consuming.\161\ The proposed amendment is designed 
to retain the existing exception from the 80% investment policy 
requirements for UITs that pre-date the original rule. Any such UIT 
would be included in the set of UITs that the proposed exception would 
include--those that have not adopted, and not been required to adopt, 
an 80% investment policy prior to the effective date of the proposed 
amendments. We believe the same reasoning also supports excepting UITs 
that pre-date the effective date of the proposed rule amendments, to 
the extent that they would be required to adopt an 80% investment 
policy for the first time or make a written record of their analysis 
that such a policy is not required under the rule as a result of the 
proposed amendments. Further, the lack of active management for UITs 
would make these proposed requirements operationally difficult.\162\
---------------------------------------------------------------------------

    \160\ Names Rule Adopting Release, supra footnote 2, at n.33 and 
accompanying text.
    \161\ See, e.g., Good Faith Determinations of Fair Value, 
Investment Company Act Release No. 34128 (Dec. 3, 2020) [86 FR 748 
(Jan. 6, 2021)] at nn.170-180 and accompanying text.
    \162\ As these UITs would not be subject to the requirement to 
adopt an 80% investment policy, they would not be subject to the 
rule's other requirements that only apply when a fund is required to 
adopt an 80% investment policy, such as the proposed temporary 
departure and notice requirements. See, e.g., proposed rule 35d-
1(b)(1) and (e).
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    In addition, all UITs would be subject to the rule's other 
requirements under the proposed amendments, as well as those of the 
federal securities laws generally, including section 35(d) of the Act. 
For example, we are not proposing to except UITs from the prohibition 
on names that suggest a guarantee by the U.S. government regardless of 
the date of initial deposit.\163\ Further, the ability to provide 
prospectus disclosure is not precluded by the fixed nature of a UIT's 
portfolio. As a result, UITs would be subject to the proposed plain 
English requirements, and as discussed above we would also require all 
UITs to make the prospectus disclosures that would be mandated under 
the proposed rule and to tag newly-required information in the 
prospectus using Inline XBRL.
---------------------------------------------------------------------------

    \163\ See proposed rule 35d-1(f) (not excepting applicable UITs 
from paragraph (a)(1) of the rule).
---------------------------------------------------------------------------

    We request comment on the proposed exception for certain UITs from 
the requirements to adopt an 80% investment policy and make certain 
records.

[[Page 36621]]

    94. Is it necessary to except the UITs that the proposed rule 
amendments describe from these provisions? Would UITs that have made an 
initial deposit of securities prior to the adoption of any rule 
amendments be able to make the appropriate name or portfolio 
adjustments necessary to conform to the 80% investment policy and 
related requirements? In general, what would be the impact on UITs 
currently in existence of the proposed changes to the scope of the 80% 
investment policy requirement?
    95. What would be the extent of the impact on UITs if we were not 
to include either of the sets of UITs in the proposed rule amendments' 
exceptions for UITs--that is, either UITs that have made an initial 
deposit of securities prior to July 31, 2002, or UITs that have made an 
initial deposit of securities prior to the effective date of any final 
rules the Commission adopts?
    96. Should these or other UITs be excepted from any other 
provisions? How would we ensure that investors are protected in those 
cases?

I. Transition Period and Compliance Date

    Staff in the Division of Investment Management is 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 any adoption 
of this proposal. Upon the adoption of any final rule amendments, some 
of these letters and other staff statements, or portions thereof, would 
be moot, superseded, or otherwise inconsistent with the final rule 
amendments and, therefore, would be withdrawn. If interested parties 
believe that additional staff letters or other staff statements should 
be withdrawn, they should identify the letter or other statement, state 
why it is relevant in light of the proposed rule amendments, how it or 
any specific portion thereof should be treated, and the reason 
therefor. The staff review would include, but would not necessarily be 
limited to, all of the staff no-action letters and other staff 
statements listed below.
    <bullet> Frequently Asked Questions about Rule 35d-1;
    <bullet> Disclosure by Funds Investing in Government Sponsored 
Enterprises (staff letter to the ICI, Oct. 17, 2003);
    <bullet> IM Guidance Update, No. 2013-12, Fund Names Suggesting 
Protection from Loss (Nov. 2013).
    Following a one-year transition period to provide time for funds to 
prepare to come into compliance with the proposed rule amendments, if 
adopted, funds would be required to comply with the requirements of the 
proposed names rule amendments, the proposed new prospectus disclosure 
requirements, and the proposed new Form N-PORT reporting requirements. 
At that time, as determined appropriate in connection with the staff's 
review of no-action letters and staff statements described in this 
release, staff no-action letters and other staff statements, or 
portions thereof, may be withdrawn.
    We propose to provide a one-year compliance period for the proposed 
names rule amendments, if adopted, to provide time for funds to bring 
their fund names and disclosures into conformity with the amendments. 
We propose that the transition period discussed in this section would 
run from the date of the publication of any final rule amendments in 
the Federal Register.
    We request comment on the proposed transition period.
    97. Do commenters agree that a one-year transition period provides 
time for funds to come into compliance with the proposed names rule? 
Should the period be shorter or longer?
    98. Should the transition period be the same for all funds that 
rely on the proposed names rule?
    99. Would our proposal to rescind the current staff statements 
discussed above provide sufficient time for funds to comply with the 
proposed names rule?
    100. Is it clear what statements would be withdrawn or rescinded? 
Are there additional letters or other statements, or portions thereof, 
that should be withdrawn or rescinded? If so, commenters should 
identify the letter or statements, state why it is relevant to the 
proposed rule, how it or any specific portion thereof should be 
treated, and the reason therefor.

III. Economic Analysis

A. Introduction

    We are mindful of the costs imposed by, and the benefits obtained 
from, our rules. Section 2(c) of the Investment Company Act provides 
that when the Commission is engaging in rulemaking under the Act and is 
required to consider or determine whether an action is consistent with 
the public interest, the Commission shall also consider whether the 
action will promote efficiency, competition, and capital formation, in 
addition to the protection of investors. The following analysis 
considers, in detail, the likely significant economic effects that may 
result from the proposed rule amendments, including the benefits and 
costs to investors and other market participants as well as the broader 
implications of the proposed rule amendments for efficiency, 
competition, and capital formation.
    Many of the benefits and costs discussed below are difficult to 
quantify. For example, the Commission cannot quantify how investors may 
change their investments in funds in response to the proposed rule 
amendments. Also, in some cases, data needed to quantify these economic 
effects are not currently available and the Commission does not have 
information or data that would allow such quantification. For example, 
monitoring and search costs may depend on investors' opportunity cost 
of time, which could differ across investors. While the Commission has 
attempted to quantify economic effects where possible, much of the 
discussion of economic effects is qualitative in nature. The Commission 
seeks comment on all aspects of the economic analysis, especially any 
data or information that would enable a quantification of the 
proposal's economic effects.

B. Broad Economic Considerations

    As discussed in section I.B above, we believe that a fund's name is 
an important piece of information that investors use to select a fund, 
and that asset managers give considerable thought to the fund names 
that they choose in light of their goals in communicating to investors. 
To the extent that holding investments inconsistent with the investment 
focus that a fund's name suggests could lead to increased assets under 
management and increased fees, however, the adviser may have an 
incentive for the fund to hold investments different from those 
suggested by the fund's name. For example, a fund may deviate from the 
investment focus suggested by its name in an attempt to outperform its 
peers and attract greater inflows. The potential for funds to hold 
investments that are not consistent with the investment focus that a 
fund's name suggests exists to the extent that there are costs for 
investors to monitor fund investments, either directly by reviewing 
fund disclosures or indirectly through third parties. Because there are 
costs for investors to monitor fund investments, fund advisers may be 
able to engage in activities that benefit themselves, rather than 
investors, through increased assets under management and fees without 
those activities invariably being detected by investors. Holding 
investments not consistent with the investment focus that a fund's name 
suggests could, in

[[Page 36622]]

turn, lead to investors holding investments that are inconsistent with 
their goals and risk tolerances.
    Research on fund names focuses on the relation between investment 
styles identified by fund names and the risks and returns generated by 
fund holdings.\164\ Academic research has found that funds may not 
follow an investment style that aligns with the investment style 
identified in a fund's name.\165\ Researchers have also found that 
certain funds have changed names in such a way as to suggest changes in 
style, but the funds do not subsequently change styles.\166\
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    \164\ Academic research generally distinguishes between the 
asset classes identified in fund names (e.g., ``equity'' or 
``debt'') versus ``investment style'' descriptions in fund names 
(e.g., value/growth, or small/mid/large-cap), and generally does not 
examine the relation between asset classes identified in fund names 
(e.g., ``equity'' or ``debt'') and portfolio holdings for funds 
currently subject to the 80% requirement.
    \165\ For example, See Anne-Florence Allard, Jonathan Krakow, 
and Kristien Smedts, ``When Mutual Fund Names Misinform,'' 2020, 
working paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3628293 (``Allard et al''). The authors 
examine 2,126 US equity funds, 1,339 of which have ``small,'' 
``large,'' ``growth,'' or ``value'' in their names. The authors 
conclude that ``that a significant fraction of US equity mutual 
funds provides inaccurate naming information: 33% of US equity 
mutual funds have, at least once in their life-cycle, an inaccurate 
name.'' See also E. Ghoul, and A. Karoui, What's in a (Green) Name? 
The Consequences Of Greening Fund Names On Fund Flows, Turnover, And 
Performance, 39 Finance Research Letters 101620 (2021). The authors 
find a statistically insignificant change in fund exposure to 
socially responsible investment following a fund name change 
suggesting socially responsible investment. B. Candelon, J. B. 
Hasse, J.-Q. Lajaunie, ESG-Washing in the Mutual Funds Industry? 
From Information Asymmetry to Regulation, Risks, 9, 199 (2021). The 
authors provide empirical evidence that some asset managers portray 
themselves as socially responsible yet do not make tangible 
investment decisions consistent with that portrayal.
    \166\ See Michael J. Cooper, Huseyin Gulen, and P. Raghavendra 
Rau, ``Changing Names with Style: Mutual Fund Name Changes and Their 
Effects on Fund Flows,'' Journal of Finance (2005, vol. 60, pp. 
2825-2858) (``Cooper Paper''). The authors identify 296 equity 
mutual funds that make a style name change over the period April 
1994 to July 2001. They find that 63% of style-related name changes 
are `misleading' in that they are not accompanied by corresponding 
changes in investment style to reflect the investment style 
suggested by the new name. See also Susanne Espenlaub, Imtiaz ul 
Haq, and Arif Khurshed, ``It's all in the name: Mutual fund name 
changes after SEC Rule 35d-1,'' Journal of Banking and Finance 
(2017, vol. 84, pp. 123-134) (``Espenlaub Paper''). The authors 
examine 2,677 fund name changes among 2,110 funds from the fourth 
quarter of 2001 through the fourth quarter of 2011. The authors find 
435 ``misleading'' name changes in their sample.
---------------------------------------------------------------------------

    That same research suggests that gaps between the investment style 
implied by a fund's name and the actual style of the fund are 
consistent with self-interest of the fund's adviser. For example, 
research findings suggest that funds' investment styles may be altered 
during the last part of a year, without changing their names to reflect 
a new style, in an effort to outperform their peers and attract greater 
inflows over the remainder of the year.\167\ Research findings also 
suggest that funds' name changes that do not also involve a style 
change may be intentional, in order to attract fund flows.\168\ In 
particular, these fund name changes tend to suggest fund styles that 
have performed well recently and that have received a disproportionate 
amount of fund flows (so-called ``hot'' fund styles).\169\ Also, the 
``hotter'' the style implied by a name change, the more flows funds 
attract from investors.\170\
---------------------------------------------------------------------------

    \167\ See Allard et al. The researchers find that funds that 
perform poorly over the first three quarters of a year, and funds 
that have experienced poor fund flows over the first three quarters 
of a year, are more likely to change to an investment style that is 
inconsistent with the style implied by the fund's name. These 
results suggest that funds that have performed poorly over the first 
three quarters of a year, and funds that have experienced poor fund 
flows over the first three quarters of a year, would bear an 
opportunity cost if they continued to follow the investment style 
consistent with the strategy implied by the funds' names.
    \168\ See Cooper Paper. The researchers find that funds that 
change their names: (1) experience negative flows, relative to their 
peers, prior to changing their names, (2) have performed poorly on a 
risk-adjusted basis, and (3) are in a style, irrespective of a 
fund's individual performance, that has recent poor performance. See 
also Espenlaub Paper. The researchers do not find a relation between 
prior fund flows and prior performance, but they do find a negative 
relation between management fees and the likelihood of a misleading 
name change. The researchers argue that because management fees are 
tied to assets under management, fund managers feel greater pressure 
to increase fund size in order to maintain personal incentives.
    \169\ See Cooper Paper.
    \170\ Id.
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C. Economic Baseline

    The baseline against which the costs, benefits, and the effects on 
efficiency, competition, and capital formation of the final rule are 
measured consists of the current state of the fund market, current 
practice as it relates to fund names and investment policies, and the 
current regulatory framework.
1. Fund Industry Overview
    The fund industry has grown and evolved substantially in past 
decades in response to various factors, including investor demand, 
technological developments, and an increase in domestic and 
international investment opportunities, both retail and institutional. 
As of July 2021, there were 10,223 mutual funds (excluding money market 
funds) with approximately $18,588 billion in total net assets, 2,320 
ETFs organized as an open-end fund or as a share-class of an open-end 
fund with approximately $6,447 billion in total net assets, 736 
registered closed-end funds with approximately $314 billion in total 
net assets, and 49 UITs with approximately $598 billion in total net 
assets.\171\ There also were 432 money market funds with approximately 
$5,534 billion in total net assets.\172\ Finally, as of July 2021, 
there were 99 BDCs with approximately $79 billion in total net 
assets.\173\
---------------------------------------------------------------------------

    \171\ Estimates of the number of registered investment companies 
and their total net assets are based on a staff analysis of Form N-
CEN filings as of July 31, 2021. For open-end management funds, 
closed-end funds, and management company separate accounts, total 
net assets is the sum of monthly average net assets across all funds 
in the sample during the reporting period (see Item C.19.a in Form 
N-CEN). For UITs, we only count N-CEN UIT filers that indicated 
registration on Form S-6 or Form N-8B-2. Furthermore, we use the 
total assets as of the end of the reporting period (see Item F.11 in 
Form N-CEN), and for UITs with missing total assets information, we 
use the aggregated contract value for the reporting period instead 
(see Item F.14.c in Form N-CEN).
    \172\ Estimates of the number of money market mutual funds and 
their total net assets are based on a staff analysis of Form N-MFP 
filings as of July 31, 2021.
    \173\ Estimates of the number of BDCs and their net assets are 
based on a staff analysis of Form 10-K and Form 10-Q filings as of 
June 30, 2021. Our estimate includes BDCs that may be delinquent or 
have filed extensions for their filings, and it excludes 4 wholly-
owned subsidiaries of other BDCs.
---------------------------------------------------------------------------

    The proposed rule amendments would also affect current and 
prospective individual investors who invest in funds. According to an 
association representing regulated funds, as of December 2020, 60.9 
million (47.4%) U.S. households and 106.3 million individuals owned 
U.S. registered investment companies.\174\ Median mutual fund assets of 
mutual fund-owning households were $126,700 with the median number of 
mutual funds held being four.\175\ Moreover, registered funds play an 
important role in individuals' retirement savings. 64% of households 
had tax-advantaged retirement savings with $11.1 trillion invested in 
mutual funds either through defined contribution plans or IRAs.\176\
---------------------------------------------------------------------------

    \174\ See 2021 ICI Fact Book.
    \175\ Id.
    \176\ Id.
---------------------------------------------------------------------------

(a) Market Practice
    Fund names are an important mechanism in marketing funds to 
investors. Although investors have access to the entirety of a fund's 
disclosures, a fund's name is often the first piece of fund information 
investors see and can have a significant impact on their investment 
decision. Fund names commonly include words that describe the fund's 
investment focus--for example, the asset class(es) in which the fund 
invests, as well as the fund's

[[Page 36623]]

investment strategy. For example, the words ``equity'' or ``stock'' 
appear in 9.6% of fund names. The words ``growth'' and ``income'' 
appear in 8.2% and 10.4% of fund names, respectively.\177\
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    \177\ Certain word pairs are also common in fund names. For 
example, the word pair ``small cap'' appears in 3.6% of fund names. 
Other common word pairs include ``large cap'' (2.1% of funds), 
``high yield'' (1.7% of funds), and ``emerging markets'' (3.4% of 
funds). We are not aware of any funds with the word pairs ``ESG 
Integration'' or ``ESG Integrated'' in their names.
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    Preliminary review of fund filings suggests that approximately 84% 
of funds have investment policies specifying a minimum percentage of 
investments consistent with a certain fund focus.\178\ Of those funds, 
approximately 82% have an investment policy requiring at least 80% of 
fund investments be consistent with a certain fund focus.\179\ Certain 
funds also specify investment maximums as a percentage of fund 
assets.\180\
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    \178\ This estimate is based on a random stratified sample of 
100 fund names, which is a representative sample based on fund size 
randomly selected from the population of N-CEN filings as of 
December 31, 2020. Specifically, 497 and 485BPOS fund prospectuses 
filed in 2019 or 2020 that match to the sample of 100 funds are 
parsed both programmatically and manually for keywords and phrases 
indicative of minimum investment commitment policies. 485BPOS refers 
to any post-effective amendments to the initial registration 
statement or prospectus filed pursuant to Securities Act Rule 
485(b). The investment policies for six funds could not be 
identified in the 497 and 485BPOS fund prospectuses filed in 2019 or 
2020. Therefore, these six funds are excluded for this estimate. The 
random sample of 100 funds referenced here is the same sample of 
funds as that used to estimate the percentage of funds whose names 
implicate the 80% requirement. See infra section III.C.3
    \179\ 18% of funds that have investment policies specifying a 
minimum percentage of investments consistent with a certain fund 
focus specify a percentage less than 80%. We note that while 69% of 
funds have an investment policy requiring at least 80% of fund 
investments be consistent with a certain investment strategy, we 
estimate that 62% of funds have names that trigger the 80% 
requirement (discussed below). These results suggest that funds may 
adopt 80% investment policies even if they are not currently within 
the scope of the names rule's current requirement to adopt an 80% 
investment policy.
    \180\ For example, a fund may specify that it invests no more 
than a given percentage of fund assets in a given country or 
geographic region.
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(b) Current Regulatory Framework
    As discussed above, section 35(d) the Act authorizes the Commission 
to define such fund names or titles as are materially deceptive or 
misleading.\181\ The names rule generally requires that if a fund's 
name suggests a particular type of investment, industry, or geographic 
focus, the fund must invest at least 80% of its assets in the type of 
investment, industry, country, or geographic region suggested by its 
name. The names rule also provides that a fund's 80% investment policy 
applies ``under normal circumstances''--giving funds flexibility to 
take cash or other defensive positions during market crises. The names 
rule also imposes an 80% investment policy requirement for tax-exempt 
funds.\182\ Under the rule, a fund may generally 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.\183\ A preliminary review of fund names suggests that 
approximately 62% of funds have names that implicate the 80% investment 
policy requirement.\184\
---------------------------------------------------------------------------

    \181\ See supra section I.A.
    \182\ See supra footnote 10.
    \183\ See supra footnote 11
    \184\ This estimate is based on a random stratified sample of 
100 fund names. See supra footnote 178.
---------------------------------------------------------------------------

    Staff generally reviews initial fund registration statements, 
certain post-effective amendments, and proxy statements. Staff may 
provide comments, and these comments may address the fund's name in 
light of the names rule's requirements.\185\ Registration statements 
for most new mutual funds and ETFs organized as corporations, as well 
as material changes to these funds, automatically go effective after a 
period of time, typically 75 days for new funds and 60 days for funds 
with material changes. For new mutual funds and ETFs organized as 
trusts and many closed-end funds, filings typically become effective 
pursuant to Commission action that has been delegated to the 
staff.\186\
---------------------------------------------------------------------------

    \185\ See discussion at supra footnote 35. Staff do not approve 
any fund or its disclosure.
    \186\ See, e.g., 17 CFR 200.30-5(b).
---------------------------------------------------------------------------

    In addition, no less frequently than once every three years, staff 
reviews the annual report of all management investment companies, 
including their financial statements (``SOX Reviews''). As part of that 
review, staff may provide comments to funds to the extent staff 
observes fund holdings that are inconsistent with its disclosure. All 
registered management investment companies (other than money market 
funds and small business investment companies), as well as UITs 
operating as ETFs, file Form N-PORT with the Commission on a monthly 
basis. Form N-PORT requires reporting of a fund's complete portfolio 
holdings in a structured data language, with every third month 
available to the public 60 days after the end of the fund's fiscal 
quarter.

D. Benefits, Costs, and Effects on Efficiency, Competition and Capital 
Formation

    The proposed amendments are designed to modernize and enhance the 
investor protections that the names rule currently provides. The 
proposed amendments would improve and clarify the requirement for 
certain funds to adopt a policy to invest at least 80% of their assets 
in accordance with the investment focus that the fund's name suggests. 
These amendments are designed to ensure that fund names that 
communicate to investors that the fund focuses its investments in a 
particular way are addressed by the rule, and to address investors' 
reasonable expectations regarding the focus that the fund's name 
communicates. The proposed amendments also would update the rule's 
notice requirements, establish recordkeeping requirements, and require 
enhanced prospectus disclosure and reporting on Form N-PORT.
1. Benefits
    The investor protections provided by the names rule benefit 
investors by helping to ensure investors' assets in funds are invested 
in accordance with their investment goals and risk tolerances.\187\ For 
example, the current scope of the rule has created interpretive issues, 
including about whether certain fund names are subject to the names 
rule, which in turn has raised questions about the rule's application 
with respect to particular fund names that could mislead investors 
about the fund's investment focus. Also, under certain circumstances, 
the current structure of the rule may not protect investors from funds 
departing from the investment focus suggested by their name over time. 
Additionally, the investor protections provided by the names rule are 
not designed to address funds' increasing use of derivatives.
---------------------------------------------------------------------------

    \187\ See supra footnote 5.
---------------------------------------------------------------------------

    The benefits associated with the proposed amendments may vary based 
on funds' current practices. Our understanding is that certain funds, 
even those that are not currently within the scope of the names rule, 
currently have in place practices related to investing a certain 
percentage of their assets in a particular type of assets or assets 
that have certain characteristics. Depending on the extent to which 
those practices differ across funds or differ from the proposed rule's 
requirements, the benefits realized by fund investors, as detailed 
below, may vary across fund investors.

[[Page 36624]]

    Names Suggesting an Investment Focus. To the extent fund names are 
not representative of funds' investment focuses, existing and potential 
investors may hold, or invest in, funds with risk and return 
characteristics that differ from investors' reasonable expectations. 
Absent investor protections with respect to fund holdings, existing 
investors may expend resources they otherwise would not expend to 
confirm fund investments, or they may choose to reduce or eliminate 
their investments in funds. Similarly, uncertainty about fund holdings 
could cause potential investors to expend greater resources to confirm 
fund investments prior to investment or, could lead potential investors 
to invest less or forgo investment altogether. The proposed amendments 
would extend the provisions of the names rule to a broader set of fund 
names. We believe that investors would benefit to the extent that the 
scope expansion helps ensure that a fund's investment activity supports 
the investment focus its name communicates and, thus, the investor 
expectations the name creates.
    Temporary Departures. The proposed amendments would permit a fund 
to depart temporarily from the requirement to invest at least 80% of 
the value of its assets in accordance with the investment focus its 
name suggests only: (1) as a result of market fluctuations, or other 
circumstances where the temporary departure is not caused by the fund's 
purchase or sale of a security or the fund's entering into or exiting 
an investment; (2) to address unusually large cash inflows or unusually 
large redemptions; (3) to take a position in cash and cash equivalents 
or government securities to avoid a loss in response to adverse market, 
economic, political, or other conditions; (4) to reposition or 
liquidate a fund's assets in connection with a reorganization, to 
launch the fund, or when notice of a change in the fund's 80% 
investment policy has been provided to fund shareholders pursuant to 
the rule.\188\ Unlike the more principles-based approach of the current 
rule, the proposed rule would specify the circumstances where a fund's 
temporary departure from the 80% investment requirement would be 
permitted. We believe that funds and their shareholders would benefit 
from the degree of flexibility that the proposed approach would 
provide, as it would allow fund managers to depart temporarily from the 
80% investment requirement in particular, time-limited circumstances 
when doing so would be beneficial to the fund and its shareholders, 
while providing additional parameters designed to prevent a fund from 
investing inconsistently with its 80% investment policy for an extended 
period of time.
---------------------------------------------------------------------------

    \188\ See supra footnote 54.
---------------------------------------------------------------------------

    Considerations Regarding Derivatives in Assessing Names Rule 
Compliance. The proposed amendments would also address the valuation of 
derivatives instruments for purposes of determining a fund's compliance 
with its 80% investment policy, as well as the derivatives that a fund 
may include in its 80% basket. The proposed amendments would require 
that, in calculating its assets for purposes of names rule compliance, 
a fund must value each derivatives instrument using its notional 
amount, with certain adjustments, and reduce the value of its assets by 
excluding cash and cash equivalents up to the notional amount of the 
derivatives instrument(s).\189\ The proposed amendments also would 
specify that, in addition to any derivatives instrument that a fund 
includes in its 80% basket because the derivatives instrument provides 
investment exposure to the investments suggested by the fund's name, 
the fund also may include in its 80% basket a derivatives instrument 
that provides investment exposure to one or more of the market risk 
factors associated with investments suggested by a fund's name. As 
discussed above, a derivatives instrument's ``value,'' as defined in 
the Act, may bear no relation to the investment exposure created by the 
derivatives instrument.\190\ We believe the notional amount generally 
serves as a better measure (than market value) of the fund's investment 
exposure to the underlying reference asset or metric. Also, as 
discussed in section II.A.3 above, using derivatives instruments' 
market values for purposes of assessing names rule compliance could 
result in a fund being in compliance with the fund's 80% investment 
policy despite the fund having significant exposure to investments that 
are not suggested by the fund's name.\191\ Our proposed amendments 
would benefit investors by allowing funds that use derivatives to use 
names that may more effectively communicate their investments and risks 
and reduce the risk that a fund may use derivatives to invest in a 
manner inconsistent with the investment focus suggested by the fund's 
name.
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    \189\ See proposed rule 35d-1(g)(2).
    \190\ See discussion in section II.A.3.
    \191\ We request comment above on funds' current practices 
regarding including or excluding short positions in their 80% basket 
and whether any changes in this area would be appropriate.
---------------------------------------------------------------------------

    Unlisted Closed-End Funds and BDCs. Under the proposed rule 
amendments, unlisted closed-end funds and BDCs would not be permitted 
to change their 80% investment policies without shareholder approval. 
Unlisted closed-end funds and BDCs do not issue redeemable shares or 
list their shares on a national securities exchange. Shareholders in an 
unlisted closed-end fund or BDC generally would have no ready recourse, 
such as the ability to redeem or quickly sell their shares, if the fund 
were to change its investment policy and the investment focus that the 
fund's name indicates. The absence of recourse would tend to reduce 
investor protections with respect to fund investments. The proposed 
amendments would increase investor protections by requiring that a 
fund's 80% investment policy be a fundamental investment policy, and 
this would, in turn, require unlisted closed-end funds and BDCs to 
secure investor approval before changing their 80% investment policies.
    Effect of Compliance with an 80% Investment Policy. We are 
proposing a new provision in the names rule providing that a fund's 
name may be materially deceptive or misleading under section 35(d) even 
if the fund adopts an 80% investment policy and otherwise complies with 
the rule's requirement to adopt and implement the policy.\192\ The 
Commission has previously stated that the names rule's 80% investment 
policy requirement is not intended to create a safe harbor for fund 
names.\193\ We believe that investors will benefit from the enhanced 
protections created by the codification of the view that a fund name 
may be materially deceptive or misleading even where the fund complies 
with its 80% investment policy.
---------------------------------------------------------------------------

    \192\ Proposed rule 35d-1(c).
    \193\ See supra footnote 101.
---------------------------------------------------------------------------

    Materially Deceptive and Misleading Use of ESG Terminology in 
Certain Fund Names. The proposed amendments would define the names of 
``integration funds'' as materially deceptive and misleading if the 
name includes terms indicating that the fund's investment decisions 
incorporate one or more ESG factors. We believe that the proposed 
amendments would benefit those investors who prefer to invest in funds 
for which ESG factors are determinative in deciding whether to include 
or exclude any portfolio investment, because the proposed amendments 
would make it easier for these investors to select funds that meet 
these criteria and distinguish them from integration funds. For those 
investors, we anticipate that this benefit would

[[Page 36625]]

result from the way that the proposed amendments address names that 
have the potential to overstate the importance of ESG factors in a 
fund's selection of its portfolio investments, in that the proposed 
amendments effectively define this practice to be materially deceptive 
and misleading.
    Prospectus Disclosure. We are also proposing amendments to funds' 
registration forms that would require each fund that is required to 
adopt and implement an 80% investment policy to include disclosure in 
its prospectus that defines the terms used in its name, including the 
specific criteria the fund uses to select the investments that the term 
describes, if any.\194\ We believe that these provision would help the 
investor understand whether the investment focus the name suggests is 
consistent with the investor's investment goals and risk tolerance. The 
proposed amendments would also reduce costs for investors to search for 
funds that match their investment preferences and facilitate monitoring 
by investors or third parties as well as facilitate oversight by the 
Commission.\195\
---------------------------------------------------------------------------

    \194\ See supra footnote 104.
    \195\ See section II.B, section II.C, section II.F and section 
II.G for discussions of how the proposed prospectus disclosure 
requirements, plain English requirements, N-PORT reporting 
requirements, and recordkeeping requirements, respectively, 
facilitate monitoring of fund investments by investors or third 
parties as well facilitate oversight by the Commission.
---------------------------------------------------------------------------

    The proposed amendments would require funds to tag the new 
prospectus disclosure in Inline XBRL, a structured, machine-readable 
data language.\196\ This requirement is designed to make the proposed 
disclosures more readily accessible for aggregation, comparison, 
filtering, and other analysis. As a point of comparison, XBRL 
requirements for public operating company financial statement 
disclosures have been observed to improve investor understanding of the 
disclosed information.\197\ While those observations are specific to 
operating company financial statement disclosures (including 
footnotes), and not to disclosures from funds outside the financial 
statements, they indicate that the proposed Inline XBRL requirements 
could provide fund investors with increased insight into term 
definitions and investment selection criteria at specific funds and 
across funds, asset managers, and time periods.\198\ Additionally, 
while Forms N-8B-2 and S-6 would be structured only for this proposed 
disclosure requirement, we do not expect this to negatively impact 
investors' ability to understand the disclosures on these Forms. An 
Inline XBRL requirement would ensure that all disclosures on these 
forms--including both structured and unstructured disclosures--would be 
human-readable, because Inline XBRL enables a single document to 
include both human-readable and machine-readable disclosure.
---------------------------------------------------------------------------

    \196\ See section II.B.
    \197\ See, e.g., Birt, J., Muthusamy, K. & P. Bir, XBRL and the 
Qualitative Characteristics of Useful Financial Information, 30 
Account. Res. J. 107 (2017) (finding ``financial information 
presented with XBRL tagging is significantly more relevant, 
understandable and comparable to non-professional investors''); 
Cahan, S.F., Chang, S., Siqueira, W.Z. & K. Tam, The roles of XBRL 
and processed XBRL in 10-K readability, J. Bus. Fin. Account. (2021) 
(finding 10-K file size reduces readability before XBRL's adoption 
since 2012, but increases readability after XBRL adoption, 
indicating ``more XBRL data improves users' understanding of the 
financial statements''); Efendi, J., Park, J.D. & C. Subramaniam, 
Does the XBRL Reporting Format Provide Incremental Information 
Value? A Study Using XBRL Disclosures During the Voluntary Filing 
Program, 52 Abacus 259 (2016) (finding XBRL filings have larger 
relative informational value than HTML filings).
    \198\ Investors could benefit from their direct use of the 
Inline XBRL data, or through indirect use of the indirect data 
(i.e., through information intermediaries such as financial media, 
data aggregators, academic researchers, et al.). See, e.g., 
Trentmann, N., Companies Adjust Earnings for Covid-19 Costs, but Are 
They Still a One-Time Expense? The Wall Street Journal (2020) 
(citing an XBRL research software provider as a source for the 
analysis described in the article); Bloomberg Lists BSE XBRL Data, 
XBRL.org (2018); Hoitash, R & U. Hoitash, Measuring accounting 
reporting complexity with XBRL. 93 Account. Rev. 259-287 (2018). 
Also, in contrast to XBRL financial statements (including 
footnotes), which consist of tagged quantitative and narrative 
disclosures, the proposed disclosures here do not expressly require 
the disclosure of any quantitative values (if a fund were to include 
any quantitative values as nested within the required discussion, 
for example by disclosing a specific upper limit of greenhouse gas 
emissions as a selection criterion, those values would also be 
individually detail tagged, in addition to the block text tagging of 
the narrative discussion). Tagging narrative disclosures can 
facilitate analytical benefits such as automatic comparison/
redlining of these disclosures against prior periods and the 
performance of targeted artificial intelligence/machine learning 
(``AI/ML'') assessments (tonality, sentiment, risk words, etc.) of 
specific definition and selection criteria disclosures rather than 
the entire unstructured document.
---------------------------------------------------------------------------

    We are also proposing to require that any terms used in the fund's 
name that suggest either an investment focus, or that the fund is a 
tax-exempt fund, must be consistent with those terms' plain English 
meaning or established industry use. This requirement is designed to 
provide investors with a better understanding of the fund and its 
investment objectives by effectively requiring a fund's name to be 
consistent with a reasonable investor's likely understanding of the 
investment focus or tax status that the fund's name suggests.
    New Form N-PORT Reporting Requirements. We are also proposing to 
amend Form N-PORT to include a new reporting requirement regarding a 
registered investment companies' names rule compliance.\199\ Registered 
investment companies, other than money market funds, required to adopt 
an 80% investment policy would be required to report on Form N-PORT: 
(1) the value of the fund's 80% basket, as a percentage of the value of 
the fund's assets, and (2) if applicable, the number of days that the 
value of the fund's 80% basket fell below 80% of the value of the 
fund's assets during the reporting period. There would also be a 
proposed new Form N-PORT reporting item requiring a fund that is a Form 
N-PORT filer and that is subject to the 80% investment policy 
requirement to indicate, with respect to each portfolio investment, 
whether the investment is included in the fund's 80% basket. We believe 
that the new information that funds would be required to report on Form 
N-PORT filings would facilitate the Commission's oversight of funds' 
names rule compliance and assist Commission staff in examination, 
enforcement, and monitoring with respect to the consistency between 
funds' portfolio investments and the investment focus that the fund's 
name suggests. In addition to assisting the Commission in its 
regulatory functions, we believe that investors and other potential 
users would benefit from the periodic public disclosure of the 
information reported on Form N-PORT. Although Form N-PORT is not 
primarily designed for disclosing information directly to individual 
investors, we believe that entities providing services to investors, 
such as investment advisers, broker-dealers, and entities that provide 
information and analysis for fund investors, would also utilize and 
analyze the new information that will be required by the proposed 
amendments to Form N-PORT to monitor fund investments for consistency 
with investment focuses suggested by fund names. Accordingly, whether 
directly or through third parties, we believe that the proposed new 
disclosure on Form N-PORT will benefit all fund investors.
---------------------------------------------------------------------------

    \199\ As discussed above, the proposed amendments to Form N-
PORT, like all Form N-PORT reporting requirements, apply to 
registered investment companies other than money market funds. BDCs 
are not subject to any Form N-PORT reporting requirements and thus 
would not be subject to the proposed amendments to Form N-PORT. See 
supra footnote 141.
---------------------------------------------------------------------------

    Recordkeeping. The proposed amendments would require funds to 
maintain certain records depending on whether the fund would be 
required to

[[Page 36626]]

adopt an 80% investment policy.\200\ While the amendments would not 
prescribe the particular form of documentation required to be 
maintained, funds generally should maintain appropriate documentation 
that would be sufficient for a third party to verify the matter covered 
by each record. These proposed requirements would provide our staff, 
and a fund's compliance personnel, the ability to evaluate the fund's 
compliance with the proposed amendments and thereby would benefit 
investors.
---------------------------------------------------------------------------

    \200\ See proposed rule 35d-1(b)(3).
---------------------------------------------------------------------------

    Notice Requirement. The proposed amendments would also protect 
investors by modifying the current notice requirements when a fund 
chooses to change its investment policy. The proposed amendments are 
designed to draw investor attention to the upcoming change that the 
notice documents describe, clarify the requirements for the notice, and 
provide investors with more consistent information. The proposed 
amendments also incorporate changes to the notice requirement to 
provide specificity with respect to notices that may be delivered 
electronically. These changes would help ensure that investors who have 
opted into electronic delivery will receive the notices the names rule 
requires in the format that they prefer.
    Unit Investment Trusts. The proposed rule amendments would except 
UITs that have made their initial deposit of securities prior to the 
effective date of any final rule amendments the Commission adopts from 
the requirements to adopt an 80% investment policy and the 
recordkeeping requirements, including recordkeeping for funds which do 
not adopt an 80% investment policy, unless the UIT has already 
adopted--or was required to adopt at the time of the initial deposit--
an 80% investment policy under the current rule.\201\ UITs are 
passively managed vehicles that operate pursuant to a trust indenture 
or a similar document and have fixed portfolios that would make it 
difficult to adjust their portfolios to comply with the rule's 
portfolio composition requirements.\202\ The proposed exception would 
benefit investors in UITs that meet the requirements of the exception 
by allowing those UITs to avoid changes to an UIT's operational 
documents that are potentially expensive and time-consuming, and could 
result in inconvenience to extant investors.
---------------------------------------------------------------------------

    \201\ Proposed rule 35d-1(f).
    \202\ See supra footnote 160.
---------------------------------------------------------------------------

    Effects on Efficiency, Competition and Capital Formation. To the 
extent the proposed amendments would ensure that fund names are more 
appropriately representative of a fund's investment focus, we predict 
that investors will benefit. Developing a dollar figure for this 
predicted benefit is complex, however. We do not observe investors' 
decision-making and resources expended in the management of their 
investment portfolio, nor do we observe the cost to investors from 
being invested in a fund that does not match their preferences. To the 
extent fund names would be more appropriately representative of the 
fund investment focus under the proposed amendments and to the extent 
those more appropriately representative fund names would allow 
investors to more easily select funds that better matched their 
preferences, however, we would expect the efficiency of investment to 
increase.
    To the extent the proposed amendments increase efficiency of 
investment in the funds market, then we may observe a change in 
investment in funds. For example, if there are investors who currently 
do not invest in certain funds (or invest less than they would have) 
because it is too costly to search for funds that match their 
investment preferences, or if investors lack confidence that funds' 
names accurately convey funds' investment focuses, then to the extent 
the proposed amendments lower those costs and enhance investor 
protections, we would expect to observe more investors entering the 
funds market.\203\ To the extent that competition in a market is 
related to the size of the market, the effect of this potential 
increase in investor demand for funds could increase competition in the 
funds market.
---------------------------------------------------------------------------

    \203\ For example, by decreasing potential greenwashing 
concerns, the proposed amendments, in turn, may increase investor 
confidence in selecting funds with names implying an ESG strategy 
and increase capital formation among ESG issuers.
---------------------------------------------------------------------------

    The proposed amendments could affect competition through an 
additional channel. Certain funds may have established reputations for 
making investments consistent with the fund's investment focus. 
Investors wishing to invest in funds with specific investment focuses 
may have greater confidence investing in funds with established 
reputations for investing in a way consistent with the fund's 
investment focus.\204\ There may be investors who do not invest in 
funds lacking established reputations for making investments consistent 
with fund focuses (or invest less than they would have) because those 
investors are less confident that such funds will make investments 
consistent with funds' investment focuses. We would expect the investor 
protections offered by the proposed amendments to lead to greater 
investor confidence that funds' names accurately convey funds' 
investment focuses which could, in turn, enhance the ability of funds 
without established reputations to compete with those funds with 
established reputations which could, in turn, lead to increased 
investment for funds without established reputations.\205\
---------------------------------------------------------------------------

    \204\ Investors may believe that these funds have an incentive 
to protect the value of their reputations by continuing to invest in 
ways consistent with their names. See Klein, Benjamin and Keith B. 
Leffler, The Role of Market Forces in Assuring Contractual 
Performance. Journal of Political Economy 89, 615-641 (1981) 
(``Klein Paper'').
    \205\ This argument assumes that fund reputation and investor 
protections provided by regulatory requirements are substitute 
mechanisms for providing assurances to investors.
---------------------------------------------------------------------------

    If the proposed amendments increase the efficiency of investment in 
the funds market, then we may observe an increase in investment in 
funds. Greater investment in funds could lead to increased demand for 
securities held by funds. The increased demand for securities could, in 
turn, facilitate capital formation. We note, however, that to the 
extent increased investment in funds reflects substitution from other 
investments, the effect on capital formation would be attenuated.
2. Costs
    We believe that compliance costs associated with the proposed 
amendments, particularly those that expand the current scope of the 
names rule, would vary based on a fund's current practices with respect 
to adopting policies to invest a particular percentage of fund assets 
in investments that have, or whose issuers have, particular 
characteristics. We also believe that certain funds' current investment 
policies may already be in line with many of the proposed rule's 
requirements or could be readily conformed without material change. For 
example, as discussed in section III.C.1 above, preliminary review of 
fund filings suggests that more funds have minimum investment policies 
than are required to do so under the current names rule.\206\
---------------------------------------------------------------------------

    \206\ See supra footnote 179.
---------------------------------------------------------------------------

    We expect that funds would incur costs to review the proposed 
rule's requirements and modify, as necessary, their investing 
practices, policies and procedures, and recordkeeping to comply with 
the proposed rule. Even

[[Page 36627]]

though we understand that many funds, even those that are not currently 
within the scope of the names rule, currently have in place practices 
related to investing a certain percentage of their assets in a 
particular type of assets or assets that have certain characteristics, 
those practices may differ across funds and also may differ from the 
proposed rule's requirements.
    Certain costs may be fixed, while other costs may vary with the 
size of the fund and its investment focus. For instance, certain funds 
may determine that, in furtherance of the 80% investment policy that 
the rule requires, they will need to create or purchase certain data 
used in selecting investments consistent with the fund's investment 
focus. Costs associated with either creating or purchasing certain data 
used in selecting investments may not vary much across funds. For 
example, growth funds may rely on financial data when selecting fund 
portfolio investments. Generally Accepted Accounting Principles promote 
consistency and comparability in reported financial information. The 
consistency and comparability of reported financial information leads 
to similar costs across funds, regardless of investment focus. On the 
other hand, the cost of certain data may vary across funds based on 
investment focus. For example, funds with an ESG focus may face a lack 
of consistent and comparable ESG information. The lack of consistent 
and comparable information could increase the cost, relative to funds 
with other investment focuses, of determining whether an investment is 
consistent with a fund's investment focus.
    Also, larger funds or funds that are part of a large fund complex 
may incur higher costs in absolute terms but find it less costly, per 
dollar managed, to meet the requirements of the proposed amendments. 
For example, larger funds may have to allocate a smaller portion of 
existing resources, and fund complexes may realize economies of scale 
in complying with the proposed amendment's requirements for several 
funds.
    Names Suggesting an Investment Focus. The proposed amendments would 
broaden the scope of the names rule's current 80% investment policy 
requirement to also apply to fund names that include terms suggesting 
that the fund focuses in investments that have, or whose issuers have, 
particular characteristics.\207\ We estimate that approximately 8,250 
(62%) funds are currently subject to this names rule requirement and 
that our proposed rule amendments would increase this estimate to 
approximately 10,000 (75%) funds.\208\ Fund registration forms 
currently require each fund to include disclosure in its prospectus 
that describes its principal investment strategies (including the type 
or types of securities in which the fund invests or will invest 
principally).\209\ We believe funds with names that would be newly 
scoped into the names rule's 80% investment policy requirement under 
the proposed amendments already have systems in place for monitoring 
compliance with existing principal investment strategy disclosure 
requirements. As a result, we believe funds with names that would be 
newly scoped in already have internal systems that could be used to 
assess compliance with the proposed rule. Funds would need to develop 
new, or revise existing, recordkeeping processes as discussed below. 
Funds with names that are newly scoped into the 80% investment policy 
requirement may also face an indirect cost in the need to calculate 
whether a specific asset would qualify as part of a fund's 80% basket.
---------------------------------------------------------------------------

    \207\ See section II.A.1 and supra footnote 31.
    \208\ See note 3 of Table 6.
    \209\ See, e.g., Item 9(b)(1) of Form N-1A. Instruction 2 to 
Item 9(b)(1) of Form N-1A states that a fund shall, in determining 
whether a strategy is a principal investment strategy, consider, 
among other things, the amount of the fund's assets expected to be 
committed to the strategy, the amount of the fund's assets expected 
to be placed at risk by the strategy, and the likelihood of the 
fund's losing some or all of those assets from implementing the 
strategy. See also Item 8(2)(b) of Form N-2. Item 8(2)(b) requires 
the registrant to disclose the investment objectives and policies of 
the registrant that will constitute its principal portfolio emphasis 
as well as how it proposes to meet its objectives, including: (1) 
the types of securities in which the registrant invests or will 
invest principally, and (2) the identity of any particular industry 
or group of industries in which the registrant proposes to 
concentrate.
---------------------------------------------------------------------------

    Temporary Departures. The proposed amendments would retain a fund's 
ability to depart temporarily from the 80% investment requirement, but 
eliminate advisers' ability to define the circumstances. The proposed 
amendments would also require that a fund departing from the 80% 
investment requirement must bring its investments back into compliance 
as soon as reasonably practicable, and that the maximum amount of time 
for the departure would be 30 consecutive days, other than in the case 
of a fund launch (which would be limited to 180 consecutive days 
starting from the day the fund commences operations), a reorganization, 
or when notice of a change in a fund's policy has been provided to fund 
shareholders under the rule. This change could create a cost for 
investors if there exist circumstances where departing from the 80% 
investment requirement would be beneficial to the fund and its 
shareholders, the proposed amendments would not allow a departure, and 
absent the proposed amendments, an adviser would have characterized the 
circumstance as allowing a departure. For example, investors may 
experience lower returns if funds are forced to sell assets at 
depressed prices, or in a tax-disadvantaged manner, or if funds are 
forced to purchase less liquid securities in a compressed timeframe 
which could drive up the price for those securities. Also, to the 
extent that funds' assets become less liquid during a market crisis, 
funds' ability to manage liquidity risk may be affected as well as 
funds' ability to meet redemptions. Conversely, a departure for longer 
than 30 days to address a market disruption might frustrate the 
expectation of investors who may expect the fund to invest consistent 
with its stated investment focus even during market disruptions, and 
therefore may choose to rebalance investments on their own rather than 
relying upon the fund to do so. To the extent that they do not already 
have systems in place for doing so, funds would have to set up systems 
to monitor departures from the 80% investment requirement, the reasons 
for departures, and the time limits for returning to the 80% investment 
requirement.
    Considerations Regarding Derivatives in Assessing Names Rule 
Compliance. The proposed rule would address the valuation of 
derivatives instruments for purposes of determining the fund's 
compliance with its 80% investment policy requirement. The proposed 
amendments would require that, in calculating its assets for purposes 
of names rule compliance, a fund must use the notional amount of each 
derivatives instrument, with certain adjustments as discussed above, 
and reduce the value of its assets by excluding cash and cash 
equivalents up to the notional amounts of the derivatives 
instrument(s).\210\ The proposed amendments also would specify that a 
fund may include in its 80% basket derivatives that provide investment 
exposure to one or more of the market risk factors associated with 
investments suggested by the fund's name.\211\ Our understanding is 
that funds that use derivatives typically calculate notional amounts 
for purposes other than names rule compliance.\212\

[[Page 36628]]

As such, we do not believe there would be additional costs associated 
with calculating notional values. We understand, however, that meeting 
the requirements of the proposed amendments could require reprogramming 
of internal systems for funds not currently subject to the names rule, 
and reprogramming of existing systems used for monitoring names rule 
compliance by funds currently subject to the names rule.
---------------------------------------------------------------------------

    \210\ See proposed rule 35d-1(g)(2).
    \211\ See proposed rule 35d-1(b)(2).
    \212\ For example, rule 18f-4 includes an exception from certain 
of the rule's requirements that requires the calculation of notional 
amounts. More generally, however, we believe that funds that use 
derivatives typically consider notional amounts when entering into 
derivatives contracts or when considering the economic effects of a 
derivatives contract within an existing portfolio.
---------------------------------------------------------------------------

    Commenters suggest that certain investors care about more than the 
expected returns and exposures their investments create.\213\ For 
example, certain investors may care about the environmental or social 
impact of their investments (e.g., investors in ESG funds, or funds 
whose strategies involve the application of moral parameters).\214\ 
Those investors may value funds investing directly in the securities of 
certain issuers, rather than simply having an indirect exposer to those 
securities through fund derivatives positions--e.g., direct equity 
investments typically include voting rights and an ability, under 
certain conditions, to make shareholder proposals, whereas equity 
derivatives do not. To the extent investors value direct investment in 
issuer securities rather than simply having an indirect exposure to 
them through derivatives, investors may expend greater resources to 
monitor whether funds are making direct investments rather than using 
derivatives to meet the proposed amendments' 80% investment 
requirement.\215\
---------------------------------------------------------------------------

    \213\ See AllianzGI Comment Letter, Cantrell and Estevez Comment 
Letter, IRC Comment Letter, Federated Hermes Comment Letter, Hull 
Comment Letter, PRI Comment Letter, and Schanzenbach Comment Letter.
    \214\ See, e.g., Nia Impact Capital Comment Letter (stating ``. 
. . our core objective is to generate a competitive rate of return 
for our clients, while creating a positive impact for investors, for 
society and for our planet''); Allianz Letter (stating ``ESG 
strategies seek to meet a common non-investment objective without 
detracting from return relative to capweighted benchmarks'').
    \215\ As discussed in section II.A.3 above, costs such as 
transaction and custody costs can be lower for indirect investments 
via derivatives than they are for direct investments. See also, 
e.g., Daniel N. Deli and Raj Varma, ``Contracting in the investment 
management industry: Evidence from mutual funds,'' Journal of 
Financial Economics (2002, vol. 63, pp. 79-98) (``Deli and Varma 
Paper''). The authors argue that derivatives can provide 
transaction-cost benefits relative to direct investment. Also as 
discussed in section II.A.3 above, a derivatives instrument's 
``value,'' as defined in the Act, may bear no relation to the 
financial exposure created by the derivatives instrument. For 
example, a fund entering into a swap or other derivative referencing 
a market index with a notional amount of $1 million would achieve 
the same investment exposure as investing $1 million in the 
underlying securities directly, but the swap's market value 
therefore generally would be far smaller than $1 million and would 
not reflect the swap's market exposure. The swap's market value may 
be a small percentage of the fund's net assets. Under the current 
rule, then, fund advisers may forgo the potential transaction-cost 
benefits associated with the use of derivatives, or use them to a 
lesser degree, because using derivatives may not allow a fund to 
meet the rule's 80% requirements. Under the proposed amendments, 
however, using derivatives may allow a fund to both realize the 
transaction-costs benefits associated with derivatives and meet the 
80% requirements of the names rule.
---------------------------------------------------------------------------

    Unlisted Closed-End Funds and BDCs. Under the proposed rule 
amendments, unlisted closed-end funds and BDCs would not be permitted 
to change their 80% investment policies without shareholder approval. 
Rather than adopting a policy to notify investors 60 days prior to any 
change in its 80% investment policy, unlisted closed-end funds and BDCs 
would be required to obtain shareholder approval. The costs of 
obtaining shareholder approval would include legal and accounting fees 
incurred in connection with preparing proxy materials, the costs of 
printing and mailing the proxy materials, the cost of an external proxy 
solicitor, if one is used, and the cost of holding an annual or special 
meeting of the shareholders.\216\
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    \216\ In 2019, the ICI surveyed its member firms with respect to 
the costs of obtaining shareholder approval for proposals requiring 
funds to obtain a quorum of greater than 50% to approve. The ICI 
reports that 64 member firms with over $18 trillion of US-registered 
fund assets responded. Cost estimates for 145 separate campaigns 
totaled $373 million. The ICI also reports that: (1) 22 campaigns 
had costs greater than, or equal to, $1 million, (2) eight had costs 
greater than or equal to $10 million, and (3) the most expensive 
campaign was $107 million. The ICI report does not disaggregate data 
on the cost of obtaining shareholder approval for changes to a 
fund's fundamental investment policies. See Comment Letter of the 
Investment Company Institute regarding the SEC Roundtable on the 
Proxy Process (File No. 4-725) (December 23, 2019) available at 
https://www.sec.gov/comments/4-725/4725-6580709-201124.pdf. In a 
2002 rulemaking related to fund mergers, we estimated the cost of 
obtaining shareholder approval to be $75,000. We did not received 
any comments on that estimate. See Investment Company Mergers, 
Investment Company Act Release No. 25666 (July 18, 2002). Adjusting 
for inflation, $75,000 at the beginning of 2002 would imply a cost 
of approximately $118,000 as of the end of 2021. See Bureau of Labor 
Statistics CPI Inflation Calculator available at https://www.bls.gov/data/inflation_calculator.htm.
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    Effect of Compliance with an 80% Investment Policy. The proposed 
amendments would state that a fund's name may be materially deceptive 
or misleading under section 35(d) even if the fund adopts an 80% 
investment policy and otherwise complies with the rule's requirement to 
adopt and implement the policy.\217\ The Commission has previously 
stated that the names rule's 80% investment policy requirement is not 
intended to create a safe harbor for fund names, and the proposed 
amendments would codify this view to make it clear.\218\ Because the 
proposed provision would codify an existing Commission position that 
that 80% investment policy is not intended to create a safe harbor for 
fund names and restate the existing scope and effect of section 35(d), 
we do not believe the proposed provision creates new costs.
---------------------------------------------------------------------------

    \217\ Proposed rule 35d-1(c).
    \218\ See supra footnote 101.
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    Materially Deceptive and Misleading Use of ESG Terminology in 
Certain Fund Names. The proposed rule amendments would define the names 
of what this release refers to as ``integration funds'' as materially 
deceptive or misleading if the name includes terms indicating that the 
fund's investment decisions incorporate one or more ESG factors. To the 
extent ESG integration fund sponsors use fund names to facilitate 
investors' search for funds that use ESG factors as one of multiple 
components of their investment process, the loss of the ability to 
facilitate investors' search would represent a cost for integration 
funds and their investors.\219\ We are unable to quantify this cost as 
we do not have data indicating the extent to which ESG integration 
funds use their names to facilitate investors' search for funds that 
consider ESG factors as one of multiple components of their investment 
process, or the value ESG integration funds place on the ability to use 
their fund names in such a way. We are also unable to quantify this 
cost from an investor's perspective. We do not observe the extent to 
which investors in integration funds rely on fund names in the 
management of their investment portfolio. Additionally, integration 
funds that change their names in order to comply with the rule may 
incur costs of revising various fund communications and documents 
(e.g., organizational documents, registration statements, shareholder 
reports, etc.).\220\ A fund may also face costs to determine

[[Page 36629]]

whether it qualifies as an integration fund under the proposed rule, 
particularly whether ESG factors are generally no more significant than 
other factors in the fund's investment selection process, and thus 
whether including ESG terminology in the fund's name would be 
materially deceptive and misleading under the proposal.\221\
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    \219\ Integration funds and their investors could also bear 
costs of revising various fund communications to reflect the name 
change, as well as costs for revising marketing materials to 
describe the integration approach, to the extent that those 
materials do not already do so.
    \220\ When adopting the current names rule, the Commission 
estimated the funds would bear a cost of $7,000 to change a fund's 
name. We did not received any comments on that estimate. Adjusting 
for inflation, $7,000 at the beginning of 2009 would imply a cost of 
approximately $9,243 as of the end of 2021. See Bureau of Labor 
Statistics CPI Inflation Calculator available at https://www.bls.gov/data/inflation_calculator.htm.
    \221\ See supra discussion in section II.D; see also supra 
section II.A.1 (discussing fund names suggesting an investment focus 
with multiple elements, where a fund would have to adopt an 80% 
investment policy addressing each of the elements that the 
investment focus in its name suggests).
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    Prospectus Disclosure. The proposed amendments to funds' 
registration forms--specifically, Form N-1A, Form N-2, Form N-8B-2, and 
Form S-6--would also require each fund that is required to adopt and 
implement an 80% investment policy to include disclosure in its 
prospectus that defines the terms used in its name, including the 
specific criteria the fund uses to select the investments that the term 
describes, if any.\222\ The proposed amendments would require funds to 
tag this disclosure in Inline XBRL.\223\
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    \222\ See proposed instruction to Item 4(a)(1) of Form N-1A; 
proposed instruction to Item 8(2) of Form N-2; and proposed 
instruction to Item 11 of Form N-8B-2. Based on the results of the 
PRA analysis provided in Tables 2, 3, and 4 infra it is estimated 
that the annual costs attributable to information collection 
requirements associated with this aspect of the proposed amendments 
would be $3,560 per fund. However, as we understand that including 
the prospectus disclosure that the proposed amendments would require 
is currently a common practice, the PRA estimates likely 
overestimate the costs associated with the proposed amendments for 
those funds whose disclosure is currently in line with the 
disclosure the amendments would require. See infra section IV.C.
    \223\ See supra footnote 105. Based on the results of the PRA 
analysis provided in Table 7 infra it is estimated that the costs 
attributable to Inline XBRL tagging requirements would be $2,324 per 
fund for Form N-8B-2 filers, who are not subject to any current 
Inline XBRL requirements (or Inline XBRL requirements with 
compliance dates in the future) and would thus incur initial 
implementation costs associated with structuring disclosures in 
Inline XBRL (such as the cost of training in-house staff to prepare 
filings in Inline XBRL, and the cost to license Inline XBRL filing 
preparation software from vendors). For Form N-1A and Form N-2 
filers, who are subject to current Inline XBRL requirements, the PRA 
estimate does not incorporate any such implementation costs.
---------------------------------------------------------------------------

    For funds that are required to adopt an 80% investment policy, the 
proposed amendments would require that any terms used in the fund's 
name that suggest either an investment focus, or that the fund is a 
tax-exempt fund, must be consistent with those terms' plain English 
meaning or established industry use.\224\
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    \224\ See supra footnote 116.
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    New Form N-PORT Reporting Requirements. The proposed amendments 
include a new Form N-PORT reporting item regarding the 80% investment 
policy that a fund would adopt in compliance with the names rule.\225\ 
There would also be a proposed new Form N-PORT reporting item requiring 
a fund that is a Form N-PORT filer and that is subject to the 80% 
investment policy requirement to indicate, with respect to each 
portfolio investment, whether the investment is included in the fund's 
80% basket.\226\ Although the proposed amendments would not increase 
the frequency of public disclosure, it would increase the amount of 
information available about certain funds' portfolio investments. The 
increased information could lead, indirectly, to increased costs for 
investors. For example, one commenter argued that funds might have 
innovative ways in which they apply factors, such as those indicating 
growth or value, to categorizing issuers or securities and that 
disclosing which securities are included in a fund's calculation of 
assets that are included in the fund's 80% basket could reduce the 
value of the fund's proprietary security selection process.\227\ We 
note, however, that Form N-PORT data is only made public for the third 
month of each quarter, and on a 60-day delayed basis. We do not believe 
that quarterly public disclosure with a 60-day lag will have a 
significant, additional competitive impact.
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    \225\ Based on the results of the PRA analysis provided in Table 
5, it is estimated that the costs attributable to information 
collection requirements would be $3,204 per fund.
    \226\ Based on the results of the PRA analysis provided in Table 
5, it is estimated that the annual costs attributable to information 
collection requirements for investments to be included in a fund's 
80% basket would be $3,560 per fund.
    \227\ See Allianz Letter.
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    Recordkeeping. The proposed amendments would require funds to 
maintain certain records depending on whether the fund would be 
required to adopt an 80% investment policy. The proposed amendments 
would not prescribe the particular form of documentation required to be 
maintained but would instead provide flexibility in how a fund 
documents the information delineated in the recordkeeping requirements. 
However, a fund that would be subject to the requirement to adopt an 
80% investment policy generally should maintain appropriate 
documentation that would be sufficient for a third party to verify the 
matter covered by each record.\228\
---------------------------------------------------------------------------

    \228\ Based on the results of the PRA analysis provided in Table 
1, it is estimated that the annual costs attributable to 
recordkeeping requirements would be $17,800 per fund.
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    Notice Requirement. The proposed amendments would require that 
unless the 80% investment policy is a fundamental policy of the fund, 
notice must be provided to fund shareholders of any change in the 
fund's 80% investment policy.\229\ The proposed amendments would 
incorporate some modifications to the current notice requirement that 
are designed to better address the needs of shareholders who have 
elected electronic delivery and to incorporate additional specificity 
about the content and delivery of the notice. We do not believe that 
these proposed alterations would increase the cost to prepare the 
notice.\230\
---------------------------------------------------------------------------

    \229\ Proposed rule 35d-1(e).
    \230\ Like the current rule, based on the results of the PRA 
analysis provided in Table 1, it is estimated that the costs 
attributable to notice requirements would be $8,500 per fund, for 
those funds providing notices.
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    Unit Investment Trusts. The proposed rule amendments except UITs 
that have made their initial deposit of securities prior to the 
effective date of any final rule amendments the Commission adopts from 
the requirements to adopt an 80% investment policy and the 
recordkeeping requirements, including recordkeeping for funds which do 
not adopt an 80% investment policy, unless the UIT has already 
adopted--or was required to adopt at the time of the initial deposit--
an 80% investment policy under the current rule.\231\ The proposed 
amendment largely retains the existing exception from the 80% 
investment policy requirements for UITs that pre-date the original 
rule.
---------------------------------------------------------------------------

    \231\ See supra footnote 159.
---------------------------------------------------------------------------

    Overall Costs. We estimate that the costs to establish and 
implement practices designed to meet the requirements of the proposed 
amendments as described above will range from $50,000 to $500,000 per 
fund, depending on the particular facts and circumstances of the 
fund.\232\ These estimated costs are broadly attributable to the 
following activities: (1) reviewing the proposed rule's requirements; 
(2) developing new (or modifying existing) practices, reporting, and 
recordkeeping requirements to align with the requirements of the 
proposed rule; (3) integrating and implementing those practices, 
reporting, and recordkeeping requirements to the rest of the funds' 
activities; and (4) preparing new training materials and administering 
training sessions for staff in affected areas. We believe the costs 
would be closer to the lower end of the range for

[[Page 36630]]

funds whose current practices are more similar to the requirements of 
the proposed amendments.\233\ In addition, under certain specified 
circumstances funds, and thus shareholders, may incur costs related to 
the proposed amendment's limits on temporary departures from the 80% 
requirement. Further, integration funds could incur costs associated 
with changing fund names.
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    \232\ We believe that the low end of this range is reflective of 
a fund that already has practices in place that could be readily 
adapted to meet the proposed rule's requirements. Such a fund would 
nevertheless incur costs associated with analyzing its current 
practices relative to the final rule's requirements.
    \233\ We believe the costs would be closer to the lower end of 
the range for funds that belong to fund families because certain 
aspects of the costs are fixed costs that could be spread across 
multiple funds.
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    The proposed rule amendments would result in new ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\234\ There will be costs associated 
with the new collection of information requirements related to: (1) the 
notice provision and the new recordkeeping requirements under the 
proposed amendments to the names rule, (2) prospectus disclosure, and 
(3) Form N-PORT disclosure.\235\ Those costs are discussed in section 
IV below.
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    \234\ 44 U.S.C. 3501-3520.
    \235\ For items (2) and (3), the costs will include the cost of 
adding new data tags for the new disclosures on Form N-1A, Form N-2, 
and Form N-PORT, but will not include any initial implementation 
costs associated with structuring data, because those forms are 
already subject to structuring requirements. By contrast, the cost 
of adding new Inline XBRL tags for the new disclosures on Form N-8B-
2 and Form S-6 is more likely to entail initial implementation costs 
for UITs and their sponsors, because UITs are not currently subject 
to Inline XBRL requirements. See infra footnote 241.
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E. Reasonable Alternatives Considered

1. Returns-Based Requirement
    The proposed rule amendments, like the current rule, rely on a 
percentage-of-assets-based test to determine if fund names are 
misleading. Alternatively, we could require that funds' historical 
returns exhibit minimum exposures to certain risk factors. For example, 
we could require funds that use the term ``small cap'' in their name to 
have to have a certain minimum exposure to a historical firm-size risk 
factor. Such a returns-based standard would eliminate the need to 
specify how funds must value their derivatives holdings. Further, a 
returns-based standard could result in more risk information being 
available for investors concerned with risk-adjusted fund performance. 
For example, a returns-based standard would allow investors to evaluate 
exposure to certain risk factors over the entire measurement period 
rather than as of the end of the reporting period.
    One commenter suggested several disadvantages associated with a 
returns-based standard.\236\ First, a returns-based standard would 
require the specification of some arbitrary time over which fund 
returns are compared to a risk factor. Second, a returns-based standard 
would be inherently backward looking, detracting from a manager's 
ability and purpose to focus on future performance. Finally, a returns-
based standard would require the identification of appropriate 
benchmarks against which to evaluate funds' exposures. The same 
commenter also argued that an asset-based standard offers certain 
advantages. For example, assessing compliance with an asset-based 
standard is facilitated by the calculation of funds' daily net asset 
values. Also, compliance with an asset-based standard is easily 
measured, easily understood, and easily corrected should a fund drop 
below its asset-based threshold.\237\ Taking these considerations into 
account, we are proposing to continue requiring compliance with an 
asset-based standard, rather than a returns-based standard. We believe 
an asset-based standard is more easily understood and can be assessed 
contemporaneously with investment decisions. A returns-based standard 
can be assessed only after the fact and over time and is not 
necessarily more consistent or easily measured.
---------------------------------------------------------------------------

    \236\ See Fidelity Comment Letter.
    \237\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

2. Permit the Use of Derivatives' Notional Values for Purposes of Names 
Rule Compliance
    As an alternative, we considered permitting, but not requiring, 
funds to value derivatives (or a subset of derivatives, such as 
derivatives that provide synthetic exposure to the investment focus 
that the fund's name suggests) using notional values for purposes of 
assessing names rule compliance. As discussed in section II.A.3 above, 
allowing a fund to use notional values for these purposes could allow a 
fund to use a name that effectively communicates its investments where 
it would not be able to do so under the current rule. However, allowing 
a fund to use using derivatives instruments' market values for purposes 
of assessing names rule compliance could result in a fund being in 
compliance with the fund's 80% investment policy despite the fund 
having significant exposure to investments that are not suggested by 
the fund's name. Because we believe the use of notional values better 
reflects the investment exposure of derivatives investments than market 
values for purposes of assessing names rule compliance, we are 
proposing to require, rather than permit, the use of notional values.
3. Modify Requirements for Tagging Prospectus Disclosure
    Under the proposed amendments, the new prospectus disclosure of 
term definitions and investment selection criteria submitted on Form N-
1A, Form N-2, Form N-8B-2, and Form S-6 would be tagged in Inline XBRL. 
Alternatively, we could have changed the scope of the proposed tagging 
requirement for the proposed new prospectus disclosures, such as by 
limiting this requirement to a subset of funds.
    For example, the tagging requirements could have excluded UITs, 
which are not currently required to tag any filings in Inline XBRL. 
Under such an alternative, UITs would submit their prospectus 
disclosures in unstructured HTML or ASCII, and forgo the initial Inline 
XBRL implementation costs (such as the cost of training in-house staff 
to prepare filings in Inline XBRL, and the cost to license Inline XBRL 
filing preparation software from vendors) and ongoing Inline XBRL 
compliance burdens that would result from the proposed tagging 
requirement.\238\ However, narrowing the scope of tagging requirements, 
whether based on fund structure, fund size, or other criteria, would 
diminish the extent of informational benefits that would accrue as a 
result of the proposed disclosure requirements by making the excluded 
funds' disclosures comparatively costlier to process and analyze. As 
such, we are not proposing to exclude any funds or otherwise narrow the 
scope of Inline XBRL tagging requirements.
---------------------------------------------------------------------------

    \238\ See section IV.E. Funds file registration statements and 
amendments using the Commission's EDGAR electronic filing system, 
which generally requires filers to use ASCII or HTML for their 
document submissions, subject to certain exceptions. EDGAR Filer 
Manual (Volume II) version 60 (December 2021), at 5-1; see 17 CFR 
232.301 (incorporating EDGAR Filer Manual into Regulation S-T). To 
the extent unit investment trusts are part of the same fund family 
as other types of funds that are subject to Inline XBRL 
requirements, they may be able to leverage those other funds' 
existing Inline XBRL tagging experience and software, which would 
mitigate the initial Inline XBRL implementation costs that unit 
investment trusts would incur under the proposal.
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4. Board Approval or Notification of Temporary Departures
    The proposed amendments would permit a fund to depart temporarily 
from the 80% investment requirement only under certain specified 
circumstances and, in most such circumstances, for a limited 30-day 
time

[[Page 36631]]

period. As an alternative, we considered whether to require instead 
that, if a temporary departure persists past 30 days, the fund's board 
must approve, or be informed in writing about, the temporary departure. 
In the context of requiring board approval, we also considered 
requiring a majority of the independent directors to approve the 
departure. In the context of requiring board notification, we 
considered requiring a written report or notification that includes a 
recommendation from the fund's adviser to be provided to the board 
immediately or at the next regularly scheduled board meeting. Had we 
proposed either such alternative, these alternatives could have 
accompanied the retention of the current rule's ``under normal 
circumstances'' standard with either of these additional alternative 
requirements as a supplementary element designed to prevent a fund from 
investing inconsistently with its 80% investment policy for an extended 
period of time.
    Collectively, these alternatives may provide more flexibility for 
funds to address the conditions that necessitate temporary departures 
than the proposed amendments in that they would not limit the types of 
circumstances in which a fund could engage in a temporary departure, 
and allow longer departures, provided that the board either approves or 
is notified of the departure. This approach could also provide funds 
with more flexibility to reduce loss during market crises and manage 
liquidity risk, which could, in turn, reduce any adverse effects that a 
fund's trading activity may have on the markets for the investments in 
its portfolio. Conversely, these alternatives may have been less 
effective than the proposed amendments at addressing the concerns 
highlighted above regarding portfolio ``drift'' and could be more 
likely to frustrate investors' expectations for the fund's portfolio 
investments in light of the investment focus the fund's name suggests 
to the extent that investors might expect a fund manager to be fully 
invested in designated investments rather than expect the manager to 
use its judgment to mitigate losses. For example, a fund board could 
determine to engage in a departure for longer than 30 days to address a 
market disruption, but this action might frustrate the expectation of 
investors who may expect the fund to invest consistent with its stated 
investment focus even during market disruptions, and therefore may 
choose to rebalance investments on their own rather than relying upon 
the fund to do so. We also believe that this alternative would increase 
burdens on fund boards, particularly if we were to require the approval 
or notification be immediate. Alternatively, if we were to require the 
approval or notification be made at the next regularly scheduled board 
meeting, the conditions that gave rise to the need for the departure 
may have resolved without the input of the board, given that most fund 
boards meet on a quarterly basis. Lastly, this approach would not be 
suitable for UITs, which have neither active management nor boards.
5. Require a Higher Percentage of Assets Invested in Accordance with 
the Investment Focus
    The 80% investment policy requirement under the proposed amendments 
would not change the percentage of assets in which a policy adopted 
under the names rule would require funds to invest in accordance with 
the investment focus that the fund's name suggests, in relation to the 
current rule's requirements. However, we considered whether to proposed 
requiring a higher percentage than 80% for certain fund names--for 
example, index funds and funds whose names suggest an investment focus 
involving consideration of ESG factors--to the extent that reasonable 
investor expectations could make a higher percentage appropriate. For 
example, investors in an index fund may expect the fund to be invested 
at or near 100% in the named index given that these investors would 
likely be purchasing the fund to obtain exposure to that index.
    We ultimately determined not to propose this alternative, given the 
ways in which the other aspects of the proposed amendments address 
reasonable investor expectations and materially deceptive and 
misleading fund names. These include, for example, the provision that a 
fund's name may be materially deceptive or misleading even if the fund 
adopts an 80% investment policy and otherwise complies with the rule's 
requirement to adopt and implement the policy, the proposed new 
prospectus disclosure requirements, and the proposed Form N-PORT 
reporting requirements. As discussed above, the Commission has 
previously stated that index funds generally would be expected to 
invest more than 80% of their assets in investments connoted by the 
applicable index. To the extent that investors expect and prefer index 
funds that invest a significantly higher percentage of their assets in 
their 80% baskets, information would be available to help them make 
investment decisions that reflect this preference. Additionally, we 
believe that proposing to raise the threshold in the required 
investment policy is less necessary to address investors' expectations, 
in light of the proposal to narrow the circumstances and limit the time 
period during which a fund may engage in temporary departures from the 
80% investment requirement, which similarly addresses investors' 
expectations that a fund's investments reflect the investment focus 
that the fund's name suggests.
6. Unlisted Closed-End Funds and BDCs
    We are proposing to require that a fund's 80% investment policy 
must always be a fundamental investment policy if the fund is an 
unlisted closed-end fund or a BDC. As an alternative, we considered 
requiring instead that such funds either adopt the 80% investment 
policy as a fundamental policy or both provide shareholders 60 days' 
prior notice of a change and conduct an issuer tender offer or a 
repurchase offer to provide shareholders the opportunity to redeem 
their shares. This alternative would provide affected funds the 
opportunity to avoid the costs of a shareholder vote while also 
providing investors with some recourse if the fund were to change its 
investment policy and the investment focus that the fund's name 
indicates.
    However, this alternative approach raised concerns regarding the 
percentage of fund shares we should require these funds to offer to 
repurchase, and therefore the proposal incorporates a shareholder vote 
requirement for unlisted closed-end funds and BDCs that seek to change 
their 80% investment policy, instead of this alternative. As noted 
above, while unlisted closed-end funds and BDCs generally offer a 
periodic repurchase tender offer, these offers are limited and unlikely 
to provide recourse to investors in the case where a large number of 
investors are dissatisfied with the change. Even discretionary 
repurchases as permitted under 17 CFR 270.23c-3(c) are generally 
limited to 25% of the common stock outstanding.\239\ This amount could 
be too low to address the investor protection concerns that the 
proposed approach for unlisted closed-end funds and BDCs is designed to 
address. As a result, we considered some larger percentage. However, a 
large tender offer for all or substantially all of the outstanding 
shares could prove even more costly to these funds

[[Page 36632]]

than a shareholder vote and could result in the fund's liquidation.
---------------------------------------------------------------------------

    \239\ See 17 CFR 270.23c-3(a)(3), (b)(5), and (c).
---------------------------------------------------------------------------

F. General Request for Comment

    The Commission requests comment on all aspects of this initial 
economic analysis, including whether the analysis has: (1) identified 
all benefits and costs, including all effects on efficiency, 
competition, and capital formation; (2) given due consideration to each 
benefit and cost, including each effect on efficiency, competition, and 
capital formation; and (3) identified and considered reasonable 
alternatives to the proposed regulations. We request and encourage any 
interested person to submit comments regarding the proposed 
regulations, our analysis of the potential effects of the proposed 
regulations, and other matters that may have an effect on the proposed 
regulations. We request that commenters identify sources of data and 
information as well as provide data and information to assist us in 
analyzing the economic consequences of the proposed regulations. We 
also are interested in comments on the qualitative benefits and costs 
we have identified and any benefits and costs we may not have 
discussed.
    In addition to our general request for comment on the economic 
analysis associated with the proposed amendments, we request specific 
comment on certain aspects of the proposal:
    1. Have we correctly identified the benefits and costs of the 
proposed rule amendments? Are there additional benefits and costs that 
we should include in our analysis?
    2. We encourage commenters to identify, discuss, analyze, and 
supply relevant data, information, or statistics related to the 
benefits and costs associated the proposed rule amendments.
    3. Are there costs to, or effect on, parties other than those we 
have identified? What are the costs and/or effects?
    4. The proposed amendments would permit some flexibility to depart 
temporarily from the 80% investment requirement in particular, time-
limited circumstances when doing so would be beneficial to the fund and 
its shareholders. Are there circumstances where the proposed amendments 
would not allow a fund to temporarily depart from the 80% requirement, 
that would be allowed under the current rule? Please provide specific 
examples, if possible.
    5. How costly would the proposed provision regarding the use of ESG 
terminology in their names be for ESG integration funds?
    6. Do investors in certain types of funds (e.g., ESG funds, or 
funds whose strategies involve the application of moral parameters) 
care if a fund's 80% investment policy includes derivatives that 
provide synthetic exposure to the investment focus that the name 
suggests, rather than cash market holdings in that investment focus? 
Would the use of notional values cause investors to be less likely to 
invest in those types of funds, or if they continue to invest in those 
funds, cause investors to expend greater resources to monitor how a 
fund complies with the 80% investment requirement?

IV. Paperwork Reduction Act Analysis

A. Introduction

    Certain provisions of the proposed rules and form amendments 
contain ``collection of information'' requirements within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA'').\240\ We are 
submitting the proposed collections of information to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\241\ The title for the collection of information is: (1) ``Rule 
35d-1 under the Investment Company Act of 1940, Investment Company 
Names'' (OMB Control No. 3235-0548); (2) ``Form N-1A under the 
Investment Company Act of 1940 and Securities Act of 1933, registration 
statement of Open-End Management Investment Companies'' (OMB Control 
No. 3235-0307); (3) ``Form N-2 under the Investment Company Act of 1940 
and Securities Act of 1933, Registration Statement of Closed-End 
Management Companies'' (OMB Control No. 3235-0026); (4) ``Form N-8B-2, 
Registration Statement of Unite Investment Trusts Which Are Currently 
Issuing Securities'' (OMB Control No. 3235-0186); (5) ``Form S-6, 
Registration Under the Securities Act of 1933 of Unit Investment Trusts 
Registered on Form N-8B-2'' (OMB Control No. 3235-0184); (6) ``Form N-
PORT under the Investment Company Act of 1940'' (OMB Control No. 3235-
730); and (7) ``Investment Company Interactive Data'' (OMB Control No. 
3235-0642).
---------------------------------------------------------------------------

    \240\ 44 U.S.C. 3501 et seq.
    \241\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number.
    We discuss below the collection of information burdens associated 
with proposed amendments to rule 35d-1, Form N-1A, Form N-2, Form N-8B-
2, Form S-6, Form N-PORT; and the proposed interactive data 
requirements.

B. Rule 35d-1

    Rule 35d-1 is designed to address certain broad categories of 
investment company names that, in the Commission's view, are likely to 
mislead an investor about a company's investments and risks. Under our 
proposal, the scope of funds covered by the 80% investment policy 
requirement of rule 35d-1 would be expanded. In addition to those fund 
names currently subject to the rule, the proposal would specify that 
any fund with a name suggesting that the fund focuses its investments 
in investments that have, or whose issuers have, characteristics 
suggested by the fund's name would have to adopt an 80% investment 
policy.
    We are further proposing to update the names rule's notice 
requirement expressly to address funds that use electronic delivery 
methods to provide information to their shareholders. The proposed 
amendments also would require notices not only to describe a change in 
the fund's 80% investment policy, but also a change to the fund's name 
that accompanies the investment policy change.
    The proposed amendments would also include certain new 
recordkeeping requirements. The amendments would newly require a fund 
that is required to adopt an 80% investment policy to maintain a 
written record documenting its compliance with the rule, including the 
fund's record of which assets are invested in the fund's 80% basket, 
the basis for including each such asset in the fund's 80% basket, as 
well as the operation of its 80% investment policy. Funds that do not 
adopt an 80% policy must would be required to maintain a written record 
of the fund's analysis that an 80% policy is not required under the 
names rule. A fund also would be required to keep records of any notice 
sent to the fund's shareholders pursuant to the rule.
    Rule 35d-1, including the proposed amendments, contains collection 
of information requirements. These collection of information 
requirements include, as detailed in the chart below, the proposed 
notice requirement and recordkeeping requirements (those for funds that 
are required to adopt an 80% investment policy, and those for funds 
that do not adopt an 80% investment policy). Compliance with these 
requirements of the proposed rule would be mandatory. Responses to 
these

[[Page 36633]]

requirements would not be kept confidential.
BILLING CODE 8011-01-P
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[[Page 36634]]


[GRAPHIC] [TIFF OMITTED] TP17JN22.001

C. Prospectus Disclosure

    We are proposing amendments to funds' registration forms'--
specifically, Form N-1A, Form N-2, Form N-8B-2, and Form S-6--that 
would require each fund that is required to adopt and implement an 80% 
investment policy to include disclosure in its prospectus that defines 
the terms used in its name, including the specific criteria the fund 
uses to select the investments that the term describes, if any. These 
amendments are designed to help investors better understand how the 
fund's investment strategies correspond with the investment focus that 
the fund's name suggests as well as to provide additional information 
about how the fund's management seeks to achieve the fund's objective. 
While the proposed new disclosure is not currently required in a fund's 
prospectus, we understand that including similar disclosure is 
currently common practice and that this proposal would codify this 
practice. Based on our understanding of current disclosure practices, 
we believe that any changes to current practices that the proposed 
amendments would create would generally be minor. Therefore, the PRA 
estimates associated with the proposed amendments likely overestimate 
the costs associated with the proposed amendments for those funds whose 
disclosure is currently in line with the disclosure the amendments 
would require.
    The proposed amendments to Form N-1A, Form N-2, Form N-8B-2, and 
Form S-6 all contain collection of information requirements. Compliance 
with the disclosure requirements of each form is mandatory. Responses 
to these disclosure requirements will not be kept confidential.

[[Page 36635]]

1. Form N-1A
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[[Page 36636]]


2. Form N-2
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[[Page 36637]]


3. Form N-8B-2
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[[Page 36638]]


4. Form S-6
[GRAPHIC] [TIFF OMITTED] TP17JN22.005

D. N-PORT Reporting Requirements

    We are proposing to amend Form N-PORT to include a new reporting 
item regarding the 80% investment policy that a fund would adopt in 
compliance with the names rule. There would also be a proposed new Form 
N-PORT reporting item requiring a fund subject to the 80% investment 
policy requirement to indicate, with respect to each portfolio 
investment, whether the investment is included in the fund's 
calculation of assets in the fund's 80% basket.
    Form N-PORT, including the proposed amendments, contains collection 
of information requirements. Compliance with the requirements of the 
form is mandatory. Responses to these reporting requirements will be 
kept confidential, subject to the provisions of applicable law, for 
reports filed with respect to the first two months of each quarter. 
Responses to the new Form N-PORT reporting requirements for the third 
month of the quarter will not be kept confidential, but made public 
sixty days after the quarter end.

[[Page 36639]]

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[[Page 36640]]



E. Investment Company Interactive Data

    We are proposing to amend Form N-2, Form N-8B-2, and Form S-6, as 
well as rules 485 and 497 under the Securities Act and rule 11 and 405 
of Regulation S-T, to require certain new structured data reporting 
requirements for funds.\242\ Specifically, the proposed amendments 
would include new structured data requirements that would require funds 
to tag the information that the proposal would require funds to include 
in their registration statements about their fund name using Inline 
XBRL.\243\ The purpose of these information collections is to make 
information regarding fund names easier for investors to analyze and to 
help automate regulatory filings and business information processing, 
and to improve consistency across all types of funds with respect to 
the accessibility of fund name information they provide to the market.
---------------------------------------------------------------------------

    \242\ The Investment Company Interactive Data collection of 
information do not impose any separate burden aside from that 
described in our discussion of the burden estimates for this 
collection of information. The amendments we are proposing to rule 
485 and 497 are conforming amendments that have no associated PRA 
burden. While the new names-related information that open-end funds 
would be required to disclose under our proposed amendments to Form 
N-1A also would be required to be tagged using Inline XBRL, the 
proposed amendments to Form N-1A would create no additional PRA 
burden. Our proposal would amend Item 4 of Form N-1A; Form N-1A 
registrants are already required to submit the information that they 
provide in response to Item 4 using Inline XBRL. See supra footnote 
115. Therefore, the burdens associated with tagging Item 4 
disclosure are already accounted for under the current Investment 
Company Interactive Data collection of information.
    \243\ See supra section II.B; see also proposed instruction to 
Item 4(a)(1) of Form N-1A; proposed instruction to Item 8(2) of Form 
N-2; proposed and proposed instruction to Item 11 of Form N-8B-2.
---------------------------------------------------------------------------

    Funds filing registration statements on Form N-2 already submit 
certain information using Inline XBRL format. Based on filing data as 
of December 30, 2020, we estimate that 626 funds filing registration 
statements on these forms would be subject to the proposed interactive 
data amendments. UITs filing initial registration statements on Form N-
8B-2 and post-effective amendments on Form S-6 are not currently 
subject to requirements to submit information in structured form. 
Because these UITs have not previously been subject to Inline XBRL 
requirements, we assume that these funds would experience additional 
burdens related to one-time costs associated with becoming familiarized 
with Inline XBRL reporting. These costs would include, for example, the 
acquisition of new software or the services of consultants, and the 
training of staff. Based on filing data as of December 30, 2020, we 
estimate that 785 filings would be subject to these proposed 
amendments. In our most recent Paperwork Reduction Act submission for 
Investment Company Interactive Data, we estimated a total aggregate 
annual hour burden of 252,602 hours, and a total aggregate annual 
external cost burden of $15,350,750.\244\ Compliance with the 
interactive data requirements is mandatory, and the responses will not 
be kept confidential.
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    \244\ On November 9, 2020, the Office of Management and Budget 
approved without change a revision of the currently approved 
information collection estimate for Registered Investment Company 
Interactive Data.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-1A, 
Form N-2, Form N-8B-2, and Form S-6, as well as Regulation S-T.

[[Page 36641]]

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BILLING CODE 8011-01-C

F. Request for Comments

    We request comment on whether these estimates are reasonable. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
in order to: (1) evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (3) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) determine whether there are ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons wishing to submit comments on the collection of information 
requirements of the proposed amendments should direct them to the OMB 
Desk Officer for the Securities and Exchange Commission, 
<a href="/cdn-cgi/l/email-protection#85c8c7ddabcac8c7abcaccd7c4abd6c0c6dae1e0f6eedaeae3e3ece6e0f7c5eae8e7abe0eaf5abe2eaf3"><span class="__cf_email__" data-cfemail="f2bfb0aadcbdbfb0dcbdbba0b3dca1b7b1ad96978199ad9d94949b919780b29d9f90dc979d82dc959d84">[email protected]</span></a>, and should send a copy to 
Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-1090, with reference to File No. 
S7-16-22. OMB is required to make a decision concerning the collections 
of information between 30 and 60 days after publication of this 
release; therefore a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days after publication of this 
release. Requests for materials submitted to OMB by the Commission with 
regard to these collections of information should be in writing, refer 
to File No. S7-16-22, and

[[Page 36642]]

be submitted to the Securities and Exchange Commission, Office of FOIA 
Services, 100 F Street NE, Washington, DC 20549-2736.

V. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with section 3(a) of the 
Regulatory Flexibility Act (``RFA'').\245\ It relates to proposed 
amendments to rule 35d-1 and Forms N-1A, N-2, N-8B-2, S-6, and N-PORT, 
as well as proposed conforming amendments to rules 11 and 405 of 
Regulation S-T and rules 485 and 497 under the Securities Act 
(collectively, ``proposed amendments'').
---------------------------------------------------------------------------

    \245\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Actions

    Section 35(d) of the Act prohibits a registered investment company 
from adopting as part of its name or title any word or words that the 
Commission finds are materially deceptive or misleading. Rule 35d-1 
addresses certain broad categories of investment company names that are 
likely to mislead an investor about a company's investments and risks. 
We are proposing amendments designed to increase investor protection by 
improving and clarifying the requirement for certain funds to adopt a 
policy to invest at least 80% of their assets in accordance with the 
investment focus that the fund's name suggests, updating the rule's 
notice requirements, and establishing recordkeeping requirements. The 
Commission also is proposing enhanced prospectus disclosure 
requirements for terminology used in fund names and additional 
requirements for funds to report information regarding their compliance 
with rule 35d-1 on Form N-PORT.

B. Legal Basis

    The Commission is proposing the amendments to rule 35d-1 under the 
authority set forth in sections 8, 30, 31, 34, 35, 38, 59, and 64 of 
the Investment Company Act of 1940 [15 U.S.C. 80a-8, 80a-29, 80a-30, 
80a-33, 80a-34, 80a-37, 80a-58, and 80a-63]. The Commission is 
proposing amendments to Form N-1A, Form N-2, Form N-8B-2, Form S-6, and 
Form N-PORT under the authority set forth in sections 8, 30, 35, and 38 
of the Investment Company Act of 1940 [15 U.S.C. 80a-8, 80a-18, 80a-34, 
and 80a-37], sections 5, 6, 7(a), 8, 10, and 19(a) of the Securities 
Act of 1933 [15 U.S.C. 77e, 77f, 77g(a), 77h, 77j, 77s(a)], and 
sections 10, 13, 15, 23, and 35A of the Exchange Act [15 U.S.C. 78j, 
78m, 78o, 78w, and 78ll]. The Commission is proposing amendments to 
Rules 11 and 405 of Regulation S-T under the authority set forth in 
section 23 of the Exchange Act [15 U.S.C. 78w]. The Commission is 
proposing amendments to rules 485 and 497 under the authority set forth 
in sections 10 and 19 of the Securities Act [15 U.S.C. 77j and 77s].

C. Small Entities Subject to Proposed Rule Amendments

    For purposes of Commission rulemaking in connection with the 
Regulatory Flexibility Act, an investment company is a small entity if, 
together with other investment companies in the same group of related 
investment companies, it has net assets of $50 million or less as of 
the end of its most recent fiscal year (a ``small fund'').\246\ 
Commission staff estimates that, as of June 2021, approximately 27 
registered open-end mutual funds (including one money market fund), 6 
registered ETFs, 23 registered closed-end funds, 5 UITs, and 9 BDCs 
(collectively, 70 funds) are small entities.\247\
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    \246\ See rule 0-10(a) under the Act [17 CFR 270.0-10(a)].
    \247\ This estimate is derived from an analysis of data obtained 
from Morningstar Direct as well as data reported to the Commission 
for the period ending June 2021.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The proposed amendments contain compliance requirements regarding 
reporting, recordkeeping, and other compliance requirements. First, the 
proposed amendments would expand the types of fund names subject to the 
names rule's 80% investment policy requirement, and any fund that has 
or adopts a newly-covered name would need to adopt an 80% investment 
policy.\248\ The proposed amendments would also include other changes 
to the current names rule, such as only permitting a fund to engage in 
temporary departures from an 80% investment requirement under 
particular circumstances, which would also necessitate an update to 
funds' existing practices regarding names rule compliance. The proposed 
amendments would further specify that a fund's name may be materially 
deceptive or misleading under section 35(d) even if the fund adopts an 
80% investment policy and otherwise complies with the rule's 
requirement to adopt and implement the policy. The proposed amendments 
would further require a fund that is required to adopt an 80% 
investment policy to maintain certain records documenting its 
compliance with the rule, including, among other things, the fund's 
record of which assets are invested in accordance with the investment 
focus that the fund's name suggests (or consistent with the tax-exempt 
treatment its name suggests). Conversely, funds that do not adopt an 
80% investment policy would be required to maintain a record 
documenting their analysis that the 80% investment policy is not 
required under the rule.
---------------------------------------------------------------------------

    \248\ While the proposed rule amendments would add BDCs to the 
definition of ``fund'' under the rule, we do not anticipate that 
this addition will have a significant impact on small entities. BDCs 
are currently subject to the requirements of section 35(d) pursuant 
to section 59 of the Act. We understand that BDCs currently comply 
with the names rule because they are subject to the requirements of 
section 35(d). See also supra footnote 7.
---------------------------------------------------------------------------

    The proposed amendments would also require disclosure in the fund's 
prospectus regarding the definitions of terms used in the fund's name, 
including a requirement that funds must tag new information that would 
be included using Inline XBRL. Under the proposal, funds (other than 
money market funds and BDCs) that would be required to adopt an 80% 
investment policy also would newly have to report certain information 
on Form N-PORT regarding names rule matters. The proposed amendments 
would define the names of ``integration funds'' as materially deceptive 
and misleading if the name includes terms indicating that the fund's 
investment decisions incorporate one or more ESG factors, which would 
necessitate that such funds either change their names or adjust their 
investment strategies, and thus potentially their portfolio 
investments, to ensure compliance. Lastly, the proposed amendments 
would include exceptions for certain UITs.
1. 80% Investment Policy Requirements--Proposed Scope Expansion and 
Other Proposed Amendments
    Funds, including small funds, which have names that include terms 
suggesting that the fund focuses its investments in investments that 
have, or whose issuers have, particular characteristics would be 
required to adopt an 80% investment policy under the proposed 
amendments. Further, in order to comply with this element of the 
proposed amendments, a fund may have to engage in a name change or 
change its portfolio investments so that the fund's name reflects its 
80% basket or vice-versa. Funds that have an existing 80% investment 
policy would need to

[[Page 36643]]

change their practices to comply with the names rule to address other 
aspects of the proposal: (1) changes to how the rule addresses 
temporary departures from the 80% investment requirement, (2) changes 
to address derivatives in calculating compliance with the 80% 
investment policy requirement, (3) the plain English/established 
industry use requirement, and (4) updates to the rule's notice 
requirement. Lastly, a fund that is an unlisted closed-end fund or BDC 
may be required to amend its existing 80% investment policy so that it 
is a fundamental policy and, on a going-forward basis, engage in 
shareholder votes to change its 80% investment policy.
    These requirements are designed to help ensure that a fund's 
investment activity supports the investment focus its name communicates 
and, thus, the investor expectations the name creates. These 
requirements will impose burdens on all funds, including those that are 
small entities. We discuss the specifics of these burdens in the 
Economic Analysis and Paperwork Reduction Act sections above. These 
sections also discuss the professional skills that we believe 
compliance with the proposed amendments would require.
    While we would expect larger funds or funds that are part of a 
large fund complex to incur higher costs related to these requirements 
in absolute terms relative to a smaller fund or a fund that is part of 
a smaller fund complex, we would expect a smaller fund to find it more 
costly, per dollar managed, to comply with the proposed requirements 
because it would not be able to benefit from a larger fund complex's 
economies of scale. In particular, a larger fund complex may be able to 
develop a process with outside counsel or utilize existing systems to 
make these changes more efficiently across all of their funds that a 
smaller fund with less resources may find too costly. For example, a 
larger unlisted BDC or closed-end fund may be able to use existing 
procedures to develop a method of soliciting shareholder votes 
regarding name changes that smaller unlisted BDCs or closed-end funds 
do not have. Notwithstanding the economies of scale experienced by 
larger versus smaller funds, we would not expect the costs of 
compliance associated with the new requirements to be meaningfully 
different for smaller versus larger funds. The costs of compliance 
would vary only based on fund characteristics tied to their name. That 
is, whether a fund would now need to adopt, or change, its 80% 
investment policy, or its practices to comply with the names rule, 
would be as a consequence of that fund having a name that suggests an 
investment focus under the proposed amendments, not based upon the size 
of the fund.
2. Effect of Compliance With an 80% Investment Policy
    We are proposing a new provision in the names rule providing that a 
fund's name may be materially deceptive or misleading under section 
35(d) even if the fund adopts an 80% investment policy and otherwise 
complies with the rule's requirement to adopt and implement the policy. 
The proposed provision would make clear that a fund name may be 
materially deceptive or misleading even where the fund complies with 
its 80% investment policy, for example, potentially where a fund 
complies with its 80% investment policy but makes a substantial 
investment that is the antithesis of the fund's investment focus. This 
proposed new provision is consistent with prior Commission statements 
noting that the 80% investment requirement under the names rule is not 
intended to create a safe harbor for investment company names.
    This provision would apply to funds, including those that are small 
entities. However, because this provision restates section 35(d), we 
believe that it would not result in any additional costs beyond those 
already attendant on compliance with the Act itself.
3. Recordkeeping Requirements
    The proposed recordkeeping requirements are designed to help ensure 
compliance with the rule's requirements and aid in oversight. A fund 
that would be required to adopt an 80% investment policy under the 
proposed amendments would be required to maintain a written record 
documenting its compliance under the 80% investment policy provisions 
of the rule. Specifically, the written records documenting the fund's 
compliance that these funds would be required to maintain would 
include: (1) the fund's record of which assets are invested in 
accordance with the fund's investment focus (or, as applicable, 
consistent with the tax treatment suggested by a tax-exempt fund's 
name) and any basis for determining that each such asset is invested in 
accordance with the investment focus that the name suggests (or the tax 
treatment the name suggests); (2) the percentage of the value of the 
fund's assets that are invested in accordance with the investment focus 
that the fund's name suggests (or consistent with the tax treatment 
suggested by a tax-exempt fund's name); (3) the reasons for any 
departures from the 80% investment policy; (4) the dates of any 
departures from the 80% investment policy; and (5) any notice sent to 
the fund's shareholders pursuant to the rule. If a fund does not adopt 
an 80% investment policy, it must maintain a written record of the 
fund's analysis that such a policy is not required under the names 
rule. Funds must maintain records relating to the fund's compliance 
with its 80% investment policy for at least six years following the 
creation of each record (or, in the case of notices, following the date 
the notice was sent), the first two years in an easily accessible 
place. A fund that does not adopt a policy under the rule must maintain 
written records of its analysis for a period of not less than six years 
following the fund's last use of its name in an easily accessible 
place.
    These proposed requirements would impose burdens on all funds, 
including those that are small entities. We discuss the specifics of 
these burdens in the Economic Analysis and Paperwork Reduction Act 
sections above. These sections also discuss the professional skills 
that we believe compliance with this aspect of the proposal would 
require. We would expect that smaller funds--and more specifically, 
smaller funds that are not part of a fund complex--may not have 
recordkeeping systems that would meet all the elements that would be 
required under the proposed amendments. Also, while we would expect 
larger funds or funds that are part of a large fund complex to incur 
higher costs related to the requirements in absolute terms relative to 
a smaller fund or a fund that is part of a smaller fund complex, we 
would expect a smaller fund to find it more costly, per dollar managed, 
to comply with the proposed requirements because it would not be able 
to benefit from a larger fund complex's economies of scale.
4. Disclosure and Reporting Requirements
    The proposed requirement for a fund that is subject to the 80% 
investment policy requirement to define the terms used in the fund's 
name, including the specific criteria the fund uses to select the 
investments the term describes, if any, in the fund's prospectus is 
designed to help investors better understand how the fund's investment 
strategies correspond with the investment focus that the fund's name 
suggests as well as to provide additional information about how the 
fund's management seeks to achieve the fund's objective. The proposed 
amendments

[[Page 36644]]

would require funds to tag this disclosure in Inline XBRL.
    The proposed amendments would also require funds (other than money 
market funds and BDCs) that would be required to adopt an 80% 
investment policy to report certain new information on Form N-PORT: (1) 
the percentage of the value of the fund's assets that are invested in 
accordance with the investment focus that the fund's name suggests (or 
consistent with the tax treatment suggested by a tax-exempt fund's 
name); (2) if applicable, the number of days that the value of the 
fund's investments that are invested in accordance with its investment 
focus fell below 80% of the value of the fund's assets during the 
reporting period; and (3) with respect to each portfolio investment, 
whether the investment is included in the fund's calculation of assets 
in the fund's 80% basket. These Form N-PORT reporting requirements are 
designed to provide investors with information that may allow them to 
make better investment choices consistent with their investment 
preferences as well as increase the effectiveness of the Commission's 
oversight of a fund's compliance with the names rule.
    These requirements will impose burdens on all funds, including 
those that are small entities. The specifics of these burdens are 
discussed in the Economic Analysis and Paperwork Reduction Act sections 
above. These sections also discuss the professional skills that we 
believe compliance with this aspect of the proposal would require. 
While we would expect larger funds or funds that are part of a large 
fund complex to incur higher costs related to these requirements in 
absolute terms relative to a smaller fund or a fund that is part of a 
smaller fund complex, we would expect a smaller fund to find it more 
costly, per dollar managed, to comply with the proposed requirements 
because it would not be able to benefit from a larger fund complex's 
economies of scale. Notwithstanding the economies of scale experienced 
by larger versus smaller funds, we would not expect the costs of 
compliance associated with the new Form N-PORT requirements to be 
meaningfully different for smaller versus larger funds. The costs of 
compliance would vary only based on fund characteristics tied to their 
name. For example, a fund that frequently departs from the 80% 
investment requirement would need to provide more information than 
those that do not, regardless of size. Furthermore, based on our 
experience implementing tagging requirements that use the XBRL, we 
recognize that some funds that would be affected by the proposed 
requirement, particularly filers with no Inline XBRL tagging 
experience, likely would incur initial costs to acquire the necessary 
expertise and/or software as well as ongoing costs of tagging required 
information in Inline XBRL. The incremental effect of any fixed costs, 
including ongoing fixed costs, of complying with the proposed Inline 
XBRL requirement may be greater for smaller filers. However, we believe 
that smaller funds in particular may benefit more from any enhanced 
exposure to investors that could result from these proposed 
requirements. If reporting the disclosures in a structured format 
increases the availability of, or reduces the cost of collecting and 
analyzing, key information about funds, smaller funds may benefit from 
improved coverage by third-party information providers and data 
aggregators.
5. Materially Deceptive and Misleading Use of ESG Terminology in 
Certain Fund Names
    We are proposing to define the names of what this release refers to 
as ``integration funds'' as materially deceptive and misleading if the 
name includes terms indicating that the fund's investment decisions 
incorporate one or more ESG factors. This provision addresses funds 
that consider one or more ESG factors alongside other, non-ESG factors 
in the fund's investment decisions, but ESG factors are generally no 
more significant than other factors in the investment selection 
process, such that ESG factors may not be determinative in deciding to 
include or exclude any particular investment in the portfolio. This 
proposed approach to integration funds targets misleading fund names, 
and relatedly it is designed to promote ``truth in advertising'' in 
fund names by making clear that we believe it would be misleading for a 
fund for which ESG factors are generally no more significant than other 
factors in the investment selection process to include ESG terminology 
in its name, as this has the potential to overstate the importance of 
the ESG factors in the fund's selection of its portfolio investments. 
This proposed new provision could result in an integration fund needing 
to change its name or change its investment strategies, policies, or 
investments themselves in order to comply with it.
    This requirement would impose burdens on all funds, including those 
that are small entities. The specifics of these burdens are discussed 
in the Economic Analysis section above. There are different factors 
that would affect whether and to what extent a smaller fund incurs 
costs related to this requirement. For example while we would expect 
larger funds or funds that are part of a large fund complex to incur 
higher costs related to this requirement in absolute terms relative to 
a smaller fund or a fund that is part of a smaller fund complex, we 
would expect a smaller fund to find it more costly, per dollar managed, 
to comply with the proposed requirement because it would not be able to 
benefit from a larger fund complex's economies of scale to absorb these 
costs. In particular, a large fund complex that includes an integration 
fund could more easily bear the costs--if necessary under the proposed 
provision addressing integration funds--of changing that fund's name, 
its investment strategies and portfolio, or even a liquidation of that 
fund more readily than a small fund where the integration fund may be a 
larger portion of the assets under management. We also believe that 
small funds may need to use professional skills, particularly retaining 
counsel to assist in understanding and assisting in compliance with 
this requirement, should we adopt this provision.
6. Exceptions for Certain UITs
    The proposed rule amendments would include certain exceptions for 
UITs that have made their initial deposit of securities prior to the 
effective date of any final rule amendments the Commission adopts. 
Specifically, these UITs would be excepted from the requirements to 
adopt an 80% investment policy and the recordkeeping requirements, 
including that for funds which do not adopt an 80% investment policy, 
unless the UIT has already adopted--or was required to adopt at the 
time of the initial deposit--an 80% investment policy under the current 
rule. These exceptions are generally consistent with the treatment of 
UITs under the current rule, and are designed to address the issues 
that a UIT's fixed portfolio and lack of active management cause in 
making portfolio changes to address the proposed amendments. However, 
UITs, regardless of the date of their initial deposit, would be subject 
to the rule's other requirements under the proposed amendments, such as 
the amended notice and recordkeeping requirements discussed above, as 
well as those of the federal securities laws generally. This exception 
would be available to UITs of all sizes that meet the criteria that the 
proposed amendments specify, including the five smaller UITs as 
applicable.

[[Page 36645]]

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We do not believe that the proposed amendments would duplicate, 
overlap, or conflict with other existing federal rules. Additionally, 
we do not believe that the proposed recordkeeping requirements are 
duplicative with the proposed requirement to make reports on Form N-
PORT. The purpose of the recordkeeping requirements is to provide our 
staff, and a fund's compliance personnel, the ability to evaluate the 
fund's compliance with the proposed amendments, whereas the Form N-PORT 
reporting requirement would provide information to investors and other 
market participants. Further, while rule 2a-7 contains a provision 
applying to money market fund names, it only addresses the use of the 
term ``money market'' and related terms, not the names and terminology 
that the proposed amendments would.\249\ For example, a fund with the 
name ``Treasury money market fund'' would suggest a money market fund 
that has an investment focus in Treasury securities or a fund with the 
name ``Tax-free money market fund'' would suggest a money market fund 
that is also a tax-exempt fund. In both of these cases, such fund names 
can be misleading if they do not invest consistent with the investment 
focus or tax-exempt status suggested by the name even if they follow 
the requirements of rule 2a-7.
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    \249\ See 17 CFR 270.2a-7(b)(2).
---------------------------------------------------------------------------

F. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish our stated objective, 
while minimizing any significant economic impact on small entities. We 
considered the following alternatives for small entities in relation to 
our proposal: (1) exempting funds that are small entities from the 
proposed reporting, recordkeeping, and other compliance requirements, 
to account for resources available to small entities; (2) establishing 
different reporting, recordkeeping, and other compliance requirements 
or frequency, to account for resources available to small entities; (3) 
clarifying, consolidating, or simplifying the compliance requirements 
under the proposal for small entities; and (4) using performance rather 
than design standards.
    We do not believe that exempting small funds from the provisions of 
the proposed amendments would permit us to achieve our stated 
objectives. Only those investment companies that have certain names, 
such as those suggesting an investment focus or particular tax 
treatment, would be required to comply with much of the proposal. 
Further, consistent with the current rule, the 80% investment 
requirement of the proposed amendments would allow a fund to maintain 
up to 20% of its assets in other investments. A fund seeking maximum 
flexibility with respect to its investments would continue be free to 
use a name that does not require the fund to adopt an 80% investment 
policy. While such funds would still be subject to a requirement to 
make a particular record, we believe that such a record creates a 
minimal burden on funds and helps ensure that investors are receiving 
the benefits of the names rule where appropriate.
    We estimate that 84% of funds have investment policies specifying a 
minimum percentage of investments consistent with a certain investment 
focus and, of these, approximately 82% have an investment policy 
requiring at least 80% of fund investments be consistent with a certain 
investment focus.\250\ This estimate indicates that some funds, 
including some small funds, would not bear the costs of adopting a new 
80% investment policy, though such funds would likely need to update 
existing policies to account for elements of the proposed amendments. 
However, for small funds that would be more significantly affected by 
the proposed amendments, providing an exemption for them could subject 
investors in small funds to a higher degree of risk than investors to 
large funds that would be required to comply with the proposed elements 
of the rule.
---------------------------------------------------------------------------

    \250\ See supra footnotes 178 and 179 and accompanying text.
---------------------------------------------------------------------------

    We also do not believe that it would be appropriate to subject 
small funds to different reporting, recordkeeping, and other compliance 
requirements or frequency. Similar to the concerns discussed above, if 
the proposal included different requirements for small funds, it could 
raise investor protection concerns for investors in small funds in that 
a small fund would not be subject to requirements addressing materially 
deceptive and misleading fund names that are as robust as those 
requirements on a large fund. Also, the Commission and other market 
participants would have less transparency and insight with respect to 
those smaller funds' 80% investment policies and related investments.
    We do not believe that clarifying, consolidating, or simplifying 
the compliance requirements under the proposal for small funds, beyond 
that already proposed for all funds, would permit us to achieve our 
stated objectives. Again, this approach would raise investor protection 
concerns for investors in small funds and, as discussed above, the 
proposed amendments would only apply most of the rule's requirements--
and corresponding compliance burdens--to certain fund names which are 
required to adopt an 80% investment policy.
    The costs associated with the proposed amendments would vary 
depending on the fund's particular circumstances, and thus the 
amendments could result in different burdens on funds' resources. In 
particular, we expect that a fund that has a name that would be 
required to adopt an 80% investment policy under the proposed 
amendments would have higher costs than those that do not even though 
those funds that do not adopt an 80% investment policy would be 
required to keep records of their analysis. Thus, to the extent a fund 
that is a small entity has a name that would not require the fund to 
adopt an 80% investment policy under the proposed amendments, we 
believe it would incur relatively low costs to comply with it. Further, 
some funds with names that would be newly subject to the 80% investment 
policy requirement may already have adopted an investment policy that 
requires them to invest 80% or more of the value of their assets in 
investments consistent with the name, or otherwise may already have 
investments that reflect the name's focus totaling 80% or more of the 
value of the fund's assets. These funds would not have to bear the 
burden of adjusting their portfolios or changing their name, and the 
burden of adopting an investment policy consistent with the names 
rule's requirements also could be relatively lower for these funds. 
However, we believe that it is appropriate for the costs associated 
with the proposed amendments to correlate with the costs of ensuring 
that the fund's name reflects its investments (and thus the 
expectations fostered with investors), as opposed to adjusting these 
costs to account for a fund's size, in light of how the proposed 
amendments are designed to further our investor protection objectives.
    Finally, with respect to the use of performance rather than design 
standards, the proposed amendments generally use performance standards 
for all funds subject to the amendments, regardless of size. We believe 
that providing funds with the flexibility permitted in the proposal 
with respect to designing 80% investment policies is

[[Page 36646]]

appropriate because of the fact-specific nature of the investment focus 
of funds.

G. Request for Comment

    The Commission requests comments regarding this analysis. We 
request comment on the number of small entities that would be subject 
to our proposal and whether our proposal would have any effects that 
have not been discussed. We request that commenters describe the nature 
of any effects on small entities subject to our proposal and provide 
empirical data to support the nature and extent of such effects. We 
also request comment on the estimated compliance burdens of our 
proposal and how they would affect small entities.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''), the Commission must advise OMB whether a 
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results in or is likely 
to result in:
    <bullet> An annual effect on the economy of $100 million or more;
    <bullet> A major increase in costs or prices for consumers or 
individual industries; or
    <bullet> Significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether our proposal would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data 
on:
    <bullet> The potential effect on the U.S. economy on an annual 
basis;
    <bullet> Any potential increase in costs or prices for consumers or 
individual industries; and
    <bullet> Any potential effect on competition, investment, or 
innovation.
    Commenters are requested to provide empirical data and other 
factual support for their views to the extent possible.

VII. Statutory Authority

    The Commission is proposing the amendments to rule 35d-1 under the 
authority set forth in sections 8, 30, 31, 34, 35, 38, 59, and 64 of 
the Investment Company Act of 1940 [15 U.S.C. 80a-8, 80a-29, 80a-30, 
80a-33, 80a-34, 80a-37, 80a-58, and 80a-63]. The Commission is 
proposing amendments to Form N-1A, Form N-2, Form N-8B-2, Form S-6, and 
Form N-PORT under the authority set forth in sections 8, 30, 35, and 38 
of the Investment Company Act of 1940 [15 U.S.C. 80a-8, 80a-18, 80a-34, 
and 80a-37], sections 5, 6, 7(a), 8, 10, and 19(a) of the Securities 
Act of 1933 [15 U.S.C. 77e, 77f, 77g(a), 77h, 77j, and 77s(a)], and 
sections 10, 13, 15, 23, and 35A of the Exchange Act [15 U.S.C. 78j, 
78m, 78o, 78w, and 78ll]. The Commission is proposing amendments to 
rules 11 and 405 of Regulation S-T under the authority set forth in 
section 23 of the Exchange Act [15 U.S.C. 78w]. The Commission is 
proposing amendments to rules 485 and 497 under the authority set forth 
in sections 10 and 19 of the Securities Act [15 U.S.C. 77j and 77s].

List of Subjects

17 CFR Part 230

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

17 CFR Part 232

    Administrative practice and procedure, Reporting and recordkeeping 
requirements, Securities.

17 CFR Part 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rules and Rule and Form Amendments

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The general authority citation for part 230 continues to read as 
follows:

    Authority:  15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *
    Sections 230.400 to 230.499 issued under secs. 6, 8, 10, 19, 48 
Stat. 78, 79, 81, and 85, as amended (15 U.S.C. 77f, 77h, 77j, 77s).
* * * * *
0
2. Amend Sec.  230.485 by revising paragraph (c)(3) to read as follows:


Sec.  230.485  Effective date of post-effective amendments filed by 
certain registered investment companies.

* * * * *
    (c) * * *
    (3) A registrant's ability to file a post-effective amendment, 
other than an amendment filed solely for purposes of submitting an 
Interactive Data File, under paragraph (b) of this section is 
automatically suspended if a registrant fails to submit any Interactive 
Data File (as defined in Sec.  232.11 of this chapter) required by the 
Form on which the registrant is filing the post-effective amendment. A 
suspension under this paragraph (c)(3) shall become effective at such 
time as the registrant fails to submit an Interactive Data File as 
required by the relevant Form. Any such suspension, so long as it is in 
effect, shall apply to any post-effective amendment that is filed after 
the suspension becomes effective, but shall not apply to any post-
effective amendment that was filed before the suspension became 
effective. Any suspension shall apply only to the ability to file a 
post-effective amendment pursuant to paragraph (b) of this section and 
shall not otherwise affect any post-effective amendment. Any suspension 
under this paragraph (c)(3) shall terminate as soon as a registrant has 
submitted the Interactive Data File required by the relevant Form.
* * * * *
0
3. Amend Sec.  230.497 by revising paragraphs (c) and (e) to read as 
follows:


Sec.  230.497  Filing of investment company prospectuses--number of 
copies.

* * * * *
    (c) For investment companies filing on Sec. Sec.  239.15A and 
274.11A of this chapter (Form N-1A), Sec. Sec.  239.17a and 274.11b of 
this chapter (Form N-3), Sec. Sec.  239.17b and 274.11c of this chapter 
(Form N-4), or Sec. Sec.  239.17c and 274.11d of this chapter (Form N-
6), within five days after the effective date of a registration 
statement or the commencement of a public offering after the effective 
date of a registration statement, whichever occurs later, 10 copies of 
each form of prospectus and form of Statement of Additional Information 
used after the effective date in connection with such offering shall be 
filed with the Commission in the exact form in which it was used. 
Investment companies filing on Forms N-1A, N-3, N-4, or N-6 must submit 
an Interactive Data File (as defined in Sec.  232.11 of this chapter) 
if required by the Form on which the registrant files its registration 
statement.
* * * * *
    (e) For investment companies filing on Sec. Sec.  239.15A and 
274.11A of this chapter (Form N-1A), Sec. Sec.  239.17a and 274.11b of 
this chapter (Form N-3), Sec. Sec.  239.17b and 274.11c of this chapter 
(Form N-4), or Sec. Sec.  239.17c and 274.11d of this chapter (Form N-
6), after the effective date of a registration statement, no prospectus 
that purports to comply with Section 10 of the Act (15 U.S.C. 77j) or 
Statement of Additional Information that varies from any form of

[[Page 36647]]

prospectus or form of Statement of Additional Information filed 
pursuant to paragraph (c) of this section shall be used until five 
copies thereof have been filed with, or mailed for filing to the 
Commission. Investment companies filing on Forms N-1A, N-3, N-4, or N-6 
must submit an Interactive Data File (as defined in Sec.  232.11 of 
this chapter) if required by the Form on which the registrant files its 
registration statement.
* * * * *

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
4. The general authority citation for part 232 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
0
5. Amend Sec.  232.11 by revising the definition of ``Related Official 
Filing'' to read as follows:


Sec.  232.11   Definition of terms used in this part.

* * * * *
    Related Official Filing. The term Related Official Filing means the 
ASCII or HTML format part of the official filing with which all or part 
of an Interactive Data File appears as an exhibit or, in the case of a 
filing on Form N-1A (Sec. Sec.  239.15A and 274.11A of this chapter), 
Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this chapter), Form N-3 
(Sec. Sec.  239.17a and 274.11b of this chapter), Form N-4 (Sec. Sec.  
239.17b and 274.11c of this chapter), Form N-6 (Sec. Sec.  239.17c and 
274.11d of this chapter), Form N-8B-2 (Sec.  274.12 of this chapter), 
Form S-6 (Sec.  239.16 of this chapter), and Form N-CSR (Sec.  274.128 
of this chapter), and, to the extent required by Sec.  232.405 [Rule 
405 of Regulation S-T] for a business development company as defined in 
Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), Form 10-K (Sec.  249.310 of this chapter), Form 10-Q (Sec.  
249.308a of this chapter), and Form 8-K (Sec.  249.308 of this 
chapter), the ASCII or HTML format part of an official filing that 
contains the information to which an Interactive Data File corresponds.
* * * * *
0
6. Amend Sec.  232.405 by revising:
0
a. The introductory text, paragraphs (a)(2), (a)(3) introductory text, 
(a)(3)(i) introductory text, (a)(3)(ii), and (a)(4);
0
b. Paragraphs (b)(1) introductory text, (b)(2), and (b)(3)(iii); and
0
c. Note 1 to Sec.  232.405.
    The revisions read as follows:


Sec.  232.405  Interactive Data File submissions.

    This section applies to electronic filers that submit Interactive 
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101) 
of Regulation S-K), paragraph (101) of Part II--Information Not 
Required to be Delivered to Offerees or Purchasers of Form F-10 (Sec.  
239.40 of this chapter), paragraph 101 of the Instructions as to 
Exhibits of Form 20-F (Sec.  249.220f of this chapter), paragraph 
B.(15) of the General Instructions to Form 40-F (Sec.  249.240f of this 
chapter), paragraph C.(6) of the General Instructions to Form 6-K 
(Sec.  249.306 of this chapter), General Instruction C.3.(g) of Form N-
1A (Sec. Sec.  239.15A and 274.11A of this chapter), General 
Instruction I of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this 
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a 
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4 
(Sec. Sec.  239.17b and 274.11c of this chapter), General Instruction 
C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d of this chapter), 
General Instruction 2.(l) of Form N-8B-2 (Sec.  274.12 of this 
chapter), General Instruction 5 of Form S-6 (Sec.  239.16 of this 
chapter), and General Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 
and 274.128 of this chapter) specify when electronic filers are 
required or permitted to submit an Interactive Data File (Sec.  
232.11), as further described in note 1 to this section. This section 
imposes content, format, and submission requirements for an Interactive 
Data File, but does not change the substantive content requirements for 
the financial and other disclosures in the Related Official Filing 
(Sec.  232.11).
    (a) * * *
    (2) Be submitted only by an electronic filer either required or 
permitted to submit an Interactive Data File as specified by Sec.  
229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K), 
paragraph (101) of Part II--Information Not Required to be Delivered to 
Offerees or Purchasers of Form F-10 (Sec.  239.40 of this chapter), 
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.  
249.220f of this chapter), paragraph B.(15) of the General Instructions 
to Form 40-F (Sec.  249.240f of this chapter), paragraph C.(6) of the 
General Instructions to Form 6-K (Sec.  249.306 of this chapter), 
General Instruction C.3.(g) of Form N-1A (Sec. Sec.  239.15A and 
274.11A of this chapter), General Instruction I of Form N-2 (Sec. Sec.  
239.14 and 274.11a-1 of this chapter), General Instruction C.3.(h) of 
Form N-3 (Sec. Sec.  239.17a and 274.11b of this chapter), General 
Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b and 274.11c of this 
chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.  239.17c 
and 274.11d of this chapter), General Instruction 2.(l) of Form N-8B-2 
(Sec.  274.12 of this chapter), General Instruction 5 of Form S-6 
(Sec.  239.16 of this chapter), or General Instruction C.4 of Form N-
CSR (Sec. Sec.  249.331 and 274.128 of this chapter), as applicable;
    (3) Be submitted using Inline XBRL:
    (i) If the electronic filer is not a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), a separate account as defined in Section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, a business development company as defined in 
Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), or a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), and is not within one 
of the categories specified in paragraph (f)(1)(i) of this section, as 
partly embedded into a filing with the remainder simultaneously 
submitted as an exhibit to:
* * * * *
    (ii) If the electronic filer is a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), a separate account (as defined in Section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, a business development company as defined in 
Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), or a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4) and is not within one 
of the categories specified in paragraph (f)(1)(ii) of this section, as 
partly embedded into a filing with the remainder simultaneously 
submitted as an exhibit to a filing that contains the disclosure this 
section requires to be tagged; and
    (4) Be submitted in accordance with the EDGAR Filer Manual and, as 
applicable, either Item 601(b)(101) of Regulation S-K (Sec.  
229.601(b)(101) of this chapter), paragraph (101) of Part II--
Information Not Required to be Delivered to Offerees or Purchasers of 
Form F-10 (Sec.  239.40 of this chapter), paragraph 101 of the 
Instructions as to Exhibits of Form 20-F (Sec.  249.220f of this 
chapter), paragraph B.(15) of the General Instructions to Form 40-F 
(Sec.  249.240f of this chapter), paragraph C.(6) of the General 
Instructions to Form 6-K (Sec.  249.306 of this chapter), General 
Instruction C.3.(g) of Form N-1A

[[Page 36648]]

(Sec. Sec.  239.15A and 274.11A of this chapter), General Instruction I 
of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this chapter), General 
Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a and 274.11b of this 
chapter), General Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b 
and 274.11c of this chapter), General Instruction C.3.(h) of Form N-6 
(Sec. Sec.  239.17c and 274.11d of this chapter); Instruction 2.(l) of 
Form N-8B-2 (Sec.  274.12 of this chapter; General Instruction 5 of 
Form S-6 (Sec.  239.16 of this chapter); or General Instruction C.4 of 
Form N-CSR (Sec. Sec.  249.331 and 274.128 of this chapter).
    (b) * * *
    (1) If the electronic filer is not a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), a separate account (as defined in Section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, a business development company as defined in 
Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), or a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), an Interactive Data 
File must consist of only a complete set of information for all periods 
required to be presented in the corresponding data in the Related 
Official Filing, no more and no less, from all of the following 
categories:
* * * * *
    (2) If the electronic filer is an open-end management investment 
company registered under the Investment Company Act of 1940, a separate 
account (as defined in section 2(a)(14) of the Securities Act) 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), or a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), an Interactive Data 
File must consist of only a complete set of information for all periods 
required to be presented in the corresponding data in the Related 
Official Filing, no more and no less, from the information set forth 
in:
    (i) Items 2, 3, 4, and 10(a)(4) of Sec. Sec.  239.15A and 274.11A 
of this chapter (Form N-1A);
    (ii) Items 2, 4, 5, 11, 18 and 19 of Sec. Sec.  239.17a and 274.11b 
of this chapter (Form N-3);
    (iii) Items 2, 4, 5, 10, and 17 of Sec. Sec.  239.17b and 274.11c 
of this chapter (Form N-4); or
    (iv) Items 2, 4, 5, 10, 11, and 18 of Sec. Sec.  239.17c and 
274.11d of this chapter (Form N-6); or
    (v) Item 11 of Sec.  274.12 of this chapter (Form N-8B-2), 
including to the extent required by Sec.  239.16 of this chapter (Form 
S-6); as applicable.
    (3) * * *
    (iii) As applicable, all of the information provided in response to 
Items 3.1, 4.3, 8.2.b, 8.2.d, 8.3.a, 8.3.b, 8.5.b, 8.5.c, 8.5.e, 
10.1.a-d, 10.2.a-c, 10.2.e, 10.3, and 10.5 of Form N-2 in any 
registration statement or post-effective amendment thereto filed on 
Form N-2; or any form of prospectus filed pursuant to Sec.  230.424 of 
this chapter (Rule 424 under the Securities Act); or, if a Registrant 
is filing a registration statement pursuant to General Instruction A.2 
of Form N-2, any filing on Form N-CSR, Form 10-K, Form 10-Q, or Form 8-
K to the extent such information appears therein.
* * * * *

    Note 1 to Sec.  232.405: Section 229.601(b)(101) of this chapter 
(Item 601(b)(101) of Regulation S-K) specifies the circumstances 
under which an Interactive Data File must be submitted and the 
circumstances under which it is permitted to be submitted, with 
respect to Sec.  239.11 of this chapter (Form S-1), Sec.  239.13 of 
this chapter (Form S-3), Sec.  239.25 of this chapter (Form S-4), 
Sec.  239.18 of this chapter (Form S-11), Sec.  239.31 of this 
chapter (Form F-1), Sec.  239.33 of this chapter (Form F-3), Sec.  
239.34 of this chapter (Form F-4), Sec.  249.310 of this chapter 
(Form 10-K), Sec.  249.308a of this chapter (Form 10-Q), and Sec.  
249.308 of this chapter (Form 8-K). Paragraph (101) of Part II--
Information not Required to be Delivered to Offerees or Purchasers 
of Sec.  239.40 of this chapter (Form F-10) specifies the 
circumstances under which an Interactive Data File must be submitted 
and the circumstances under which it is permitted to be submitted, 
with respect to Form F-10. Paragraph 101 of the Instructions as to 
Exhibits of Sec.  249.220f of this chapter (Form 20-F) specifies the 
circumstances under which an Interactive Data File must be submitted 
and the circumstances under which it is permitted to be submitted, 
with respect to Form 20-F. Paragraph B.(15) of the General 
Instructions to Sec.  249.240f of this chapter (Form 40-F) and 
Paragraph C.(6) of the General Instructions to Sec.  249.306 of this 
chapter (Form 6-K) specify the circumstances under which an 
Interactive Data File must be submitted and the circumstances under 
which it is permitted to be submitted, with respect to Sec.  
249.240f of this chapter (Form 40-F) and Sec.  249.306 of this 
chapter (Form 6-K). Section 229.601(b)(101) (Item 601(b)(101) of 
Regulation S-K), paragraph (101) of Part II--Information not 
Required to be Delivered to Offerees or Purchasers of Form F-10, 
paragraph 101 of the Instructions as to Exhibits of Form 20-F, 
paragraph B.(15) of the General Instructions to Form 40-F, and 
paragraph C.(6) of the General Instructions to Form 6-K all prohibit 
submission of an Interactive Data File by an issuer that prepares 
its financial statements in accordance with 17 CFR 210.6-01 through 
210.6-10 (Article 6 of Regulation S-X). For an issuer that is a 
management investment company or separate account registered under 
the Investment Company Act of 1940 (15 U.S.C. 80a et seq.), a 
business development company as defined in Section 2(a)(48) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), or a unit 
investment trust as defined in Section 4(2) of the Investment 
Company Act of 1940 (15 U.S.C. 80a-4), General Instruction C.3.(g) 
of Form N-1A (Sec. Sec.  239.15A and 274.11A of this chapter), 
General Instruction I of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 
of this chapter), General Instruction C.3.(h) of Form N-3 
(Sec. Sec.  239.17a and 274.11b of this chapter), General 
Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b and 274.11c of 
this chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.  
239.17c and 274.11d of this chapter), General Instruction 2.(l) of 
Form N-8B-2 (Sec.  274.12 of this chapter), General Instruction 5 of 
Form S-6 (Sec.  239.16 of this chapter), and General Instruction C.4 
of Form N-CSR (Sec. Sec.  249.331 and 274.128 of this chapter), as 
applicable, specifies the circumstances under which an Interactive 
Data File must be submitted.

PART 239 -- FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
7. The general authority citation for part 239 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat. 
312, unless otherwise noted.
* * * * *
0
8. Amend Form S-6 (referenced in Sec. Sec.  239.16) by adding General 
Instruction 5 as follows:

    Note: The text of Form S-6 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form S-6

* * * * *

Instruction 5. Interactive Data

    (a) An Interactive Data File as defined in rule 11 of Regulation S-
T [17 CFR 232.11] is required to be submitted to the Commission in the 
manner provided by rule 405 of Regulation S-T [17 CFR 232.405] for any 
registration statement or post-effective amendment thereto on Form S-6 
that includes or amends information provided in response to Item 11 of 
Form N-8B-2 (as provided pursuant to Instruction 1.(a) of the 
Instructions as to the Prospectus of this Form).
    (1) Except as required by paragraph (a)(2), the Interactive Data 
File must be submitted as an amendment to the registration statement to 
which the Interactive Data File relates. The amendment must be 
submitted on or

[[Page 36649]]

before the date the registration statement or post-effective amendment 
that contains the related information becomes effective.
    (2) In the case of a post-effective amendment to a registration 
statement filed pursuant to paragraphs (b)(1)(i), (ii), (v), or (vii) 
of rule 485 under the Securities Act [17 CFR 230.485(b)], the 
Interactive Data File must be submitted either with the filing, or as 
an amendment to the registration statement to which the Interactive 
Data Filing relates that is submitted on or before the date the post-
effective amendment that contains the related information becomes 
effective. (b) All interactive data must be submitted in accordance 
with the specifications in the EDGAR Filer Manual.
* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
9. The general authority citation for part 270 continues to read as 
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *
0
10. Section 270.35d-1 is revised to read as follows:


Sec.  270.35d-1   Investment company names.

    (a) Materially deceptive and misleading fund names. For purposes of 
section 35(d) of the Act (15 U.S.C. 80a-34(d)), a materially deceptive 
and misleading name of a fund includes:
    (1) Names suggesting guarantee or approval by the United States 
government. A name suggesting that the fund or the securities issued by 
it are guaranteed, sponsored, recommended, or approved by the United 
States government or any United States government agency or 
instrumentality, including any name that uses the words ``guaranteed'' 
or ``insured'' or similar terms in conjunction with the words ``United 
States'' or ``U.S. government.''
    (2) Names suggesting an investment focus. A name that includes 
terms suggesting that the fund focuses its investments in: a particular 
type of investment or investments; a particular industry or group of 
industries; particular countries or geographic regions; or investments 
that have, or whose issuers have, particular characteristics (e.g., a 
name with terms such as ``growth'' or ``value,'' or terms indicating 
that the fund's investment decisions incorporate one or more ESG 
factors), unless:
    (i) The fund has adopted a policy to invest, except under the 
circumstances provided in paragraph (b)(1) of this section, at least 
80% of the value of its assets in investments in accordance with the 
investment focus that the fund's name suggests. For a name suggesting 
that the fund focuses its investments in a particular country or 
geographic region, investments that are in accordance with the 
investment focus that the fund's name suggests are investments that are 
tied economically to the particular country or geographic region 
suggested by its name;
    (ii) The policy described in paragraph (a)(2)(i) of this section is 
a fundamental policy, or the fund has adopted a policy to provide the 
fund's shareholders with at least 60 days prior notice of any change in 
the policy described in paragraph (a)(2)(i) of this section, and any 
change in the fund's name that accompanies the change, that meets the 
provisions of paragraph (e) of this section. If the fund is a closed-
end company or business development company, and the fund does not have 
shares that are listed on a national securities exchange, the fund's 
policy is a fundamental policy; and
    (iii) Any terms used in the fund's name that suggest that the fund 
focuses its investments as described in paragraph (a)(2)(i) of this 
section are consistent with those terms' plain English meaning or 
established industry use.
    (3) Tax-exempt funds. A name suggesting that the fund's 
distributions are exempt from federal income tax or from both federal 
and state income tax, unless:
    (i) The fund has adopted a fundamental policy:
    (A) To invest, except under the circumstances provided in paragraph 
(b)(1) of this section, at least 80% of the value of its assets in 
investments the income from which is exempt, as applicable, from 
federal income tax or from both federal and state income tax; or
    (B) To invest, except under the circumstances provided in paragraph 
(b)(1) of this section, its assets so that at least 80% of the income 
that it distributes will be exempt, as applicable, from federal income 
tax or from both federal and state income tax; and
    (ii) Any terms used in the fund's name that suggest that the fund 
invests its assets as described in paragraph (a)(3)(i) of this section 
are consistent with those terms' plain English meaning or established 
industry use.
    (b) Operation of policies and related recordkeeping. (1) A fund may 
temporarily invest less than 80% of the value of its assets in 
accordance with the fund's investment focus as otherwise required by 
paragraph (a)(2)(i) or (a)(3)(i) of this section in the circumstances 
described in paragraphs (b)(1)(i) through (iv) of this section, 
provided the fund brings its investments into compliance with paragraph 
(a)(2)(i) or (a)(3)(i) as soon as reasonably practicable:
    (i) As a result of market fluctuations, or other circumstances 
where the temporary departure is not caused by the fund's purchase or 
sale of a security or the fund's entering into or exiting an 
investment, for no more than 30 consecutive days;
    (ii) To address unusually large cash inflows or unusually large 
redemptions, for no more than 30 consecutive days;
    (iii) To take a position in cash and cash equivalents, or 
government securities as defined in section 2(a)(16) of the Act, to 
avoid losses in response to adverse market, economic, political, or 
other conditions, for no more than 30 consecutive days; or
    (iv) To reposition or liquidate the fund's assets in connection 
with a reorganization, to launch the fund, or when notice of a change 
in a fund's policy as described in paragraph (a)(2)(ii) of this section 
has been provided to fund shareholders.
    (2) For the purpose of determining the fund's compliance with an 
investment policy adopted under paragraph (a)(2)(i) or (a)(3)(i)(A) of 
this section, in addition to any derivatives instrument that the fund 
includes in its 80% basket because the derivatives instrument provides 
investment exposure to investments suggested by the fund's name, a fund 
may include in its 80% basket a derivatives instrument that provides 
investment exposure to one or more of the market risk factors 
associated with investments suggested by the fund's name.
    (3) A fund must maintain written records documenting either its 
compliance under paragraphs (a) and (b) of this section or, if the fund 
does not adopt a policy under paragraphs (a)(2)(i) and (a)(3)(i) of 
this section, a written record of the fund's analysis that such a 
policy is not required under these paragraphs. Written records 
documenting the fund's compliance under paragraphs (a) and (b) of this 
section include: the fund's record of which investments are included in 
the fund's 80% basket and the basis for including each such investment 
in the fund's 80% basket; the value of the fund's 80% basket, as a 
percentage of the value of the fund's assets; the reasons, pursuant to 
paragraphs (b)(1)

[[Page 36650]]

and (2) of this section, for any departures from the policies described 
in paragraphs (a)(2)(i) and (a)(3)(i); the dates of any departures from 
the policies described in paragraphs (a)(2)(i) and (a)(3)(i); and any 
notice sent to the fund's shareholders pursuant to paragraph (e) of 
this section. Written records documenting the fund's compliance under 
paragraphs (a) and (b) must be maintained for a period of not less than 
six years following the creation of each required record (or, in the 
case of notices, following the date the notice was sent), the first two 
years in an easily accessible place. The written record made by a fund 
that does not adopt a policy under paragraphs (a)(2)(i) and (a)(3)(i) 
must be maintained in an easily accessible place for a period of not 
less than six years following the fund's last use of its name.
    (c) Effect of compliance with policy adopted under paragraph 
(a)(2)(i) or (a)(3)(i) of this section. A fund name may be materially 
deceptive or misleading under section 35(d) of the Act even if the fund 
adopts and implements a policy under paragraph (a)(2)(i) or (a)(3)(i) 
of this section and otherwise complies with the requirements of 
paragraph (a)(2) or (3) of this section, as applicable.
    (d) Use of ESG terms in fund names. If a fund considers one or more 
ESG factors alongside other, non-ESG factors in its investment 
decisions, but those ESG factors are generally no more significant than 
other factors in the investment selection process, such that ESG 
factors may not be determinative in deciding to include or exclude any 
particular investment in the portfolio, the use of terms in the fund's 
name indicating that the fund's investment decisions incorporate one or 
more ESG factors is materially deceptive and misleading.
    (e) Notice. A policy to provide a fund's shareholders with notice 
of a change in a fund's policy as described in paragraph (a)(2)(ii) of 
this section must provide that:
    (1) The notice will be provided in plain English separately from 
any other documents (provided, however, that if the notice is delivered 
in paper form, it may be provided in the same envelope as other written 
documents);
    (2) The notice will contain the following prominent statement, or 
similar clear and understandable statement, in bold-face type: 
``Important Notice Regarding Change in Investment Policy [and Name]'', 
provided that
    (i) If the notice is provided in paper form, the statement also 
will appear on the envelope in which the notice is delivered; and
    (ii) If the notice is provided electronically, the statement also 
will appear on the subject line of the email communication that 
includes the notice or an equivalent indication of the subject of the 
communication in other forms of electronic media; and
    (3) The notice must describe, as applicable, the fund's policy 
adopted under paragraph (a)(2)(i), the nature of the change to the 
policy, the fund's old and new names, and the effective date of any 
policy and/or name changes.
    (f) Unit Investment Trusts. The requirements of paragraphs 
(a)(2)(i), (a)(3)(i), and (b)(3) of this section shall not apply to any 
unit investment trust (as defined in section 4(2) of the Act (15 U.S.C. 
80a-4(2)) that has made an initial deposit of securities prior to 
[EFFECTIVE DATE OF FINAL RULE] unless the unit investment trust has 
already adopted a policy under paragraph (a)(2) or (3) of this section 
or was required to adopt such a policy at the time of the initial 
deposit.
    (g) Definitions. For purposes of this section:
    (1) 80% basket means investments that are invested in accordance 
with the investment focus that the fund's name suggests (or as 
described in paragraph (a)(3)(i) of this section).
    (2) Assets means net assets, plus the amount of any borrowings for 
investment purposes. In determining the value of a fund's assets for 
purposes of this section, a fund must value each derivatives instrument 
using the instrument's notional amount (which must be converted to 10-
year bond equivalents for interest rate derivatives and delta adjusted 
for options contracts) and reduce the value of its assets by excluding 
any cash and cash equivalents up to the notional amount of the 
derivatives instrument(s).
    (3) Derivatives instrument means any swap, security-based swap, 
futures contract, forward contract, option, any combination of the 
foregoing, or any similar instrument.
    (4) ESG means environmental, social, and/or governance.
    (5) Fund means a registered investment company or a business 
development company, including any separate series thereof.
    (6) Fundamental policy means a policy that a fund adopts under 
section 8(b)(3) of the Act (15 U.S.C. 80a-8(b)(3)) or, in the case of a 
business development company, a policy that is changeable only if 
authorized by the vote of a majority of the outstanding voting 
securities of the fund.
    (7) Launch means a period, not to exceed 180 consecutive days, 
starting from the date the fund commences operations.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
11. The general authority for part 274 continues to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and 80a-37 unless 
otherwise noted.
* * * * *
0
12. Amend Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) by 
revising Item 4 to read as follows:

    Note:  The text of Form N-1A does not, and these amendments will 
not, appear in the Code of Federal Regulations.

* * * * *

Item 4. Risk/Return Summary: Investments, Risks, and Performance

    Include the following information, in plain English under rule 
421(d) under the Securities Act, in the order and subject matter 
indicated:
    (a) Principal Investment Strategies of the Fund.
    (1) Based on the information given in response to Item 9(b), 
summarize how the Fund intends to achieve its investment objectives by 
identifying the Fund's principal investment strategies (including the 
type or types of securities in which the Fund invests or will invest 
principally) and any policy to concentrate in securities of issuers in 
a particular industry or group of industries.
    Instruction: If the Fund is subject to paragraph (a)(2)(i) or 
(a)(3)(i) of rule 35d-1 [17 CFR 270.35d-1], the Fund's disclosure 
provided in response to Item 4(a)(1) must include definitions of the 
terms used in its name, including the specific criteria the Fund uses 
to select the investments the term describes, if any. For purposes of 
this instruction, ``terms'' means any word or phrase used in a Fund's 
name, other than any trade name of the Fund or its adviser, related to 
the Fund's investment focus or strategies.
* * * * *
0
13. Amend Form N-2 (referenced in Sec. Sec.  239.14 and 274.11a-1) by 
revising Item 8 to read as follows:

    Note:  The text of Form N-2 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-2

* * * * *

[[Page 36651]]

Part A--Information Required in a Prospectus

* * * * *

Item 8. General Description of the Registrant.

* * * * *
    2. * * *
    b. * * *

Instructions

    1. Concentration, for purposes of this Item, is deemed 25 percent 
or more of the value of the Registrant's total assets invested or 
proposed to be invested in a particular industry or group of 
industries. The policy on concentration should not be inconsistent with 
the Registrant's name.
    2. If the Fund is subject to paragraph (a)(2)(i) or (a)(3)(i) of 
rule 35d-1 [17 CFR 270.35d-1], the Fund's disclosure provided in 
response to Item 8(2)(b)(2) must include definitions of the terms used 
in its name, including the specific criteria the Fund uses to select 
the investments the term describes, if any. For purposes of this 
instruction, ``terms'' means any word or phrase used in a Fund's name, 
other than any trade name of the Fund or its adviser, related to the 
Fund's investment focus or strategies.
* * * * *
0
14. Amend Form N-8B-2 (referenced in Sec.  274.12) by adding new 
General Instruction 2.(l) and by revising Item 11 to read as follows:

    Note:  The text of Form N-8B-2 does not, and these amendments 
will not, appear in the Code of Federal Regulations.

Form N-8B-2

* * * * *

GENERAL INSTRUCTIONS FOR FORM N-8B-2

* * * * *

2. Preparation and Filing of Registration Statement

Interactive Data

    (1) An Interactive Data File as defined in Rule 11 of Regulation S-
T [17 CFR 232.11] is required to be submitted to the Commission in the 
manner provided by rule 405 of Regulation S-T [17 CFR 232.405] for any 
registration statement on Form N-8B-2 that includes information 
provided in response to Item 11 pursuant to Instruction 2. The 
Interactive Data File must be submitted with the filing to which it 
relates on the date such filing becomes effective.
    (2) All interactive data must be submitted in accordance with the 
specifications in the EDGAR Filer Manual.
* * * * *

II. General Description of the Trust and Securities of the Trust

* * * * *

Information Concerning the Securities Underlying the Trust's Securities

    11. Describe briefly the kind or type of securities comprising the 
unit of specified securities in which security holders have an 
interest. (If the unit consists of a single security issued by an 
investment company, name such investment company and furnish a 
description of the type of securities comprising the portfolio of such 
investment company.) (Note: Do not furnish a list of portfolio 
securities in answer to this item. Describe portfolio securities as 
``bonds of railroad companies,'' ``preferred stock of public utility 
holding companies,'' ``common stock of industrial companies,'' etc., 
indicating the approximate proportion of each group in terms of value 
as of a recent date.) If the trust owns or will own any securities of 
its regular brokers or dealers as defined in rule 10b-l under the Act 
[17 CFR 270. 10b-1], or their parents, identify those brokers or 
dealers and state the value of the registrant's aggregate holdings of 
the securities of each subject issuer as of the close of the 
registrant's most recent fiscal year.
    Instruction:
    (1). The registrant need only disclose information with respect to 
an issuer that derived more than 15% of its gross revenues from the 
business of a broker, a dealer, an underwriter, or an investment 
adviser during its most recent fiscal year. If the registrant has 
issued more than one class or series of securities, the requested 
information must be disclosed for the class or series that has 
securities that are being registered.
    (2). If the trust is subject to paragraph (a)(2)(i) or (a)(3)(i) of 
rule 35d-1 [17 CFR 270.35d-1], the trust's disclosure provided in 
response to item 11 must include definitions of the terms used in its 
name, including the specific criteria used to select the investments 
the term describes, if any. For purposes of this instruction, ``terms'' 
means any word or phrase used in a trust's name, other than any trade 
name of the trust or its depositor, related to the trust's investment 
focus.
* * * * *
0
15. Amend Form N-PORT (referenced in Sec.  274.150) by revising parts B 
and C to read as follows:

    Note: The text of Form N-PORT does not, and these amendments 
will not, appear in the Code of Federal Regulations.

* * * * *

Part B: Information About the Fund

* * * * *
    Item B.9 Investment Company Act Names Rule Investment Policy. If 
the Fund is required to adopt a policy as described in rule 35d-
1(a)(2)(i) or (a)(3)(i) [17 CFR 270.35d-1(a)(2)-(3)], provide the 
following:
    a. The value of the Fund's 80% basket, as defined in rule 35d-
1(g)(1), as a percentage of the value of the Fund's assets; and
    b. If applicable, the number of days that the value of the Fund's 
80% basket, as defined in rule 35d-1(g)(1), fell below 80% of the value 
of the Fund's assets during the reporting period (or, if the Fund has 
adopted a policy as described in rule 35d-1(a)(3)(i)(B), the number of 
days that less than 80% of the income that the Fund distributed was 
exempt, as applicable, from federal income tax or from both federal and 
state income tax).
    Instruction: Because in accordance with rule 35d-1(b)(3) the Fund 
must use a derivatives instrument's notional amount (which must be 
converted to 10-year bond equivalents for interest rate derivatives and 
delta adjusted for options contracts) for purposes of determining the 
fund's compliance with an investment policy adopted under rule 35d-
1(a)(2)(i), the percentages that the Fund reports in response to Item 
B.9.a and assesses for purposes of reporting in response to Item B.9.b 
similarly must reflect the use of notional amounts with certain 
adjustments as set forth above.
* * * * *

Part C: Schedule of Portfolio Investments

* * * * *
    Item C.2. Amount of each investment
* * * * *
    e. If the Fund is required to adopt a policy as described in rule 
35d-1(a)(2)(i) or (a)(3)(i) [17 CFR 270.35d-1(a)(2)(i), (3)(i)], is the 
investment included in the Fund's 80% basket, as defined in rule 35d-
1(g), as applicable? [Y/N]
* * * * *

    By the Commission.

    Dated: May 25, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-11742 Filed 6-16-22; 8:45 am]
BILLING CODE 8011-01-P


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