[Federal Register Volume 88, Number 195 (Wednesday, October 11, 2023)]
[Rules and Regulations]
[Pages 70436-70513]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-20793]



[[Page 70435]]

Vol. 88

Wednesday,

No. 195

October 11, 2023

Part II





Securities and Exchange Commission





-----------------------------------------------------------------------





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





Investment Company Names; Final Rule

  Federal Register / Vol. 88, No. 195 / Wednesday, October 11, 2023 / 
Rules and Regulations  

[[Page 70436]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

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

[Release No. 33-11238; 34-98438; IC-35000; File No. S7-16-22]
RIN 3235-AM72


Investment Company Names

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
amending the rule under the Investment Company Act of 1940 
(``Investment Company Act'' or ``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 
amendments to this rule are designed to increase investor protection by 
improving, and broadening the scope of, the requirement for certain 
funds to adopt a policy to invest at least 80 percent of the value 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 is also 
adopting 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 names-related 
regulatory requirements.

DATES: This rule is effective December 11, 2023.

FOR FURTHER INFORMATION CONTACT: Blair Burnett, Mykaila DeLesDernier, 
Pamela Ellis, Senior Counsels; Bradley Gude, Branch Chief; Amanda 
Hollander Wagner, Senior Special Counsel, 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 adopting 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 239.14 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. Regulatory Context
    B. Developments and Analysis Informing Final Rule Amendments
    C. Overview of the Final Rules
    1. Final Rules' Principal Elements
    2. Other Aspects of the 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 Registered 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. Modernizing the Rule's Notice Requirement
    E. Form N-PORT Reporting
    1. Investments To Be Included in a Fund's 80% Basket
    2. Investment Company Act Names Rule Investment Policy
    F. Recordkeeping
    G. Unit Investment Trusts
    H. Compliance Dates
III. Other Matters
IV. Economic Analysis
    A. Introduction
    B. Broad Economic Considerations
    C. Economic Baseline
    1. Fund Industry Overview
    2. Market Practice
    3. Current Regulatory Framework
    D. Benefits, Costs, and Effects on Efficiency, Competition and 
Capital Formation
    1. Benefits
    2. Costs
    3. Effects on Efficiency, Competition and Capital Formation
    E. Reasonable Alternatives Considered
    1. Disclosure-Based Framework
    2. Alternatives to 90-Day Temporary Departure Limit
    3. Permit But Not Require the Use of Derivatives' Notional 
Values for Purposes of Names Rule Compliance
    4. Exclude Unit Investment Trusts From Requirements for Tagging 
Prospectus Disclosure
V. 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. Form N-PORT Reporting Requirements
    E. Investment Company Interactive Data
VI. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the Rule and Form Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to Rule Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    1. 80% Investment Policy Requirements--Scope Expansion and Other 
Amendments
    2. Effect of Compliance With an 80% Investment Policy
    3. Recordkeeping Requirements
    4. Disclosure and Reporting Requirements
    5. Treatment of UITs
    E. Agency Action To Minimize Effect on Small Entities
Statutory Authority

I. Introduction and Background

    The Commission is adopting rule and form amendments that are 
designed to modernize and enhance the protections that rule 35d-1 under 
the Investment Company Act, the ``names rule,'' provides. This rule 
addresses the names of registered investment companies and business 
development companies (``BDCs'') that the Commission defines as 
materially misleading or deceptive.\1\ The amendments the Commission is 
adopting update the rule and other names-related regulatory 
requirements to improve the protections that the rule provides, and to 
address changes in the fund industry in the approximately 20 years 
since the rule was adopted.
---------------------------------------------------------------------------

    \1\ This release refers to registered investment companies and 
BDCs collectively as ``funds.''
---------------------------------------------------------------------------

    In May 2022, the Commission proposed rule and form amendments that 
would update the regulatory requirements associated with funds' 
names.\2\ The proposed amendments included an expansion of the names 
rule's scope, improvements to the requirements for funds' investment 
policies adopted under the names rule (including, among other things, 
specific requirements addressing temporary departures from these 
policies' requirements), updated notice requirements, and new 
recordkeeping requirements. The proposed amendments also effectively 
would

[[Page 70437]]

have required that terms in a fund's name be consistent with those 
terms' plain English meaning or established industry use, and addressed 
materially deceptive and misleading use of environmental, social, or 
governance (``ESG'') terminology in fund names. Finally, the 2022 
Proposal included amendments that would require a fund to define the 
terms used in its name in its prospectus, and amendments to Form N-PORT 
to add several new names-rule-related reporting items.
---------------------------------------------------------------------------

    \2\ See Investment Company Names, Investment Company Act Release 
No. 34593 (May 25, 2022) [87 FR 36594 (June 17, 2022)] (``Proposing 
Release'' or the ``2022 Proposal''). The Commission voted to issue 
the Proposing Release on May 25, 2022. The release was posted on the 
Commission website that day, and comment letters were received 
beginning the following day. The comment period closed on August 16, 
2022. We have considered all comments received since May 25, 2022.
---------------------------------------------------------------------------

    The Commission received comment letters on the 2022 Proposal from a 
variety of commenters, including funds, law firms, investor advocacy 
groups, environmental advocacy groups, professional and trade 
associations, public policy research institutes, academics, and 
interested individuals.\3\ Many commenters expressed support for the 
names rule generally, and the overall goals of improving and clarifying 
the regulatory framework related to fund names, with some commenters 
recognizing that the names rule has not been revisited since its 
implementation in 2001.\4\ Comments on specific aspects of the proposed 
amendments, however, were mixed. While some commenters generally 
supported the proposed scope expansion, as well as the amendments 
addressing the operation of investment policies adopted under the names 
rule, many others expressed concerns with these aspects of the proposal 
or suggested certain modifications.\5\ Comments on the proposed 
prospectus disclosure requirements were generally supportive, but 
comments on the proposed new Form N-PORT reporting items were mixed, 
with some largely objecting to these requirements or suggesting 
modifications and others arguing that the proposed new reporting items 
would help promote transparency and accountability.\6\
---------------------------------------------------------------------------

    \3\ The comment letters on the Proposing Release are available 
at https://www.sec.gov/comments/s7-16-22/s71622.htm.
    \4\ See, e.g., Comment Letter of Better Markets (Aug. 16, 2022) 
(``Better Markets Comment Letter''); Comment Letter of the Consumer 
Federation of America (Aug. 16, 2022) (``Consumer Federation of 
America Comment Letter'') (each expressing support for the 
Commission's efforts to modernize the names rule, stating, 
respectively, that the rule has not been revisited since 2001, and 
it is ``well past time'' for the Commission to revisit and update 
the names rule); see also Comment Letter of the CFA Institute (Aug. 
22, 2022) (``CFA Institute Comment Letter''); Comment Letter of the 
Teachers Insurance and Annuity Association of American and Nuveen, 
LLC (Aug. 16, 2022) (``TIAA-Nuveen Comment Letter'').
    \5\ See infra discussion at sections II.A.1-II.A.4.
    \6\ See infra discussion at sections II.B and II.E.
---------------------------------------------------------------------------

    After considering the comments on the 2022 Proposal and as 
discussed in more detail below, we are adopting amendments to the names 
rule, with some modifications based on the comments we received.

A. Regulatory Context

    Congress provided the Commission with rulemaking authority to 
address materially deceptive or misleading fund names, recognizing the 
concern that investors may focus on a fund's name to determine its 
investments and risks.\7\ The names rule, in turn, responds to this 
concern by helping to ensure that investors' assets in funds are 
invested in accordance with investors' reasonable expectations based on 
the fund's name.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 80a-34(d); Public Law 104-290, 208, 110 Stat. 
3416, 3432 (1996).; see also S. Rep. No. 293, 104th Cong., 2d Sess. 
8-9 (1996).
---------------------------------------------------------------------------

    The role of the names rule remains important and distinct from 
other disclosure requirements. A fund's name is not meant to supplant 
other required fund disclosure, and a name cannot communicate 
everything about a fund's investments, risks, and other features. The 
Commission has historically stated that investors should not rely on an 
investment company's name as the sole source of information about a 
company's investments and risks.\8\ We continue to encourage investors 
to look beyond a fund's name to other information, such as disclosure 
included in a fund's registration statement, to obtain a complete 
understanding of a fund's investment objective, policies, strategies, 
and risks, as several commenters suggested.\9\ A fund's name, however, 
is unique in several respects. It is typically the first piece of 
information that investors receive about a fund.\10\ Fund names offer 
important signaling for investors in assessing their investment 
options.\11\ Relatedly, incentives exist for asset managers to include 
terminology in fund names that is designed to attract investor 
assets.\12\
---------------------------------------------------------------------------

    \8\ See Investment Company Names, Investment Company Act Release 
No. 24828 (Jan. 17, 2001) [66 FR 8509 (Feb. 1, 2001)] (``2001 Names 
Rule Adopting Release'') at nn.4-5 and accompanying text.
    \9\ See, e.g., Comment Letter of Massachusetts Financial 
Services Company (Aug. 16, 2022) (``MFS Comment Letter''); Comment 
Letter of Capital Research and Management Company (Aug. 16, 2022) 
(``Capital Group Comment Letter''); Comment Letter of the Cato 
Institute (Aug. 12, 2022) (``Cato Institute Comment Letter'').
    \10\ See Comment Letter of the North American Securities 
Administrators Association, Inc. (Aug. 16, 2022) (``NASAA Comment 
Letter''); see also Comment Letter of the Public Investors Advocate 
Bar Association (Aug. 15, 2022) (``PIABA Comment Letter'') (stating 
that retail investors frequently base their purchase of funds solely 
upon the name of the fund and ``do little to investigate'' the 
portfolio holdings or the specific strategy of a fund beyond relying 
on the fund's name).
    \11\ See Comment Letter of U.S. SIF: The Forum for Sustainable 
and Responsible Investment (Aug. 16, 2022) (``U.S. SIF Comment 
Letter'').
    \12\ See Proposing Release, supra footnote 2, at n.6; see also, 
e.g., Comment Letter of the Center for American Progress (Aug. 16, 
2022) (``Center for American Progress Comment Letter'') (stating 
that the current investing environment creates strong incentives for 
investment companies to name funds in ways that will attract 
investors). But see Comment Letter of Benjamin Zycher, Senior 
Fellow, American Enterprise Institute (Nov. 1, 2022) (``Zycher 
Comment Letter'') (arguing that ``the implicit argument that firms 
or funds have incentives to mislead or to adopt deceptive names is 
not correct'' because funds' reputations for honesty are in funds' 
long-term interests).
---------------------------------------------------------------------------

    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.\13\ This 
section of the Act further authorizes the Commission to define such 
names or titles as are materially deceptive or misleading. The 
Commission adopted the names rule in 2001 in exercise of this 
authority.\14\
---------------------------------------------------------------------------

    \13\ 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].
    \14\ See 2001 Names Rule Adopting Release, supra footnote 8.
---------------------------------------------------------------------------

    The current names rule generally requires that if a fund's name 
suggests a focus in a particular type of investment, or in investments 
in a particular industry or geographic focus, 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.\15\ Under the current rule, a fund 
generally may elect to make its 80% investment policy a fundamental 
policy (i.e., a policy that may not be changed without shareholder 
approval) or instead provide shareholders notice at least 60 days prior 
to any change in the 80% investment policy.\16\ An 80% investment 
policy relating to a tax-

[[Page 70438]]

exempt fund, however, must be a fundamental policy.
---------------------------------------------------------------------------

    \15\ The rule imposes a similar 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'').
    \16\ Under the Act, a fund may not deviate 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 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 adopting a parallel definition of ``80% basket'' in the final 
amendments to the names rule, and when referring to the final 
amendments, references to a fund's ``80% basket'' refer to this 
definition. See final rule 35d-1(g) (defining ``eighty percent (80%) 
basket''); see also proposed rule 35d-1(g)(1) (defining ``80% 
basket,'' but otherwise identical to definition in final rule).
---------------------------------------------------------------------------

    Currently, a fund is required to invest in accordance with its 80% 
investment policy ``under normal circumstances,'' and a fund must apply 
its 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 current 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.
    In adopting the names rule, the Commission made clear that it is 
not a safe harbor for materially deceptive or misleading names.\17\ The 
prohibitions of section 35(d) and 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.\18\ 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--both 
currently, and following the Commission's adoption of amendments to the 
names rule--would include section 35(d) and the names rule.\19\
---------------------------------------------------------------------------

    \17\ See 2001 Names Rule Adopting Release, supra footnote 8, at 
paragraph accompanying n.16; see also Proposing Release, supra 
footnote 2, at nn.13-15 and accompanying text.
    \18\ See Proposing Release, supra footnote 2, at n.14 and 
accompanying text.
    \19\ See id. at nn.16-17 and accompanying text (also addressing 
the requirement for fund compliance officers to discuss any material 
compliance matter involving the names rule in annual reports to the 
board on the operation of funds' compliance policies and 
procedures).
---------------------------------------------------------------------------

B. Developments and Analysis Informing Final Rule Amendments

    The names rule has not been amended since its adoption in 2001. In 
past years, the Commission and staff have received input about the 
operation of the names rule, as well as areas for potential 
improvement, through a variety of venues. The Commission published a 
Request for Comment on Fund Names in March 2020.\20\ The 2020 Request 
for Comment sought public comment on the framework for addressing 
funds' names, particularly in light of market and other developments 
since the rule's adoption. The Commission received broad comments in 
response to the 2020 Request for Comment and, as described above, in 
response to the 2022 Proposal. In addition, staff in the Commission's 
Division of Investment Management, particularly the Division's 
Disclosure Review and Accounting Office, receive input from funds on 
names rule compliance issues regularly, for example during the course 
of staff's review of fund registration statements.
---------------------------------------------------------------------------

    \20\ See 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''); see also Proposing Release, supra 
footnote 2, at section I.B (describing the input commenters provided 
in response to the 2020 Request for Comment).
---------------------------------------------------------------------------

    Commenters generally recognized that investors view a fund's name 
as an important piece of information that communicates the fund's 
objectives.\21\ Several commenters expressed that asset managers have 
an incentive to create fund names that are designed to attract 
investors.\22\ Many commenters, including funds and others, expressed 
their general agreement that the names rule provides important investor 
protections and that the rule has been largely effective in addressing 
misleading and deceptive fund names.\23\ Commenters expressed support 
for a requirement, such as the rule's 80% investment policy provision, 
that requires a fund's underlying investments to correspond with the 
focus its name suggests in light of reasonable investor 
expectations.\24\ One, for example, with respect to funds' use of ESG 
related terminology in their names, stated that a naming requirement 
where ``the underlying strategy and data must significantly support the 
name'' is a ``basic consumer protection.'' \25\
---------------------------------------------------------------------------

    \21\ See, e.g., Comment Letter of the Asset Management Group of 
the Securities Industry and Financial Markets Association (Aug. 16, 
2022) (``SIFMA AMG Comment Letter''); NASAA Comment Letter; Consumer 
Federation of America Comment Letter; Comment Letter of Wellington 
Management Company (Aug. 16, 2022) (``Wellington Comment Letter''); 
Comment Letter of Adriana Z. Robertson and Jill E. Fisch (Apr. 20, 
2023) (``Robertson-Fisch Comment Letter''); see also PIABA Comment 
Letter (asserting fund names are particularly important for 401(k) 
plan investments, which employers make available from a pre-
determined list of options and comprise the entirety of retirement 
savings for many Americans).
    \22\ See, e.g., Consumer Federation of America Comment Letter; 
Center for American Progress Comment Letter; CFA Institute Comment 
Letter.
    \23\ See Proposing Release, supra footnote 2, at n.20 and 
accompanying text; see also, e.g., Comment Letter of Invesco Ltd. 
(Aug. 16, 2022) (``Invesco Comment Letter'') (``Since its adoption 
in 2001, the Names Rule has provided an effective regulatory 
framework for ensuring that fund names are not materially deceptive 
or misleading and has served to help investors understand what they 
can expect when they invest in a fund.''); Comment Letter of the 
Investment Company Institute (Aug. 16, 2022) (``ICI Comment Letter 
I'') The Investment Company Institute also submitted a separate 
comment letter dated December 6, 2022 (``ICI Comment Letter II''), a 
comment letter dated May 22, 2023 (``ICI Comment Letter III''), and 
a comment letter dated July 31, 2023 (``ICI Comment Letter IV''). 
Unless otherwise indicated, these letters are referred to 
collectively as if they were a single letter (``ICI Comment 
Letter'').
    \24\ See, e.g., Comment Letter of T. Rowe Price (Aug. 16, 2022) 
(``T. Rowe Comment Letter'') (discussing effectiveness of current 
80% investment policy requirement in aligning fund names with 
investor expectations); CFA Institute Comment Letter (stating that 
the terms used in fund names should reflect the fund's ``investment 
objective, strategies, and types of securities held'' and that the 
current names rule ``provide[s] a level of assurance to 
investors'').
    \25\ See Comment Letter of Amalgamated Financial Corp. (Aug. 16, 
2022) (``Amalgamated Comment Letter'').
---------------------------------------------------------------------------

    Some commenters expressed that certain changes to the names rule 
would be beneficial to ensure that the rule continues to serve its 
investor protection purposes. Some of these commenters expressed the 
view that the current scope of the rule does not cover all instances in 
which fund names create the reasonable expectation that a fund will 
invest in a certain way.\26\ Some also expressed concern that the 
current rule's ``under normal circumstances'' standard increases the 
risk that a fund's investments will not be consistent with its name 
over an extended period and that investors will be misled.\27\ 
Commenters also suggested other, more technical updates to the names 
rule, such as addressing how funds that use derivatives calculate 
compliance with their 80% investment policies, and updating the rule's 
notice provision to reflect technological changes over the past two 
decades.\28\
---------------------------------------------------------------------------

    \26\ See, e.g., Consumer Federation of America Comment Letter 
(stating that ``significant gaps and loopholes'' exist in the 
current rule); Center for American Progress Comment Letter; see also 
infra section IV.D (estimating that approximately 62% of funds have 
names that implicate the current 80% investment policy requirement).
    \27\ See, e.g., NASAA Comment Letter; Comment Letter of the 
Environmental Defense Fund (Aug. 16, 2022) (``Environmental Defense 
Fund Comment Letter'').
    \28\ See Proposing Release, supra footnote 2, at section I.B; 
see also, e.g., ICI Comment Letter; Comment Letter of J.P. Morgan 
Asset Management (Aug. 16, 2022) (``J.P. Morgan Asset Management 
Comment Letter'').
---------------------------------------------------------------------------

    In considering updates to the names rule, both the Commission and 
commenters have taken into account developments in the fund industry 
since the rule was originally adopted. Registered investment companies 
manage considerably more assets today than they did in 2001 (with this 
amount nearly quadrupling), and the number of registered investment 
companies has also increased--by close to 20%--in the two decades 
following the names rule's adoption.\29\ Similarly, over this time

[[Page 70439]]

period, it has become more likely that retail investors access the 
markets through registered investment companies than through direct 
ownership of stocks and bonds.\30\ Although the increase in the number 
of registered investment companies is modest compared to the increase 
in registered investment companies' assets under management, the number 
of funds tells only part of the story about the breadth of fund 
investment options currently available. The range of fund investment 
strategies has become notably more diverse over the past two 
decades.\31\
---------------------------------------------------------------------------

    \29\ See Investment Company Institute, 2022 Fact Book (2022) 
(``2022 ICI Fact Book''), available at https://www.icifactbook.org/pdf/2022_factbook.pdf. In 2001, there were 8,860 registered open-end 
and closed-end management investment companies, representing 
approximately $7.15 trillion in assets under management. In 2021, 
there were 10,450 registered open-end and closed-end management 
investment companies, representing approximately $28.2 trillion in 
assets under management. See also Fund Industry Overview at infra 
section IV.C.1 (discussing fund industry statistics as of Dec. 
2022).
    \30\ See Federal Reserve Bulletin, Changes in U.S. Family 
Finances from 2016 to 2019: Evidence from the Survey of Consumer 
Finances (Sept. 2020), available at https://www.federalreserve.gov/publications/files/scf20.pdf; Federal Reserve Bulletin, Recent 
Changes in U.S. Family Finances: Evidence from the 1998 and 2001 
Survey of Consumer Finances, available at https://www.federalreserve.gov/econres/files/2001_bull0103.pdf. The 
percentage of U.S. families holding stocks and bonds directly 
decreased from 24.9% in 1992 to 16.3% in 2019. The percentage of 
U.S. families holding pooled investment funds and retirement 
accounts (including individual retirement accounts, Keogh accounts, 
and certain employer-sponsored accounts such as 401(k) and 403(b) 
accounts) increased from 33.3% in 1992 to 59.5% in 2019. Mutual 
funds made up a significant portion of defined contribution plan 
assets (58%) and IRA assets (45%) at year-end 2021. In addition, the 
share of defined contribution plan assets held in mutual funds has 
grown over the past two decades, from 44% at year-end 2001 to 58% at 
year-end 2021. See 2022 ICI Fact Book.
    \31\ See Proposing Release, supra footnote 2, at nn.21-22 at 
accompanying text.
---------------------------------------------------------------------------

    For example, the number of equity mutual funds and exchange-traded 
funds (``ETFs'') that are sector funds (e.g., consumer, financial, 
utilities) increased by nearly 70% from 2001 to 2021.\32\ Mutual fund 
and ETF assets in ``thematic'' strategies have surged over the past 
three years, with data from Morningstar Direct identifying a record 589 
thematic mutual funds and ETFs debuting globally in 2021.\33\ As of 
December 2022, Morningstar data categorized 334 domestic funds 
(including mutual funds, ETFs, and registered closed-end funds) as 
thematic funds, comprising 4 ``broad themes'' (broad thematic, physical 
world, social, and technology), 27 ``themes'' (e.g., artificial 
intelligence and big data, food, space, and wellness), and 150 
``subthemes'' (e.g., health innovation, next gen auto, millennials and 
``Generation Z,'' cannabis, robotics, and travel/tourism).\34\ While 
fund managers and others understand certain of these thematic names to 
be included in the current scope of the names rule, there can be 
questions about whether certain thematic terms suggest a focus in a 
particular type of investment, or in investments in a particular 
industry or group of industries. As fund managers have incentives to 
include ``buzzwords'' in their names to attract assets, and the current 
market for funds includes a substantially broader variety of names 
suggesting a particular focus than two decades ago, a rule providing 
specific requirements to address deceptive and misleading fund names 
for any fund name that suggests a particular investment focus is even 
more relevant now than it was when it was adopted.\35\
---------------------------------------------------------------------------

    \32\ See 2022 ICI Fact Book, supra footnote 29. In 2001, there 
were 452 sector equity mutual funds and ETFs; in 2021, there were 
757.
    \33\ See Sonya Swink, Thematic Assets Have Surged--And Are Here 
to Stay, Ignites (Dec. 22, 2022), available at https://www.ignites.com/c/3870954/500734/thematic_assets_have_surged_here_stay?referrer_module=issueHeadline&module_order=1. These strategies are dominated by technology-related 
themes, such as internet, blockchain, cloud computing, and 
cybersecurity (based on staff analysis of data obtained from 
Morningstar Direct as of Dec. 15, 2022).
    \34\ Id.
    \35\ See supra footnote 12; see also NASAA Comment Letter 
(discussing the application of the names rule to names suggesting a 
focus on ``trendy `thematic areas,' . . . including cybersecurity, 
blockchain/digital assets, and artificial intelligence'').
---------------------------------------------------------------------------

    Funds that consider ESG factors in their investment strategies 
comprise a thematic area that entails unique considerations, and that 
involves the use of terminology that may be especially powerful in fund 
names to attract investors. The use of ESG or similar terminology (such 
as ``sustainable,'' ``green,'' or ``socially responsible'') in fund 
names may present particular investor protection concerns for several 
reasons. Investor interest in--and funds that offer--ESG strategies 
have rapidly increased in recent years.\36\ Asset managers have created 
and marketed funds that consider ESG factors in their selection 
process, and these funds can attract significant interest and stand out 
to investors by using ESG and related terms in their names. Approaches 
to ESG investing vary, however, and funds that consider ESG factors 
have strategies that vary in the extent to which ESG factors are 
considered versus other factors. The breadth of ESG-related terms, as 
well as evolving investor expectations around terms like 
``sustainable'' or ``socially responsible,'' compound the possibility 
of investor confusion and potential ``greenwashing'' in fund names.\37\
---------------------------------------------------------------------------

    \36\ See Proposing Release, supra footnote 2, at n.120 and 
accompanying text. See also, e.g., Letter from Morningstar to Chair 
Gary Gensler (June 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; 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/; Amalgamated 
Comment Letter, NASAA Comment Letter, U.S. SIF Comment Letter, CFA 
Institute Comment Letter (all discussing investor interest in funds 
with ESG strategies and names).
    \37\ ``Greenwashing'' involves the risk that funds marketing ESG 
strategies may exaggerate their ESG practices or the extent to which 
their investment products take into account ESG factors. See, e.g., 
Comment Letter of Public Citizen (Aug. 15, 2022) (``Public Citizen 
Comment Letter'') (discussing evolving investor expectations around 
ESG terms). But see Robertson-Fisch Comment Letter (``interrogating 
the concept of greenwashing'' and comparing the portfolios of funds 
with ESG terminology in their names to the portfolios of ``sister 
funds''--``the non-ESG fund in the same fund family most comparable 
to the ESG fund''--with the authors concluding that little evidence 
of greenwashing exists).
---------------------------------------------------------------------------

    In consideration of the broad public input the Commission has 
received on fund names, our analysis of this input, the Commission and 
staff's experience with the names rule over the past two decades, 
developments in the fund industry, and the growth of the fund industry 
and families' investments in funds during this time period, we are 
adopting amendments to the names rule (and related disclosure and 
reporting requirements) to modernize the rule and to enhance the 
investor protections it currently provides. First, it is in investors' 
interests to align the rule's scope and requirements better with the 
policies and purposes underlying the rule. The Commission has stated 
that the 80% investment policy requirement ``will provide an investor 
greater assurance that a [fund's] investments will be consistent with 
its name.'' \38\ This requirement addresses circumstances in which a 
fund's name may be materially deceptive or misleading, in exercise of 
the Commission's rulemaking authority under section 35(d). The 
amendments we are adopting address fund names that are not currently 
within the scope of the rule, or where the current scope of the rule 
has created interpretive issues.\39\ These names may entail a

[[Page 70440]]

capacity to deceive or mislead because they suggest a particular 
investment focus, which in turn offers an important signal, or entry 
point, to investors that are researching their investment options.\40\ 
For these names--like the names currently within the rule's scope--the 
80% investment policy requirement would provide investors greater 
assurance that these funds' investments are consistent with the manner 
in which a fund defines the terms in its name, which must be consistent 
with plain English or established industry use and disclosed in its 
prospectus. We therefore anticipate that including these names in the 
names rule's scope will bring more discipline to fund naming practices 
and more meaningful names that convey the funds' investment focuses, 
while allowing funds the flexibility to ascribe reasonable definitions 
for the terms used in their names.\41\ That is, the decision to include 
terms in a fund's name that suggest an investment focus, including a 
focus in investments that have or whose issuers have particular 
characteristics, will now require the fund to adopt an 80% investment 
policy and to define the terms used in its name.\42\
---------------------------------------------------------------------------

    \38\ See 2001 Names Rule Adopting Release, supra footnote 8.
    \39\ For example, 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. 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. See Proposing 
Release, supra footnote 2, at paragraph accompanying n.23; see also 
infra section II.A.1.
    \40\ See In the Matter of the Private Investment Fund for 
Governmental Personnel, Inc., Investment Company Act Release No. 
2474 (Jan. 18, 1957) (the Commission has historically expressed 
that, in considering whether a name is deceptive or misleading, 
``[a]ctual deception of investors need not be shown, it is 
sufficient if the name of the company is found to have a tendency or 
capacity to deceive or mislead'').
    \41\ See NASAA Comment Letter; see also CFA Institute Comment 
Letter. But see, e.g., infra footnote 75 and accompanying text.
    \42\ See infra sections II.A.1 and II.B.
---------------------------------------------------------------------------

    Similarly, these amendments are designed to promote greater 
specificity in the operation of funds' 80% investment policies to 
enhance investor protection by helping to ensure that funds' names are 
not misleading as their portfolios may shift over time--either because 
of inadvertent portfolio ``drift'' or intentional departures from the 
80% requirement.\43\ When an investor chooses to invest in a fund, that 
person has made an intentional decision to invest in, for example, the 
type of asset class, industry, or sector in which the fund's name 
suggests an investment focus. That investor has a reasonable 
expectation that the fund's investments will generally remain focused 
in the area that the fund's name indicates.\44\ We appreciate, however, 
that a naming rule that requires unwavering adherence to a particular 
investment threshold risks harming funds and investors.\45\ This 
rigidity ultimately could result in investor harm if portfolio managers 
were not permitted to depart from their 80% investment policy for a 
limited time to manage their funds appropriately in response to 
changing circumstances.\46\ The amended rule enhances investor 
protection by requiring funds to conduct at least quarterly reviews of 
their portfolio investments for consistency with the 80% investment 
policy requirement, and by adopting time frames to remedy departures 
from 80% that seek to balance investors' reasonable expectations with 
appropriate flexibility for advisers, consistent with their fiduciary 
duty, to manage funds' portfolios.
---------------------------------------------------------------------------

    \43\ See, e.g., Consumer Federation of America Comment Letter 
(discussing the risk of funds changing their portfolios such that 
the portfolios are no longer accurately reflected by the funds' 
names).
    \44\ See, e.g., Center for American Progress Comment Letter 
(stating that investors' expectations and investment practices often 
assume that investments in a fund will remain consistent with the 
name over the longer term, and investors who wish to change their 
own mix of investments typically do so by changing funds).
    \45\ See, e.g., ICI Comment Letter; J.P. Morgan Asset Management 
Comment Letter; Comment Letter of Dimensional Fund Advisors LP (Aug. 
16, 2022) (``Dimensional Comment Letter''); Comment Letter of 
Dechert LLP (Aug. 16, 2022) (``Dechert Comment Letter''); see also 
infra section II.A.2.
    \46\ See, e.g., SIFMA AMG Comment Letter; T. Rowe Comment 
Letter.
---------------------------------------------------------------------------

    Our disclosure and reporting framework can provide additional 
tools, in connection with technological developments over the past two 
decades, to augment investors' and other market participants' 
understanding of fund names and to increase transparency of how a 
fund's investment portfolio reflects the investment focus that its name 
suggests. In the years since the names rule was adopted, the Commission 
has adopted requirements to modernize reporting requirements for 
registered investment companies, which build on significant advances in 
the technology that can be used to report and analyze information--
namely, the use of structured data language.\47\ We recognize that 
there are many types of fund names for which understanding additional 
detail about how name terms are defined, and about the types of 
investments that the term describes, would provide greater clarity to 
an investor about the fund's investment focus. This may be helpful if, 
for example, fund names that incorporate terms that may reflect new 
themes or technologies become more prevalent. The final rules' enhanced 
prospectus disclosure and reporting provisions, which require 
information to be disclosed in structured data language, are designed 
to address this goal.
---------------------------------------------------------------------------

    \47\ Investment Company Reporting Modernization, Investment 
Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 
2016)] (``Investment Company Reporting Modernization Adopting 
Release''); see also Amendments to the Timing Requirements for 
Filing Reports on Form N-PORT, Investment Company Act Release No. 
33384 (Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)]; Proposing 
Release, supra footnote 2, at n.115 and accompanying text (generally 
discussing rules requiring funds registering on Forms N-1A and N-2 
to submit certain information using Inline XBRL format).
---------------------------------------------------------------------------

    Finally, we are incorporating certain updates to the names rule to 
address industry and technological developments over the past two 
decades, and to address names-rule-related recordkeeping.

C. Overview of the Final Rules

1. Final Rules' Principal Elements
    We are adopting amendments to the names rule, as well as related 
disclosure and reporting requirements, in consideration of the issues 
discussed above.
     Expansion of Scope. We are adopting, substantially as 
proposed, amendments to the names rule that 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 coverage will include, for example, fund names 
with terms such as ``growth'' or ``value,'' or terms indicating that 
the fund's investment decisions incorporate one or more ESG factors. 
These names will be added to the names that are currently within the 
scope of the 80% investment policy requirement--that is, generally, 
fund names that suggest a focus in a particular type of investment, or 
investments in a particular industry or geographic focus, and fund 
names suggesting that a fund's distributions are tax-exempt.
     Temporary Departures from the 80% Investment Requirement. 
In a change from the proposal, under which funds would have been 
permitted to depart from the fund's 80% investment policy only under 
certain specified circumstances, the final amendments retain the names 
rule's current requirements for a fund to invest in accordance with its 
80% investment policy ``under normal circumstances'' (the ``80% 
investment requirement''), and for the 80% investment requirement to 
apply at the time a fund invests its

[[Page 70441]]

assets. Also, in a change from the proposal, the final amendments add a 
new provision that requires a fund to review its portfolio assets' 
inclusion in its ``80% basket'' at least quarterly.\48\ Like the 
proposal, the final amendments include specific time frames--generally 
90 days, as opposed to 30 days as proposed--for getting back into 
compliance if a fund departs from the 80% requirement as a result of 
drift or in other-than-normal circumstances.
---------------------------------------------------------------------------

    \48\ See final rule 35d-1(g) (defining ``80% basket'' generally 
as investments that are invested in accordance with the investment 
focus that the fund's name suggests).
---------------------------------------------------------------------------

     Derivatives. Consistent with the proposal, the final 
amendments generally require funds to use a derivatives instrument's 
notional amount to determine the fund's compliance with its 80% 
investment policy, with certain adjustments. In a change from the 
proposal, the final amendments include a limited modification to this 
approach that would exclude certain currency hedges from the names rule 
compliance calculation. As proposed, we are also amending the names 
rule to address the derivatives instruments that a fund may include in 
its 80% basket.
     Unlisted Registered Closed-End Funds and BDCs. Consistent 
with the proposal, the final amendments generally prohibit an unlisted 
registered closed-end fund or BDC that is required to adopt an 80% 
investment policy from changing that policy without a shareholder vote. 
In a modification from the proposal, the final amendments permit these 
funds to change their 80% investment policies without such a vote if: 
(1) the fund conducts a tender or repurchase offer with at least 60 
days' prior notice of the policy change, (2) that offer is not 
oversubscribed, and (3) the fund purchases shares at their net asset 
value.\49\
---------------------------------------------------------------------------

    \49\ See infra footnote 292 (discussing the use of net asset 
value in the event of a tender offer, as well as a repurchase 
offer).
---------------------------------------------------------------------------

     Enhanced Prospectus Disclosure. Substantially as proposed, 
we are adopting amendments to funds' prospectus disclosure requirements 
that will 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.
     Plain English Requirements for Terms Used in Fund Names. 
The final amendments to the names rule, as proposed, effectively 
require that any terms used in the fund's name that suggest either an 
investment focus, or that the fund's distributions are tax-exempt, must 
be consistent with those terms' plain English meaning or established 
industry use.
     Form N-PORT Reporting Requirements. Consistent with the 
proposal, we are adopting amendments to Form N-PORT for funds to report 
the value of the fund's 80% basket, and whether an investment is 
included in the fund's 80% basket. In a change from the proposal, the 
final amendments also include a new reporting item to include the 
definition(s) of terms used in the fund's name. Funds will have to 
report this information for the third month of every quarter, instead 
of for each month as proposed.
     Recordkeeping. Consistent with the proposal (but with 
conforming changes to address the final rules' approach to temporary 
departures from the 80% investment requirement), the final rules 
include recordkeeping provisions related to a fund's compliance with 
the rule's requirements. The final rules do not, however, include the 
proposed requirement for funds that do not adopt an 80% investment 
policy to maintain a record of their analysis that such a policy is not 
required.
2. Other Aspects of the Proposal
    We are not taking action on the proposed approach regarding the use 
of ESG terms in the names of ESG ``integration funds'' at this time. 
Under the proposed approach, the names of ESG ``integration funds'' 
would have been defined as materially deceptive and misleading if the 
name includes terms indicating that the fund's investment decisions 
incorporate one or more ESG factors.\50\ Under the proposal, 
integration funds were described as 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. Such funds may select 
investments because those investments would meet other criteria applied 
by the fund's adviser (e.g., investments selected on the basis of 
macroeconomic trends or company-specific factors like price-to-earnings 
ratio). This description of integration funds in the names rule 
proposal mirrored the definition of an integration fund in the 
Commission's ESG Disclosure Proposal.\51\
---------------------------------------------------------------------------

    \50\ Proposed rule 35d-1(d).
    \51\ 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) [87 FR 36654 (June 17, 2022)] (``ESG Disclosure 
Proposal''), at section II.A.1.
---------------------------------------------------------------------------

    The proposed approach to integration funds in the names rule was 
designed to target misleading fund names by making clear that it would 
be materially 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. The proposed approach 
would have addressed the Commission's concern that such funds have the 
potential to overstate the importance of ESG factors in the fund's 
investment selection process.\52\
---------------------------------------------------------------------------

    \52\ See Proposing Release, supra footnote 2, at section II.D.
---------------------------------------------------------------------------

    Commenters offered mixed feedback on the names rule's proposed 
approach to integration fund names. Some commenters that supported the 
proposed approach stated that it would help prevent investors from 
believing that ESG factors play a more significant role than they 
actually do in the investment process--i.e., protect investors from 
greenwashing.\53\ Other commenters, however, questioned the 
Commission's proposed approach, stating that the proposed approach 
could act as a disservice to investors because, for example, it could 
result in investors believing that integration funds do not consider 
ESG factors when they actually do, or that the proposed approach could 
hinder innovation.\54\ Because the proposed provision in the names rule 
mirrored the separate proposed definition of an integration fund in the 
ESG Disclosure Proposal, we are continuing to consider comments and are 
not adopting the proposed approach to integration fund names at this 
time. As discussed above, however, the final amendments' expanded scope 
of the 80% investment policy requirement includes fund names with terms 
suggesting that the fund focuses in investments that have, or 
investments whose issuers have, particular characteristics--including 
terms

[[Page 70442]]

indicating that the fund's investment decisions incorporate one or more 
ESG factors.\55\
---------------------------------------------------------------------------

    \53\ See, e.g., Comment Letter of Ceres (Aug. 16, 2022) (``Ceres 
Comment Letter''); Consumer Federation of America Comment Letter; 
Comment Letter of Evergreen Action (Aug. 15, 2022) (``Evergreen 
Action Comment Letter'').
    \54\ See, e.g., Cato Institute Comment Letter; Comment Letter of 
Mutual Fund Directors Forum (Aug. 16, 2022) (``MFDF Comment 
Letter'') (suggesting that the marketplace has been dynamic in 
developing different approaches to bringing an ESG lens to various 
investment strategies, and that the proposed rule, as the commenter 
understood it to largely limit the use of ESG terms in fund names to 
funds that use inclusionary or exclusionary screens (as well as to 
funds that employ impact or proxy-voting strategies), risks 
hindering further innovation in the fund space as ESG strategies 
continue to evolve); Comment Letter of Minerva Analytics (Aug. 16, 
2022) (``Minerva Comment Letter'').
    \55\ See supra section I.C.1; see also final rule 35d-1(a)(2).
---------------------------------------------------------------------------

II. Discussion

A. 80% Investment Policy Requirement

1. Names Suggesting an Investment Focus
    Consistent with the proposal, we are adopting amendments that 
broaden the scope of the names rule's 80% investment policy requirement 
to apply also to fund names that include terms suggesting that the fund 
focuses in investments that have, or whose issuers have, particular 
characteristics.\56\ These amendments will apply in addition to the 
existing 80% investment policy requirement for funds whose name 
suggests a focus in a particular type of investment, industry, country, 
or geographic region, or those whose name suggests certain tax 
treatment. The purpose of the names rule is to prevent fund names from 
misrepresenting the fund's investments and risks.\57\ The expanded 
scope of the final amendments furthers this objective by ensuring that 
a fund's investment activity is consistent with the investment focus 
its name communicates.
---------------------------------------------------------------------------

    \56\ As used in this release, consistent with 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.
    \57\ See Proposing Release, supra footnote 2, at n.5 and 
accompanying text.
---------------------------------------------------------------------------

a) General Discussion
    The Commission proposed to expand the 80% investment policy 
requirement to apply to fund names that include terms suggesting that 
the fund focuses in investments that have, or whose issuers have, 
particular characteristics, whether or not such terms connote an 
investment strategy. In response to the proposal, commenters expressed 
that the names rule, as currently constituted, fails to capture a large 
segment of funds because the rule makes a distinction between terms 
that reference a type of investment and an investment strategy.\58\ 
These commenters supported the proposed scope expansion, asserting that 
terms in fund names that reference an investment strategy often 
communicate to investors an investment focus, thus creating a 
reasonable expectation among investors that the fund will hold 
investments that support that focus.\59\ These commenters suggested 
that expanding the scope of the rule to include any term in a fund's 
name that communicates an investment focus, whether or not that term 
references an investment strategy, is necessary to modernize the rule 
and is a logical step to help ensure that investment companies cannot 
circumvent the intent of the rule when naming funds.\60\ Some 
commenters also asserted that the proposed expansion of the scope would 
bring more ``discipline and clarity'' to fund naming practices and, in 
turn, help investors make more informed investment decisions.\61\ In 
particular, many commenters asserted that the expanded scope would 
improve the ability of investors to discern between funds in the ESG 
investment industry and better protect investors looking for exposure 
to ESG investments.\62\ In addition, one commenter suggested that the 
Commission provide more clarity on whether the expanded scope would 
cover names suggesting a focus on ``thematic'' areas.'' \63\
---------------------------------------------------------------------------

    \58\ See, e.g., Consumer Federation of America Comment Letter; 
Center for American Progress Comment Letter; NASAA Comment Letter; 
see also Proposing Release, supra footnote 2, at n.23 and 
accompanying text (discussing that the Commission has historically 
taken the position that fund names that incorporate terms that 
connote an investment objective, strategy, or policy are not within 
the scope of the 80% investment policy requirement).
    \59\ See, e.g., NASAA Comment Letter; Comment Letter of 
Principles for Responsible Investment (Aug. 16, 2022); (``PRI 
Comment Letter''); Comment Letter of Soundboard Governance (Aug. 16, 
2022) (``Soundboard Governance Comment Letter'') (focusing 
particularly on the inclusion of ESG-related terms in the proposed 
scope expansion).
    \60\ See, e.g., Consumer Federation of America Comment Letter; 
Center for American Progress Comment Letter.
    \61\ See NASAA Comment Letter; Better Markets Comment Letter; 
Consumer Federation of America Comment Letter.
    \62\ See, e.g., Comment Letter of Sierra Club (Aug. 16, 2022) 
(``Sierra Club Comment Letter''); Better Markets Comment Letter; 
Evergreen Action Comment Letter.
    \63\ See NASAA Comment Letter (expressing that funds with names 
that suggest a focus on ``trendy'' thematic areas in particular 
should be required to adopt an 80% investment policy and stating 
that investors, funds, and regulators would ``be well served by 
greater clarity'' on whether the proposed expansion would thematic 
fund names); see also Comment Letter of Seward & Kissel LLP (Aug. 
16, 2022) (``Seward & Kissel Comment Letter'') (stating that that 
the tension between words suggesting a ``type of investment'' versus 
those suggesting an ``investment strategy'' has resulted in the 
[names rule] being inconsistently applied, especially with respect 
to funds using thematic strategies.'').
---------------------------------------------------------------------------

    In contrast, many commenters objected to the proposal because, in 
their view, the expansion of the 80% investment policy requirement 
would lead to interpretive challenges and added compliance costs for 
fund advisers without providing commensurate benefit to investors.\64\ 
In particular, they stated that the expanded scope incorporates a vague 
standard that is more subjective than the current scope of the names 
rule which, in contrast with the proposal, they believed applies a more 
objective and intuitive framework that sufficiently ensures that fund 
assets are invested in accordance with reasonable expectations based on 
a fund's name.\65\ They questioned whether the names included in the 
expanded scope effectively communicate any real investment focus to 
investors, absent further information about a fund's objectives.\66\ 
Because these names are vague, they asserted, investors would still 
need to review a fund's disclosures to understand how the investment 
strategy is executed for these newly included terms, limiting the value 
of the rule.\67\ These commenters contended that the proposed expansion 
of the 80% investment policy requirement has limited investor 
protection benefits because it overemphasizes the importance of a 
fund's name, and thus disincentivizes investors from looking beyond the 
name to review information in fund prospectuses and related 
disclosures.\68\ In addition, several commenters questioned whether the 
Commission adequately articulated how terms that would be included in 
the proposed scope have led to investor confusion, deception, or harm 
such that they should be subject to the rule.\69\
---------------------------------------------------------------------------

    \64\ See, e.g., Comment Letter of Stradley Ronon (Aug. 16, 2022) 
(``Stradley Comment Letter''); SIFMA AMG Comment Letter; TIAA-Nuveen 
Comment Letter; Comment Letter of Calamos Investments (Aug. 16, 
2022) (``Calamos Comment Letter'').
    \65\ See, e.g., Calamos Comment Letter; Invesco Comment Letter; 
Comment Letter of Federated Hermes, Inc. (Aug. 16, 2022) 
(``Federated Hermes Comment Letter''); MFS Comment Letter; Comment 
Letter of Nationwide Funds Group (Aug. 16, 2022) (``Nationwide 
Comment Letter''); Robertson-Fisch Comment Letter (discussing these 
points in the context of ESG funds); T. Rowe Comment Letter; see 
also PRI Comment Letter (supporting the proposed scope expansion, 
but requesting that the Commission provide a definition of 
``characteristics'' in the proposed language expanding the scope).
    \66\ See, e.g., MFS Comment Letter; ICI Comment Letter; Capital 
Group Comment Letter; Cato Institute Comment Letter.
    \67\ See SIFMA AMG Comment Letter; ICI Comment Letter (comparing 
the uniformity of an 80% investment policy for funds with ``equity'' 
in their name to the potential inconsistency in 80% investment 
policies for funds with ``growth'' in their name).
    \68\ See, e.g., MFS Comment Letter; Capital Group Comment 
Letter; Cato Institute Comment Letter.
    \69\ See, e.g., Comment Letter of WisdomTree Asset Management 
(Aug. 16, 2022) (``WisdomTree Comment Letter''); SIFMA AMG Comment 
Letter; Invesco Comment Letter; Dechert Comment Letter. Commenters 
also pointed to the lack of enforcement cases charging rule 35d-1 or 
shareholder suits in this area as a reason to not expand the scope. 
See, e.g., Nationwide Comment Letter; Capital Group Comment Letter; 
ICI Comment Letter IV.

---------------------------------------------------------------------------

[[Page 70443]]

    Commenters also suggested that this vagueness would result in the 
costs of implementation of the proposed amendments being high relative 
to what they stated would be minimal value to investors. Commenters 
stated that interpretive issues relating to the proposed scope's 
vagueness would result in a number of adverse consequences, including 
inconsistent application of the 80% investment policy requirement, 
uncertainty in determining whether a term suggests a particular 
investment focus, and, where a fund has adopted an 80% investment 
policy, whether a particular investment is consistent with that 
policy.\70\ Commenters also suggested that it would be challenging to 
establish automated compliance monitoring solutions for terms in fund 
names where subjective criteria are part of the decision-making 
process.\71\ As a result, commenters expressed that funds would need 
either to require portfolio managers to adhere to specific rigid 
criteria, stifling innovative investment strategies, or to engage in 
some level of manual review, significantly increasing the complexity 
and compliance burdens for funds.\72\ Commenters also raised concerns 
that, for funds that would be within the scope of the 80% investment 
policy requirement, a portfolio manager's expectations with respect to 
investments that would qualify for inclusion in the 80% basket may 
ultimately prove wrong or change over time, which could make compliance 
with the names rule challenging.\73\ Relatedly, commenters expressed 
the concern that the expanded scope could lead to retroactive second-
guessing of portfolio managers' designations of investments by 
Commission staff.\74\ To avoid these implementation problems, 
commenters suggested funds may use broader, more generic names that 
convey less information to investors in order to avoid adopting an 80% 
investment policy.\75\
---------------------------------------------------------------------------

    \70\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Invesco Comment Letter; Dechert Comment Letter; Comment Letter of 
Fidelity Management & Research Company LLC (Aug. 16, 2022) 
(``Fidelity Comment Letter''); Ceres Comment Letter.
    \71\ See, e.g., ICI Comment Letter; T. Rowe Comment Letter; 
SIFMA AMG Comment Letter; Invesco Comment Letter. Scalable and 
automatic compliance monitoring systems typically rely on third-
party data providers to tag investments but such providers could 
vary their classification of investments and may not use the same 
classification as the fund. See, e.g., Comment Letter of Freeman 
Capital Management (July 24, 2022) (``Freeman Capital Management 
Comment Letter''); Invesco Comment Letter; T. Rowe Comment Letter.
    \72\ See, e.g., Dechert Comment Letter; Invesco Comment Letter; 
TIAA-Nuveen Comment Letter; J.P. Morgan Asset Management Comment 
Letter; T. Rowe Comment Letter; Wellington Comment Letter; ICI 
Comment Letter; Invesco Comment Letter; Freeman Capital Management 
Comment Letter.
    \73\ See, e.g., SIFMA AMG Comment Letter; Fidelity Comment 
Letter; J.P. Morgan Asset Management Comment Letter; Stradley 
Comment Letter (stating that ```equity' and `fixed income' 
investments do not change their categorization due to market 
declines, cycles or volatility, as compared to a value stock, that, 
if subjected to only objective criteria, can and does migrate from 
one category to another'').
    \74\ See, e.g., ICI Comment Letter; Federated Hermes Comment 
Letter; J.P. Morgan Asset Management Comment Letter.
    \75\ See, e.g., Dechert Comment Letter; ICI Comment Letter 
(asserting that the proposed amendments could also incentivize 
longer, more complex fund names that seek to capture the full range 
of investments reflected in a fund's investment strategy).
---------------------------------------------------------------------------

    Many commenters expressed particular concern with the inclusion of 
the terms ``growth'' and ``value'' in the proposed scope.\76\ 
Commenters asserted that there are no precise definitions or 
standardized criteria used to classify these types of investments.\77\ 
Rather, commenters expressed that portfolio managers have unique 
qualitative and quantitative criteria that they evaluate when selecting 
growth or value investments, some of which rely on more subjective 
determinations that may vary among portfolio managers.\78\ A few 
commenters suggested that investors invest in certain growth or value 
funds because they believe in a manager's unique analysis and 
conclusions for selecting investments.\79\ Some commenters expressed 
that requiring growth or value funds to define terms in their name and 
disclose the criteria used to select investments would lead to more 
rigidity in investment selection, resulting in less flexibility for 
managers to implement investment strategies that traditionally have 
been managed with more nuance.\80\
---------------------------------------------------------------------------

    \76\ See, e.g., ICI Comment Letter; Dechert Comment Letter; T. 
Rowe Comment Letter.
    \77\ See, e.g., Fidelity Comment Letter; Nationwide Comment 
Letter; Stradley Comment Letter.
    \78\ See, e.g., Wellington Comment Letter; MFS Comment Letter; 
ICI Comment Letter.
    \79\ See Stradley Comment Letter; SIFMA AMG Comment Letter.
    \80\ See, e.g., Wellington Comment Letter; Nationwide Comment 
Letter; Stradley Comment Letter.
---------------------------------------------------------------------------

    To avoid these interpretative challenges and compliance burdens, a 
number of commenters suggested narrowing the scope of the final rule to 
that of the current rule or to exclude terms that do not readily reduce 
to measurable characteristics, and for which evaluations, opinions, and 
views reasonably may vary.\81\ Separately, some commenters urged the 
Commission to require enhanced disclosure in a fund's registration 
statement when its name indicates an investment strategy, rather than 
expanding the scope to mandate an 80% investment policy for these 
funds.\82\ Several commenters expressed that investor access to 
disclosures and information about funds is widespread and easily 
accessible, making an investor's need to rely on a fund name to 
evaluate the fund's strategy less necessary than when the Commission 
adopted the names rule.\83\
---------------------------------------------------------------------------

    \81\ See, e.g., ICI Comment Letter; Invesco Comment Letter; 
Federated Hermes Comment Letter; Dechert Comment Letter; TIAA-Nuveen 
Comment Letter; see also Calamos Comment Letter (asserting that, if 
the expanded scope is adopted, the Commission should consider 
excluding existing funds from the rule's requirements because 
compliance may be costly and have unanticipated effects for existing 
funds that are not currently subject to the rule).
    \82\ SIFMA AMG Comment Letter; Invesco Comment Letter; Comment 
Letter of Calvert Research and Management (Aug. 16, 2022) (``Calvert 
Comment Letter''); CFA Institute Comment Letter (recommending that 
when a fund's name suggests an investment focus, the investment 
focus must be consistent with the key factors in the principal 
investment strategies that are disclosed in the fund's registration 
statement). See also ICI Comment Letter IV (asserting that the 
proposed amendments are unnecessary because existing prospectus 
disclosure requirements and other regulatory obligations, such as 
rules 482 and 156 under the Securities Act of 1933 and FINRA Rule 
2210, provide a sufficient framework to ensure that fund 
communications are clear and not misleading).
    \83\ See SIFMA AMG Comment Letter; Dechert Comment Letter; T. 
Rowe Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we are adopting, substantially as 
proposed, amendments that expand the rule's 80% investment policy 
requirement to apply to any fund with terms in its name that suggest 
that the fund focuses in investments that have, or investments whose 
issuers have, particular characteristics. We recognize that some 
commenters expressed concerns about perceived vagueness associated with 
the ``particular characteristics'' language in the proposed rule.\84\ 
The amended rule provides, as proposed, an illustrative parenthetical 
that is designed to give non-exclusive examples of terms that suggest 
that the fund focuses in investments that have, or whose issuers have, 
particular characteristics. The parenthetical provides as examples the 
terms ``growth'' or ``value,'' or terms indicating that the fund's 
investment decisions incorporate one or more ESG factors.\85\ We are 
not defining the term ``particular characteristics'' in the rule, as 
suggested by a commenter, because we believe that this term will be

[[Page 70444]]

adequately understood to mean any feature, quality, or attribute.\86\ 
We are adopting this approach, rather than an approach that provides an 
enumerated list of terms included in the expanded scope, in light of 
the broad diversity of fund investment strategies and fund names, and 
to ensure that the rule remains evergreen. Based on our understanding 
of the fund industry and current practice, however, we anticipate that 
the primary types of names that the expanded scope will cover will be 
names that include the terms ``growth'' and ``value,'' terms with ESG- 
or sustainability-related characteristics, or terms that reference a 
thematic investment focus.
---------------------------------------------------------------------------

    \84\ See, e.g., Stradley Comment Letter; TIAA-Nuveen Comment 
Letter; Cato Institute Comment Letter.
    \85\ See infra sections II.A.1.d) and II.D.
    \86\ See supra footnote 65.
---------------------------------------------------------------------------

    We recognize that many commenters opposed expanding the scope of 
the rule, and the inclusion of terms such as ``growth'' and ``value'' 
in particular. While we appreciate these commenters' concerns, it is 
important to balance these concerns with the investor protection goals 
that underlie the names rule and section 35(d) of the Investment 
Company Act. Although there have been limited Commission enforcement 
cases citing section 35(d) of the Act, Commission and staff's 
experience with the names rule over the past two decades and 
developments in the fund industry during this time period, including 
the increase in fund assets under management and the proliferation of 
diverse fund strategies, lead us to modernize and enhance the names 
rule to further the investor protection goals of section 35(d).\87\
---------------------------------------------------------------------------

    \87\ See infra at footnote 494 and accompanying text (asserting 
that the lack of Commission enforcement actions citing section 35(d) 
of the Act is evidence that the general framework of the rule is 
effective, not that further enhancements to the rule are 
unnecessary).
---------------------------------------------------------------------------

    We are adopting amendments that do not distinguish between a type 
of investment and an investment strategy because 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. We understand that funds typically 
include certain terms in their name to communicate an investment focus 
and to appeal to investors choosing among available investment 
options.\88\ As some commenters believed, the names included in the 
expanded scope can serve as the initial bases upon which investors make 
investment decisions and create reasonable expectations that funds that 
use those terms will focus on investments and issuers that have the 
specified characteristics that a fund's name suggests.\89\ For example, 
terms like ``growth'' and ``value'' create reasonable expectations 
among investors that funds with those terms in their name will invest 
predominantly in companies that exhibit ``growth'' or ``value'' 
characteristics. By expanding the scope of the 80% investment 
requirement to include these names, the final amendments will help 
ensure that these types of funds have portfolios that reflect the 
investment focus their name suggests. Further, the expanded scope in 
the final amendments will reduce the existing inconsistencies in the 
application of the rule by eliminating the need for fund managers to 
determine whether their name references a type of investment or an 
investment strategy.
---------------------------------------------------------------------------

    \88\ For example, funds have increasingly chosen names that 
include terms that reference popular industry themes, business 
sectors, or investment strategies. See supra footnote 33 and 
accompanying text (discussing the increase in filings over the last 
few years by funds with names that reference popular industry themes 
and business sectors, providing some evidence that investors are 
attracted to these fund names). See also supra footnote 36 
(suggesting that ESG terminology in fund names is effective in 
attracting inflows).
    \89\ See NASAA Comment Letter; Consumer Federation of America 
Comment Letter; PIABA Comment Letter.
---------------------------------------------------------------------------

    The Commission staff has observed an increase in filings by funds 
that use ``thematic'' terms in their name.\90\ We understand that fund 
managers and others would consider certain of these thematic names to 
be included in the current scope of the names rule. For instance, 
certain terms may be viewed as clearly suggesting a focus in a type of 
industry or group of industries (e.g., terms suggesting a focus in 
cybersecurity, health and wellness, or travel and tourism).\91\ There 
could be reasonable questions, however, about whether other thematic 
terms suggest a focus in a particular type of investment, or in 
investments in a particular industry or group of industries. This could 
occur, for example, because a thematic term may be narrower or more 
expansive than an ``industry'' may be commonly understood (e.g., 
drones, ``smart cities,'' metaverse, ``big data''). And there are 
certain thematic terms that we believe most practitioners would not 
consider to suggest a focus in a type of investment, or a focus in a 
particular industry or group of industries (e.g., terms suggesting 
demographic characteristics such as ``millennial'' or ``Gen Z,'' or 
political, economic, or historical themes such as ``biothreat,'' ``gig 
economy,'' ``meme stocks,'' or ``post-Corona''). The effect of the 
scope of the final amendments is that, to the extent a fund uses a term 
in its name that suggests an investment focus, including any term that 
references a thematic investment focus, the fund will be required to 
adopt an 80% investment policy, which in turn will help ensure it will 
invest in accordance with the investment focus its name suggests.
---------------------------------------------------------------------------

    \90\ See supra footnote 33 and accompanying text.
    \91\ In cases where certain terms that suggest a focus in a type 
of industry have been coupled with the word ``strategy,'' some funds 
have argued that the name suggests a focus in an investment strategy 
and not a type of investment, and therefore should not be within the 
scope of the 80% investment policy requirement. As discussed above, 
the expansion of the scope of the 80% investment policy requirement 
includes terms suggesting that the fund focuses in investments that 
have, or whose issuers have, particular characteristics, whether or 
not such terms connote an investment strategy.
---------------------------------------------------------------------------

    We understand that certain terms used in fund names may have more 
objective or standardized criteria than other terms. For instance the 
term ``equity'' generally has a more standardized definition, whether 
based on plain English principles or established industry use, compared 
to terms like ``growth'' and ``value.'' However, not all names that 
fall within the scope of the current rule have precise definitions or 
standardized, objective criteria. For instance, for fund names that 
reference a particular region or country, it is often not immediately 
apparent based on the terms in a fund's name whether the fund invests 
in issuers that are domiciled in the specific region, have a large 
presence in the region, or have some other nexus to the region. An 
investor may generally understand what constitutes ``Latin America,'' 
and seek out a ``Latin American'' fund, but different portfolio 
managers may apply different definitions of what specifically ``Latin 
America'' means in practice for their fund because definitions of 
``Latin America,'' using plain English or industry use of the term, can 
reasonably differ.
    This variation is evident based on the principal investment 
strategies disclosed in fund prospectuses. For example, a ``Latin 
America'' fund offered by one adviser has an 80% investment policy to 
invest in securities of issuers that derive at least 50% of revenue 
from Latin American markets (defined to include Spanish-speaking 
islands in the Caribbean), without consideration of the issuers' 
domicile, headquarters, or primary trading market. In contrast, another 
``Latin America'' fund managed by a different adviser has a policy to 
invest at least 80% in securities of issuers that are domiciled in 
Latin America (defined to exclude Mexico and Caribbean islands), that 
derive significant revenues from Latin America, or the securities trade 
on

[[Page 70445]]

exchanges located in Latin America. Each of these examples is 
consistent with the plain English or industry use of the term and 
demonstrates the flexibility the final amendments will provide to fund 
managers in developing definitions of the terms used in a fund's name. 
Moreover, given the proliferation of the diversity of fund investment 
strategies and fund names since the rule was originally adopted, 
retaining the current rule's scope or excluding terms that do not 
always neatly reduce to measurable characteristics, as suggested by 
commenters, would undermine the investor protection purposes of the 
rule.
    The final rule also is not as rigid as many commenters seem to 
contend when, for example, they suggested that a rule that requires 
pre-determined definitions of certain terms could lead to retroactive 
second-guessing by Commission staff and result in funds adopting more 
generic names or could create incentives for longer, more complex 
names. The amended rule provides fund managers with flexibility to 
ascribe reasonable definitions for the terms used in a fund's name and 
flexibility to determine the specific criteria the fund uses to select 
the investments that the term describes.\92\ We understand that 
different funds and various third-party data providers may use 
different definitions for the same term in order to best reflect a 
particular investment strategy. The amended rule is designed for funds 
to retain reasonable discretion in establishing their 80% investment 
policies, which allows funds to implement nuanced and innovative 
investment strategies.\93\ We also appreciate, for many terms, there 
will be various reasonable means of implementing an 80% investment 
policy that incorporates a definition or understanding of terminology 
that differs from another fund whose name incorporates the same 
terminology. For example, different funds may have ``growth'' in their 
name, and each of these funds may have portfolio managers who have 
different approaches to selecting investments that have growth 
characteristics. In such circumstances, two funds would naturally have 
different policies that reflect their portfolio managers' distinct 
approaches to growth investing. In this example, each of these funds 
would describe to investors how it defines ``growth,'' provided the 
definitions are consistent with the term's plain English meaning or 
established industry use, and then invest 80% of their investments in 
accordance with their description.\94\
---------------------------------------------------------------------------

    \92\ See infra section II.C. This flexibility also means a fund 
would not be required to include proprietary information in its 80% 
investment policy. See Stradley Comment Letter (asserting that 
providing meaningful distinctions among funds may require over-
disclosing the criteria used to select investments, which investment 
advisers may be hesitant to provide to avoid giving away proprietary 
information).
    \93\ As a result of this flexibility, we disagree with 
commenters that asserted that the expanded scope would effectively 
penalize funds that invest in a security that initially displays 
particular characteristics but where those characteristics evolve 
over time. See supra footnote 73. However, to the extent that a fund 
identifies as part of the final rule's quarterly review requirement 
that the characteristics of an existing investment in the fund's 
portfolio are inconsistent with the fund's 80% investment policy as 
a result of, for example, market declines, cycles, or volatility, 
the fund must address this in accordance with the rule's 
requirements for temporary departures from the 80% investment 
requirement. See infra footnote 185 and accompanying paragraph; see 
also section II.E.1.
    \94\ See also infra paragraph accompanying footnotes 153-154; 
infra paragraph accompanying footnotes 357-358.
---------------------------------------------------------------------------

    In addition, we understand that the expansion of the rule's scope 
will involve operational costs for many funds, particularly those that 
are not currently subject to the rule.\95\ In a modification from the 
proposal, however, the amended rule will no longer require a fund to 
re-assess its portfolio investments continuously to determine 
compliance with its 80% investment policy, but will instead require 
reassessment of each portfolio investment on an at-least quarterly 
basis.\96\ This modification will address concerns commenters raised 
related to cost burdens associated with the proposed scope expansion, 
to the extent that those concerns largely related to the costs of 
continuous monitoring and assessment of a fund's 80% investment 
policy.\97\ Moreover, considering that not all terms that fall within 
the scope of the current rule have standardized and objective 
definitions (e.g., ``Latin America'' funds as discussed above), 
existing compliance monitoring for these funds likely necessitates some 
form of manual review to ensure that investments are consistent with 
the manner in which the fund defines a given term. The assessment that 
funds would have to undertake to ensure that portfolio investments are 
consistent with their 80% investment policies under the final rules 
would entail this same aspect of current fund practices.\98\
---------------------------------------------------------------------------

    \95\ See infra sections IV and V.
    \96\ See infra section II.A.2.
    \97\ See infra section IV.D.2.
    \98\ See infra section II.A.2.a) (discussing compliance 
monitoring and portfolio investment assessment and re-assessment 
requirements under the final amendments and how these requirements 
compare to current names rule requirements).
---------------------------------------------------------------------------

    The final amendments' approach, which combines an expanded 80% 
investment policy requirement with additional disclosure and reporting 
requirements, reflects that certain terms used in a fund's name can 
simultaneously communicate an investment focus while also reflecting 
nuance that should be further discerned after reviewing the fund's 
prospectus disclosure.\99\ The Commission has historically encouraged 
investors to look beyond a fund's name and to review a fund's 
underlying disclosures to gather information about the fund's 
investment activity and objectives, and we continue to encourage 
this.\100\ We understand that such disclosures are easily accessible 
for most investors and that the current regulatory framework is 
designed to help ensure that fund disclosures, marketing materials, and 
other communications are clear, informative, and not misleading. We 
agree, however, with commenters who stated that, despite this 
accessibility, fund names can play a critical role in investment 
decisions. Congress provided the Commission with rulemaking authority 
to address materially deceptive or misleading fund names, recognizing 
the concern that investors may focus on a fund's name and what it 
communicates about the fund's investments and risks despite the 
information included in fund prospectuses and related disclosures.\101\ 
Accordingly, the final amendments require funds that use terms that 
communicate an investment focus to adopt an 80% investment policy, in 
furtherance of the investor protection objectives of the names rule, to 
provide greater assurance that a fund's investments will be consistent 
with its name.
---------------------------------------------------------------------------

    \99\ See infra sections II.B and II.E.
    \100\ See supra footnote 9.
    \101\ See supra footnote 7.
---------------------------------------------------------------------------

    Separately, a few commenters questioned the Commission's authority 
to adopt the proposed amendments under section 35(d) of the Investment 
Company Act.\102\ For instance, one commenter asserted that the 
Commission lacks authority to adopt the amendments, as ``[t]here is a 
significant difference between a name based on investors' reasonable 
expectations and a name that is materially deceptive or misleading.'' 
\103\ Another commenter suggested that neither the current rule nor the 
proposed amendments are

[[Page 70446]]

consistent with the authority that section 35(d) grants, as neither 
incorporates a finding by the Commission that a particular and 
identified word or words are materially deceptive or misleading.\104\ 
Lastly, one commenter asserted that the proposed amendments would have 
associated costs and burdens, and suggested that Congress did not 
intend for section 35(d) to authorize the Commission to impose 
significant burdens that would have a material economic impact on funds 
and their investors.\105\
---------------------------------------------------------------------------

    \102\ See, e.g., ICI Comment Letter; Stradley Comment Letter; 
Seward & Kissel Comment Letter.
    \103\ ICI Comment Letter I; see also ICI Comment Letter IV 
(asserting that ``the Commission lacks authority to adopt the 
[proposed amendments] under [section 35(d)]'' because the proposed 
amendments are ``too vague and ambiguous,'' and do not satisfy the 
``materiality'' requirement in section 35(d)).
    \104\ Seward & Kissel Comment Letter (stating that ``[w]e think 
the appropriate reading of Section 35(d) is that . . . funds subject 
to the prohibitions of the statute (and any regulations adopted 
thereunder) could provide, through the notice and comment process, 
comments on the specific ``word or words'' proposed by the 
Commission to be deemed materially deceptive or misleading'').
    \105\ SIFMA AMG Comment Letter; see also Calamos Comment Letter.
---------------------------------------------------------------------------

    We disagree with the views expressed by these commenters. Congress, 
in enacting amended section 35(d) of the Act, reaffirmed its concern 
that investors may focus on a fund's name to determine the fund's 
investments and risks, and recognized that investor protection would be 
improved by giving the Commission rulemaking authority to define 
materially deceptive or misleading fund names.\106\ Before this 
amendment, the Commission was required to ``declare by order that a 
particular name was misleading and, if necessary, obtain a federal 
court order prohibiting further use of the name.'' \107\ In light of 
this ``cumbersome process,'' \108\ Congress gave the Commission the 
power to act by ``rule, regulation, or order.'' \109\ Congress further 
gave the Commission the authority to ``define such names or titles as 
are materially deceptive or misleading,'' not ``list'' or another 
similar word, and whether any ``word or words'' are materially 
deceptive or misleading is a determination that necessarily is made 
with reference to additional facts and circumstances.\110\
---------------------------------------------------------------------------

    \106\ 2001 Names Rule Adopting Release, supra footnote 8, at 
section I.
    \107\ See id. at text proceeding footnote 3.
    \108\ S. Rep. No. 293, 104th Cong., 2d Sess. 8-9 (1996) 
(``Enforcing the Act entails a cumbersome process--the Commission 
must first find, and declare by order, that a fund's name is 
deceptive or misleading, and then bring an action in federal court 
to enjoin the use of the name'').
    \109\ 15 U.S.C. 80a-34(d).
    \110\ Id. (emphasis added); see also 80a-34(a) & (b) (making it 
unlawful for certain persons to ``represent or imply'' that a 
security is guaranteed or approved by the U.S. government or a bank, 
but not listing every specific statement that would do so).
---------------------------------------------------------------------------

    Relying on this authority, the Commission in 2001 adopted the names 
rule to ``address certain investment company names that are likely to 
mislead an investor about a company's investment emphasis,'' which 
would ``guard against the use of misleading investment company names,'' 
``provide an investor greater assurance that the company's investments 
will be consistent with its name,'' and ``reduce confusion.'' \111\ 
Similarly here, the Commission in adopting rule amendments is 
exercising its authority under section 35(d) to ``define,'' ``by 
rule,'' ``such names or titles as are materially deceptive or 
misleading'' and is doing so based on consideration of the broad public 
input the Commission has received on fund names, our analysis of this 
input, the Commission and staff's experience with the names rule over 
the past two decades, and developments in the fund industry during this 
time period.\112\ In the years since the Commission has adopted the 
names rule, it has observed certain general trends--specifically as 
discussed above, a significant broadening of fund investment options 
currently available, the growth of fund assets in sector funds and 
thematic strategies, and a growth in investor interest in funds with 
ESG strategies--that have caused us to believe that targeted action in 
this area is necessary.\113\
---------------------------------------------------------------------------

    \111\ See id.
    \112\ See supra section I.B; see also, e.g., Environmental 
Defense Fund Comment Letter; Comment Letter of Sierra Club (Aug. 16, 
2022) (``Sierra Club Comment Letter''); Ceres Comment Letter (all 
discussing the proposed amendments as within the Commission's 
authority to define materially deceptive and misleading names under 
section 35(d) of the Act).
    \113\ See supra footnote 33 and accompanying text.
---------------------------------------------------------------------------

    Although we acknowledge that the final amendments may impose 
additional costs and burdens relative to the current rule, we have made 
changes to the proposed amendments that have the result of mitigating 
the burdens associated with the final amendments compared to the 
proposal. The costs and burdens associated with the final amendments 
are carefully considered by the Commission, and such costs and burdens 
are justified given the investor protection objectives that underlie 
section 35(d) and that would be achieved through the amendments.
    Further, another commenter asserted that application of the 
proposed amendments to terms that suggest investments with particular 
characteristics would violate the First Amendment, as this ``operates 
as a restriction on funds' ability to speak through their names.'' 
\114\ We disagree that this aspect of the amendments violates the First 
Amendment. As we have explained elsewhere in this release, as Congress 
recognized by adopting section 35(d), fund names can provide important 
information to investors regarding the nature of the fund and therefore 
the nature of their potential investment. And names that do not 
necessarily fall under the existing rule can create reasonable investor 
expectations by suggesting a particular investment focus. The 
amendments adopted today will help align fund names and investor 
expectations by applying the 80% requirement to all names that suggest 
a particular investment focus, reducing the extent to which funds can 
choose names that are materially misleading or deceptive. Rather than 
barring the use of any particular name, the amendment imposes certain 
requirements when the name a fund has selected communicates specific 
and important information about the fund. Further, the amendments allow 
funds the flexibility to ascribe reasonable definitions for the terms 
used in their names.\115\ The amendments are therefore appropriately 
tailored to serve Congress's significant interest in preventing 
investors from being deceived or misled.\116\
---------------------------------------------------------------------------

    \114\ ICI Comment Letter IV.
    \115\ See supra footnote 92 and accompanying text.
    \116\ For similar reasons, we disagree with the commenter who 
asserted that certain proposed reporting requirements on Form N-PORT 
violate the First Amendment. ICI Comment Letter IV. These 
requirements do not require reporting of ``subjective information on 
which investment managers may appropriately disagree,'' (id.) but 
instead provide important information to investors regarding whether 
and how a fund's investments align with reasonable expectations 
created by the fund's name and 80% investment policy.
---------------------------------------------------------------------------

b) Names That Do Not Suggest an Investment Focus
    The 2022 Proposal acknowledged that 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.\117\ In 
particular, the Commission stated that terms in a fund's name that 
reference characteristics of the fund's portfolio as a whole, such as a 
name indicating the fund seeks to achieve a certain portfolio 
``duration'' or that the fund is ``balanced,'' would not require the 
fund to adopt an 80% investment policy.\118\ The Commission stated that 
in such cases a term may indicate a fund's objectives without 
communicating to investors the specific type of investments, or the 
particular characteristics of investments, that the

[[Page 70447]]

fund will acquire.\119\ Commenters generally agreed that such terms 
would not require an 80% investment policy under the proposal and that 
this treatment was appropriate.\120\
---------------------------------------------------------------------------

    \117\ See Proposing Release, supra footnote 2, at n.49 and 
accompanying text.
    \118\ Id.
    \119\ 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 includes section 35(d). Id. at n.50 and accompanying 
text.
    \120\ See, e.g., J.P. Morgan Asset Management Comment Letter; 
Fidelity Comment Letter; ICI Comment Letter; SIFMA AMG Comment 
Letter.
---------------------------------------------------------------------------

    Many commenters, however, sought additional clarity on terms--such 
as ``growth'' and ``value''--that commenters stated can reference 
either the characteristics of a fund's investments or the intended 
result of a fund's portfolio investments in the aggregate.\121\ One 
commenter focused in particular on ESG ``uplift'' funds, where the fund 
begins with a given universe of investments and does not add new 
investments to this universe but systematically over-or underweights 
investments within the given universe based on ESG criteria, with the 
objective of achieving a more favorable ESG profile at an aggregate 
fund level as compared to the benchmark or investment universe, within 
a specific tracking error target.\122\ The fund is investing on a 
relative basis at the portfolio level, rather than focusing its 
investment in companies that objectively exhibit strong ESG 
characteristics, and includes terms in the fund's name intended to 
communicate this investment approach to investors (such as ESG 
``Aware''). Commenters also expressed concern with the proposal's 
discussion of maturity-related terms that describe certain bond funds' 
holdings.\123\ These commenters agreed with the Commission that the 
term duration should not require an 80% investment policy because it 
refers to a portfolio-wide analysis; however, they further asserted 
that terms like ``intermediate-term (or similar) bond'' are likewise 
used by funds and understood by investors similarly to refer to the 
portfolio's duration (i.e., the portfolio's sensitivity to interest 
rate changes). Commenters also suggested that terms like ``global'' and 
``international'' should continue to be outside of the scope of the 80% 
investment policy requirement because these terms reference the 
portfolio as a whole.\124\
---------------------------------------------------------------------------

    \121\ See, e.g., TIAA-Nuveen Comment Letter; Calamos Comment 
Letter; T. Rowe Comment Letter; WisdomTree Comment Letter; ICI 
Comment Letter (stating that ``[t]erms that could refer to either a 
particular investment or the portfolio as a whole are per se not 
misleading or deceptive because they do not create an affirmative 
impression in one way or another'').
    \122\ See Comment Letter of BlackRock, Inc. (Dec. 19, 2022) 
(``BlackRock Comment Letter''); see also Robertson-Fisch Comment 
Letter (discussing ESG ``tilt'' strategies).
    \123\ See ICI Comment Letter; SIFMA AMG Comment Letter; Invesco 
Comment Letter.
    \124\ See, e.g., Dechert Comment Letter; ICI Comment Letter; 
Invesco Comment Letter; Seward & Kissel Comment Letter.
---------------------------------------------------------------------------

    Conversely, several commenters urged that certain terms may not 
connote particular characteristics of a fund's portfolio investments, 
but nonetheless should require an 80% investment policy when those 
terms clearly communicate that the fund is managed in a particular way 
(e.g., terms like ``balanced,'' ``hedged,'' and ``managed risk'').\125\ 
Relatedly, one commenter suggested that the rule should explicitly 
subject funds with allocation designations in their name (e.g., 60/40 
Target Allocation Fund) to the 80% investment policy requirement.\126\
---------------------------------------------------------------------------

    \125\ See Dogwhistle Comment Letter; PIABA Comment Letter (also 
recommending that the rule prohibit the use of terms of well-known 
organizations, affinity groups, or the reference to a specific 
population of investors (e.g., ``veterans'' or ``municipal 
employees'') in fund names). See also Consumer Federation of America 
Comment Letter (additionally recommending that the rule should 
prevent single-state tax exempt funds from investing substantially 
in securities issued by another municipality). The Commission did 
not propose amendments that addressed the scope of tax-exempt funds 
whose names require them to adopt an 80% investment policy, or the 
investments that would be included in a fund's 80% basket under such 
policy, nor do the final amendments address these points. But see 
infra footnote 155.
    \126\ See Better Markets Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we continue to recognize that there are 
certain terms that do not communicate to investors the particular 
characteristics of investments that will make up the fund's portfolio 
and for which an 80% investment policy will not be required. Such names 
include, for instance, names that suggest a portfolio-wide result to be 
achieved, such as ``real return,'' ``balanced,'' or ``managed risk,'' 
names that reference a particular investment technique, such as ``long/
short'' or ``hedged,'' and names that reference asset allocation 
determinations that evolve over time, such as a retirement target date 
or ``sector rotation'' funds.'' \127\ In each of these examples, the 
fund's name communicates information to investors about the overall 
characteristics of the fund's portfolio, rather than particular 
investments in the portfolio, and therefore will not necessitate an 80% 
investment policy under the amended rule. Likewise, terms like 
``intermediate term (or similar),'' in describing a ``bond'' fund, also 
will not require an 80% investment policy under the final amendments in 
addition to the 80% investment policy that would be required due to the 
fund's use of ``bond'' in its name in this example. We do not view 
these types of names as being distinct from names that describe 
portfolio-wide characteristics, such as names that describe portfolio 
duration. Additionally, names including the terms ``global'' and 
``international,'' without an additional term that suggests an 
investment focus such as ``fixed income'' or ``growth,'' will not 
require an 80% investment policy under the final rule. These terms 
describe a fund's approach to constructing a portfolio, but do not 
communicate the composition of the fund's portfolio with any 
particularity (unlike, say, ``Japan'' or ``Europe'') and therefore on 
their own suggest no particular investment focus.\128\ Therefore, 
requiring such funds to adopt an 80% investment policy would produce 
fewer investor protection benefits relative to names that communicate 
to investors the particular characteristics of investments that will 
compose the fund's portfolio. Names with terms that do not communicate 
the particular characteristics of investments composing the fund's 
portfolio will continue to be subject to section 35(d)'s prohibition on 
materially misleading or deceptive names.\129\ Funds with these names 
likewise will continue to be

[[Page 70448]]

subject to the anti-fraud provisions of the Federal securities laws 
regarding disclosures to investors.
---------------------------------------------------------------------------

    \127\ A target date fund's name communicates an investment 
approach to investors, but does not communicate the composition of 
the fund's portfolio at any particular point in time, as the fund's 
investments will change over time in accordance with the fund's 
glide path. Similarly, ``sector rotation'' funds seek to shift their 
portfolio in and out of sectors over time as the economy moves 
through the different phases of a business cycle. In each of these 
cases, an 80% investment policy would not be appropriate for the 
fund because the fund's name connotes portfolio-wide asset 
allocation determinations that evolve continuously over time.
    \128\ Similarly, funds that use terms in their name that 
indicate that the fund uses a negative or exclusionary screening 
process for investments (e.g., ``fossil fuel-free'') may not require 
an 80% investment policy because such terms generally provide 
insight into what is precluded from the fund's portfolio, but these 
terms do not communicate to investors the particular investment 
focus of the fund's portfolio. In any case, a fund with a name like 
``fossil fuel-free'' that indicates the fund will not invest at all 
in fossil fuels in this example will be materially deceptive or 
misleading for purposes of section 35(d) if the fund invests in 
companies that are not fossil fuel-free as defined by the fund in 
its prospectus (e.g., issuers with fossil fuel reserves).
    \129\ For instance, terms used in fund names that reference 
well-known organizations, affinity groups, or that reference a 
specific population of investors may not communicate the particular 
characteristics of investments composing the fund's portfolio and 
therefore may not require an 80% investment policy under the amended 
rule. Such funds, however, will continue to be subject to section 
35(d)'s prohibition on materially misleading or deceptive names.
---------------------------------------------------------------------------

    In response to commenters seeking additional clarity about the 
terms growth and value, we understand, based on staff review of fund 
disclosure, that it is not typical in current practice for growth and 
value funds to implement their strategies on a portfolio-wide basis, as 
opposed to a selection process based on the growth or value 
characteristics of the fund's component portfolio investments. If terms 
in a fund's name can reasonably be understood to reference either the 
characteristics of a fund's individual investments or the intended 
result of a fund's portfolio investments in the aggregate, the fund 
will be required to adopt an 80% investment policy, consistent with the 
proposal. We disagree with the commenter who asserted that such terms 
are per se not misleading.\130\ It would be confusing to investors if 
the same term in a fund's name required an 80% investment policy in 
some cases and not in others. In addition, the rule provides funds 
sufficient flexibility to design and implement an 80% investment policy 
in these circumstances. We do not agree that the ESG uplift strategies 
identified by one commenter require an 80% investment policy, however, 
because the particular strategies identified by the commenter are 
solely executed on a relative basis at the portfolio level, as 
described in more detail above, and include terms in the fund's name 
associated with this investment strategy to signal this different 
approach to investors.\131\
---------------------------------------------------------------------------

    \130\ ICI Comment Letter.
    \131\ BlackRock Comment Letter.
---------------------------------------------------------------------------

c) Investments Included in a Fund's 80% Basket
    Regarding the application of the proposed amendments, the 
Commission stated in the 2022 Proposal that when determining whether a 
particular asset is invested in accordance with the investment focus 
that the fund's name suggests (i.e., qualifies for inclusion in a 
fund's 80% basket), there must be a meaningful nexus between the given 
investment and the investment focus suggested by the name.\132\ The 
Commission discussed that a fund may define the terms used in its name 
in a reasonable way, allowing for flexibility in determining whether a 
nexus exists between a given security and the focus the fund's name 
suggests. For instance, the Commission stated it would be reasonable 
for a fund to determine a sufficient nexus between certain securities 
and a given industry if the securities are issued by companies that 
derive more than 50% of their revenue or income from, or own 
significant assets in, the industry. However, the Commission also 
explained that the use of text analytics to assign issuers to 
industries based on the frequency of particular terms in an issuer's 
disclosures was not, in and of itself, sufficient to create a 
reasonable nexus.
---------------------------------------------------------------------------

    \132\ See generally for this discussion Proposing Release, supra 
footnote 2, at nn.51-52 and accompanying text.
---------------------------------------------------------------------------

    Commenters expressed that a 50% revenue test is not always the most 
appropriate way to determine whether a company is part of a given 
industry, particularly for new companies and nascent industries and 
business sectors.\133\ These commenters urged the Commission to clarify 
the reasonableness standard as it applies to designating investments in 
a fund's 80% basket, urging that advisers need the flexibility to 
evaluate investments based on a totality of criteria beyond revenue 
tests. Some commenters asserted that funds with certain business or 
industry-adjacent investment strategies face particular difficulties 
adopting an 80% investment policy because their investments often vary 
in terms of industries, capitalization ranges, revenue sources, asset 
classes, geographies, and other key characteristics, making it 
challenging to pinpoint confidently a reasonable nexus between the 
fund's investments and the investment focus suggested by its name.\134\ 
Moreover, one commenter expressed particular concern with the 
proposal's discussion of the processing of text analytics, suggesting 
that the tool is a useful method for facilitating forward-looking 
analysis of companies and industries.\135\ Separately, two commenters 
suggested that the Commission should permit fund managers to use 
forward-looking assessments or future-based methodologies to analyze 
investments when determining whether they fit in a given industry or 
sector, on the condition that such funds use a modifying indicator like 
``emergent'' or ``future'' in their names to signal to investors that 
their analysis of investments is not completely based on current 
characteristics of the issuer.\136\
---------------------------------------------------------------------------

    \133\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment 
Letter; Seward & Kissel Comment Letter; WisdomTree Comment Letter.
    \134\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
Minerva Comment Letter.
    \135\ SIFMA AMG Comment Letter.
    \136\ See SIFMA AMG Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

    We appreciate commenters' concerns regarding potential challenges 
in determining whether a particular asset is invested in accordance 
with the investment focus that the fund's name suggests, particularly 
with respect to thematic investment strategies. Consistent with the 
2022 Proposal, the plain English and established industry use 
requirements in the final amendments are intended to provide 
flexibility for funds to determine what qualifies as a reasonable nexus 
between a security and a given investment focus.\137\ Similar to the 
Commission's discussion in the Proposing Release regarding the 
application of the final amendments, it would generally be reasonable 
for a fund to determine that a sufficient nexus exists between certain 
securities and a given industry if the securities are issued by 
companies that derive more than 50% of their revenue or income from, or 
own significant assets in, the industry. There also 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). Further, the use of text analytics to assign 
issuers to industries based on the frequency of particular terms in an 
issuer's disclosures is not, in and of itself, sufficient to create a 
reasonable nexus because it is not 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.\138\ 
These examples are not meant to serve as an exhaustive list of 
acceptable methods of qualification in a fund's 80% basket. Given the 
breadth of fund names and strategies, it is not possible to provide an 
enumerated list of circumstances in which a nexus exists between a 
security and an industry or a particular investment focus.
---------------------------------------------------------------------------

    \137\ See final rule 35d-1(a); see also infra section II.C.
    \138\ The advent and growth of advanced technologies have made 
increasing use of natural language processing that can significantly 
enhance the scale and scope of text analytics. Funds may be able to 
use these types of technologies to aid a determination that a nexus 
exists between a given security and the focus that a fund's name 
suggests that involves analysis going beyond the frequency with 
which a word or phrase appears in a document.
---------------------------------------------------------------------------

    Further, as raised by commenters, advisers may offer funds with 
strategies that seek exposure to long-term investment opportunities or 
that seek to identify issuers that are likely to generate significant 
amounts of revenue from certain industries or business sectors in the 
future. As commenters expressed, it may be challenging for these types 
of funds to find a reasonable

[[Page 70449]]

nexus between their investments and a given investment focus based on 
current characteristics of the issuer. In these circumstances, funds 
may signal to investors, through the use of ``emergent,'' ``future,'' 
or some other similar term in the fund's name, that the fund considers 
some future-based methodology when assessing whether a nexus exists 
between a given security and the investment focus suggested by the 
fund's name (e.g., ``XYZ Emergent 3D Printing Technology Fund''). More 
generally, we recognize that overall context is important in how an 
investor interprets a fund's name. For instance, descriptive terms such 
as ``aggressive,'' ``conservative,'' or ``strategic,'' when paired with 
another term that is covered by the scope of the rule can modify an 
investor's expectations with respect to the fund's investment focus. 
The rule is designed to give fund managers reasonable discretion to 
define terms in a fund's name, and to allocate investments reasonably 
into the 80% basket in accordance with the investment focus the name 
conveys, which can be dependent on the context of the terms in a name. 
In particular, the final amended rule requires that terms within a 
fund's name must be consistent with the plain English meaning or 
established industry use. We are including these provisions in the 
final amended rule to provide fund managers with sufficient 
flexibility.
    Separately, as discussed in the 2022 Proposal, when a fund's name 
includes terms suggesting an investment focus that has multiple 
elements, the fund's 80% investment policy must address all of the 
elements in the name (as all of the elements would be reflected in the 
investment focus that the fund's name suggests).\139\ The Commission 
noted, however, that a fund can take a reasonable approach in 
specifying how the fund's investments will incorporate each element. 
Commenters expressed broad support for the Commission's approach, 
asserting that it retains the appropriate level of flexibility for 
advisers to determine how best to allocate investments under an 80% 
investment policy.\140\ Where a fund's name suggests an investment 
focus that has multiple elements, the fund's 80% investment policy must 
address each of those elements. For instance, a fund with a name that 
references two or more distinct investment focuses (e.g., ``XYZ 
Technology and Growth Fund'') could have an investment policy that 
provides that each security included in the 80% basket must be in both 
the technology sector and meet the fund's growth criteria. 
Alternatively, such a fund could instead have an investment policy that 
provides that 80% of the value of the fund's assets will be invested in 
a mix of technology investments and growth investments, with some 
technology investments, some growth investments, and some investments 
in both of these categories, with no minimum or maximum investment 
requirements specified for either category. In addition, 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.
---------------------------------------------------------------------------

    \139\ See Proposing Release, supra footnote 2, at nn.50-51 and 
accompanying text; see also final rule 35d-1(a)(2) (this provision 
reflects that a fund's name may include multiple ``terms'' 
suggesting that the fund focuses its investments in a particular 
way).
    \140\ Fidelity Comment Letter; CFA Institute Comment Letter; 
Seward & Kissel Comment Letter.
---------------------------------------------------------------------------

    Moreover, 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. It would not be reasonable, however, for an acquiring fund in 
these circumstances to ignore situations where the acquiring fund knows 
that an underlying fund is not investing consistent with the acquiring 
fund's investment focus.\141\ In such cases, the acquiring fund should 
take actions to address this departure as it otherwise would to resolve 
a temporary departure from the 80% requirement under the final 
amendments.
---------------------------------------------------------------------------

    \141\ An acquiring fund is not required to continuously monitor 
the investments of the underlying fund for purposes of compliance 
with the amended names rule. For example, the XYZ Industrials Fund 
may rely on the ABC Automotive Fund to comply with the ABC 
Automotive Fund's 80% policy.
---------------------------------------------------------------------------

d) ESG-Related Terms
    Consistent with the proposal, the final amendments will apply the 
requirement to adopt an 80% investment policy to fund names that 
suggest an investment focus, including names with terms indicating that 
the fund's investment decisions incorporate one or more ESG 
factors.\142\ Many commenters supported the inclusion of ESG terms in 
the expanded scope.\143\ Some of these commenters expressed concerns 
related to ``greenwashing'' among funds that have, or purport to have, 
ESG- or sustainability-related characteristics.\144\ Many of these 
commenters asserted that given the developing market interest in, and 
regulatory and public scrutiny of, funds that incorporate ESG factors 
in their investment objectives, to the extent a fund uses an ESG-
related term in its name, the fund should be required to adopt an 80% 
investment policy that ensures it will invest in accordance with the 
investment focus its name suggests.\145\
---------------------------------------------------------------------------

    \142\ See final rule 35d-1(a)(2).
    \143\ See, e.g., U.S. SIF Comment Letter; SIFMA AMG Comment 
Letter; Sierra Club Comment Letter; Public Citizen Comment Letter; 
Comment Letter of Bonwood Social Investment (Aug. 16, 2022) 
(``Bonwood Comment Letter'').
    \144\ See NASAA Comment Letter; J.P. Morgan Asset Management 
Comment Letter; U.S. SIF Comment Letter; Comment Letter of LTSE 
Services, Inc. (Aug. 16, 2022) (``LTSE Comment Letter''); CFA 
Institute Comment Letter.
    \145\ Id.
---------------------------------------------------------------------------

    Conversely, several commenters opposed including names with ESG 
terms in the expanded scope of the 80% investment policy 
requirement.\146\ Many of these commenters expressed similar concerns 
to those discussed above opposing the expanded scope in general, 
including potential interpretive issues resulting from the perceived 
subjectivity of certain ESG-related terms, and potential increased 
compliance burdens.\147\ Some commenters also articulated concerns that 
are unique to funds that use ESG terms. For instance, several 
commenters expressed that the Commission's ESG Disclosure Proposal 
would be better suited to address investor understanding of ESG 
considerations than the proposed names rule scope

[[Page 70450]]

expansion.\148\ These commenters generally expressed more support for a 
disclosure-based framework rather than a mandated 80% investment policy 
for fund names that communicate an ESG focus. In addition, a few 
commenters expressed that certain terms, depending on the context, may 
not be solely used for ESG investment strategies (e.g., ``sustainable'' 
or ``impact''), or when read together may provide a different meaning 
than when presented individually (e.g., ``XYZ Sustainable Growth 
Fund'').\149\
---------------------------------------------------------------------------

    \146\ See, e.g., ICI Comment Letter; Calvert Comment Letter; 
Cato Institute Comment Letter; Invesco Comment Letter; Robertson-
Fisch Comment Letter.
    \147\ See, e.g., TIAA-Nuveen Comment Letter; Calvert Comment 
Letter; ICI Comment Letter, Robertson-Fisch Comment Letter. See 
generally supra section II.A.1.a) (responding to concerns from 
commenters related to interpretive challenges and compliance costs 
connected to the proposed expansion of the 80% investment policy).
    \148\ See ICI Comment Letter; TIAA-Nuveen Comment Letter.
    \149\ See ICI Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    We recognize that ``ESG'' and similar terms are expansive, 
incorporating three broad categories of interest (environmental, 
social, and governance issues) for investors and asset managers, with 
differing levels of focus on each particular issue, and different 
perspectives on what attributes of an issuer or investment fit within 
this terminology.\150\ The breadth of ESG-related terms, as well as 
evolving investor expectations around terms like ``sustainable'' or 
``socially responsible,'' compound the possibility of investor 
confusion and potential ``greenwashing'' in fund names.\151\ Moreover, 
concerns regarding materially deceptive and misleading fund names are 
particularly important for funds that incorporate ESG factors in their 
investment decisions because, unlike many other non-ESG investment 
strategies, some ESG-related strategies are not well-established or 
commonly understood to the investing public.\152\ ESG terms in fund 
names communicate to investors that the fund will invest in issuers 
that have particular characteristics, like other terms that are covered 
by the expanded scope. Accordingly, there is not a principled basis to 
treat ESG terms differently than other terms that have the potential to 
be materially deceptive and misleading, as suggested by a few 
commenters that requested a purely disclosure-based framework for funds 
that use ESG terms in their name. The final amendments thus require 
funds that use ESG terms in their name to adopt an 80% investment 
policy.
---------------------------------------------------------------------------

    \150\ See Robertson-Fisch Comment Letter (arguing that because 
ESG is a ``big tent'' term, the use of ESG terminology in fund names 
``does not convey very much information'' to investors).
    \151\ See supra footnote 37 and accompanying discussion.
    \152\ See Center for American Progress Comment Letter (stating 
that ``[t]here is more variability in investors' understanding of 
what many ESG terms mean than with terms like ``growth'' or 
``global'' because the use of ESG terms is relatively new and their 
use often is not tied to specific information about their 
meaning.'').
---------------------------------------------------------------------------

    We recognize, as with fund names that do not include ESG terms, 
that the general context of a name with terminology that could connote 
an ESG focus is critical in how an investor interprets such a 
name.\153\ For instance, a name such as ``XYZ Sustainable Growth Fund'' 
could reasonably be interpreted as a fund that employs a strategy that 
seeks growth that is sustainable over time (i.e., growth that will be 
maintained at a certain level), or a fund that incorporates ESG factors 
into its decision making. In this example, the fund would require an 
80% investment policy regardless, but the fund manager has discretion 
to reasonably define the terms in the fund's name, and to allocate 
investments into the 80% basket in accordance with the investment focus 
the name suggests.\154\
---------------------------------------------------------------------------

    \153\ See Robertson-Fisch Comment Letter (discussing different 
hypothetical ESG-related funds that could deliver very different 
results to investors, but could be presumably sold under the same 
name).
    \154\ See also supra footnote 94 and accompanying text; supra 
paragraph accompanying footnote 132.
---------------------------------------------------------------------------

2. Temporary Departures From the 80% Investment Requirement
    The final rules we are adopting permit temporary departures from 
the 80% investment requirement by allowing a fund temporarily to invest 
less than the required 80% of the value of the fund's assets in 
accordance with the investment focus or tax treatment its name 
suggests.\155\ Under the final amendments, we are retaining the current 
rule's requirement that a fund must determine at the time that it 
invests whether the investment is in the fund's 80% basket (``time-of-
investment test'').\156\ We are adopting a new requirement that, at 
least quarterly, funds subject to the 80% investment requirement must 
review the fund's portfolio investments to determine whether the fund's 
investments continue to be consistent with the fund's 80% investment 
policy.\157\ Funds must comply with the 80% investment requirement 
``under normal circumstances,'' leaving to funds the determination of 
what constitutes something other than a normal circumstance. If, 
subsequent to an investment, the 80% investment requirement is no 
longer met, the fund's future investments (that is, any portfolio 
assets it acquires) must be made in a manner that will bring the fund 
into compliance with that requirement within the time period specified 
in the rule.
---------------------------------------------------------------------------

    \155\ The amendments to the temporary departure provision are 
applicable not only to funds whose name suggest a particular 
investment focus, but also to tax-exempt funds that are required to 
invest their assets in accordance with the provisions of rule 35d-
1(a)(3).
    \156\ See final rule 35d-1(b).
    \157\ Final rule 35d-1(b)(1)(i).
---------------------------------------------------------------------------

    A fund may, in other-than-normal circumstances, choose to invest in 
a manner that is not consistent with the fund's 80% investment 
requirement for a limited period of time.\158\ The final amendments 
include specific time frames--generally 90 consecutive days, as opposed 
to 30 days as proposed--for getting back into compliance if a fund 
departs from the 80% requirement, either intentionally in other-than-
normal circumstances, or as identified by the fund as a part of its 
quarterly review or otherwise. Funds are permitted under the final 
rules to temporarily depart from the 80% investment requirement in 
connection with a reorganization (for which the final rule does not 
specify a required time frame for accompanying temporary departures) or 
a fund launch (departure not to exceed the period of 180 consecutive 
days) or when a notice of a change in a fund's policy in certain 
circumstances has been provided to fund shareholders.\159\
---------------------------------------------------------------------------

    \158\ Final rule 35d-1(b)(1)(ii).
    \159\ Final rule 35d-1(b)(1)(iii); see also rule 35d-1(g) 
(defining ``launch'' as a period, not to exceed 180 consecutive 
days, starting from the date the fund commences operations).
---------------------------------------------------------------------------

    Under the proposed amendments, funds would have been permitted to 
depart from the fund's 80% investment policy only under certain 
specified circumstances.\160\ When a fund departed under the specified 
circumstances, the proposed amendments would have required funds to 
come back into compliance with the 80% investment requirement within 30 
consecutive days after the initial departure. Departures from names 
rule compliance for fund launches would not have been permitted to 
exceed a period of 180 consecutive days. The proposed amendments did 
not specify a required time frame for temporary departures that were 
the result of reorganizations or

[[Page 70451]]

where the 60-day notice has been provided to shareholders. In all 
cases, the proposed amendments would have required that a fund would 
have to come back into compliance as soon as reasonably practicable.
---------------------------------------------------------------------------

    \160\ Temporary departures under the proposed amendments would 
have been 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.
---------------------------------------------------------------------------

    We received comment letters both supporting and opposing the 
Commission's proposed approach for temporary departures. Among the 
primary reasons commenters supported the proposal was their belief that 
the proposed amendments brought more certainty to the current rule's 
approach to temporary departures from 80% and would require funds to be 
more vigilant with respect to their names rule compliance.\161\ In 
particular, several commenters supported the goal of bringing the rule 
in line with investors' expectations by ensuring that the investments 
made by the fund remain consistent with the fund's name and the 
investor's investment preferences over the long-term life of the 
fund.\162\
---------------------------------------------------------------------------

    \161\ See, e.g., NASAA Comment Letter; PRI Comment Letter; 
Consumer Federation of America Comment Letter; Environmental Defense 
Fund Comment Letter.
    \162\ See, e.g., Consumer Federation of America Comment Letter; 
Center for American Progress Comment Letter; NASAA Comment Letter.
---------------------------------------------------------------------------

    The Commission, however, did receive many comments requesting that 
we reconsider the proposed approach to temporary departures. The 
Proposing Release sought 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.\163\ Commenters, as discussed in 
the next section, raised concerns that the proposed amendments were 
overly prescriptive, lacked flexibility, and were too limited in the 
amount of time funds would have to bring their investments back into 
compliance. In response to comments received, we are adopting an 
approach that modifies the proposed amendments, which seeks to balance 
the concerns raised by commenters and the goals of the proposal.
---------------------------------------------------------------------------

    \163\ See Proposing Release, supra footnote 2, at paragraph 
following n.35.
---------------------------------------------------------------------------

a) Time-of-Investment Test and Quarterly Review
    Under the final amendments, as under the current names rule, a fund 
is required to determine at the time it invests whether the security is 
appropriately included in the fund's 80% basket.\164\ This ``time-of-
investment test'' was originally adopted 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 (``drift'').\165\ The proposal would have removed the time-
of-investment test and instead would have required that a fund remedy 
drift within 30 days of the initial departure. In effect, the proposed 
rule would have required that funds engage in continual compliance 
testing to reassess the characteristics of investments in the fund's 
80% basket--or even daily testing and reassessment for those funds 
making investments each trading day--to ensure that they observe and 
correct any drift quickly in order to comply with the proposed 
requirement that the fund come back into compliance with the names rule 
within 30 days.
---------------------------------------------------------------------------

    \164\ See final rule 35d-1(b).
    \165\ See 2001 Names Rule Adopting Release, supra footnote 8, at 
n.32 and accompanying text; see also Investment Company Names, 
Investment Company Act Release No. 22530 (Feb. 27, 1997) [62 FR 
10955 (Mar. 10, 1997)], at n.28 and accompanying text.
---------------------------------------------------------------------------

    In response to comments we received, and as discussed in more 
detail below, we are not adopting a requirement for continual or daily 
monitoring to reassess the characteristics of the investments in the 
fund's 80% basket and are instead maintaining a time-of-investment test 
in the names rule. Under the final amendments, funds will instead be 
required to reassess their portfolio assets' inclusion in the fund's 
80% basket at least quarterly. This change means that portfolio 
investments that are included in the 80% basket at the time of 
investment will continue to be considered to be consistent with the 
fund's 80% investment policy unless the fund identifies otherwise as 
part of its required quarterly reassessments, or outside of its 
required quarterly reassessments identifies that these investments' 
characteristics are inconsistent with the fund's 80% investment policy. 
This approach to assessing the characteristics of portfolio investments 
in the 80% basket, however, does not change the requirement for funds 
to maintain at least 80% of the value of their assets in 80% basket 
assets (as determined at the time of investment), unless the fund 
departs temporarily from 80% in accordance with the final amendments. 
As an example, when a fund acquires Investment A, the fund must assess 
the characteristics of that investment when the purchase is made to 
determine whether it should be included in the 80% basket. When a fund 
acquires a new investment, Investment B, the fund must assess the 
characteristics of Investment B when it invests to determine whether it 
should be included in the 80% basket. When determining whether 80% of 
the fund's assets are invested in the 80% basket when Investment B is 
made, the fund must consider the value of Investment A, but would not 
have to re-assess the characteristics of Investment A. Each quarter, 
the fund must re-assess the characteristics of Investments A and B for 
consistency with the fund's 80% investment policy.
    We received many comments supporting the retention of the time-of-
investment test and urging the Commission not to adopt an approach that 
would require continual compliance monitoring.\166\ Several commenters 
stated that the time-of-investment test is a standard that is used in 
other portfolio compliance tests under the Investment Company Act and 
that consistency with how fund holdings are measured across Investment 
Company Act rules would therefore be a preferable approach in the 
context of the names rule.\167\ The proposed approach, which would have 
removed the time-of-investment test, would instead have effectively 
required that fund managers reassess portfolio investments' 
characteristics for consistency with the fund's 80% investment policy 
every time the fund makes a new investment, and to take corrective 
action almost immediately upon identifying any departure from 80%. The 
time-of-investment test affords some flexibility to fund managers by 
focusing on whether an asset is consistent with the fund's 80% 
investment policy at the time of investment, rather than requiring 
ongoing reassessments. In addition, commenters expressed concern that 
limitations on fund manager discretion prevent investors from having 
access to actively-managed funds that are subject

[[Page 70452]]

to the names rule.\168\ Commenters also supported retaining the time-
of-investment test so that in the event that a fund's portfolio 
inadvertently drifts out of compliance with the 80% investment 
requirement because the characteristics of portfolio investments 
change, the fund would not be forced to sell a security that was 
originally purchased in compliance with the names rule in order to come 
back into compliance within a specific time frame (as proposed, 
generally 30 days).\169\ Commenters were concerned the proposed 
approach would potentially force sales or purchases of portfolio assets 
at inopportune times with the potential to intensify the market 
conditions that prompted these transactions in the first place.\170\
---------------------------------------------------------------------------

    \166\ See, e.g., ICI Comment Letter; Calamos Comment Letter; 
Seward & Kissel Comment Letter; Fidelity Comment Letter; Dechert 
Comment Letter; T. Rowe Comment Letter; Nationwide Comment Letter; 
Cato Institute Comment Letter; Stradley Comment Letter; Dimensional 
Comment Letter; WisdomTree Comment Letter; MFS Comment Letter; 
Invesco Comment Letter; Capital Group Comment Letter.
    \167\ For example, commenters pointed to time of acquisition 
tests in the 1940 Act, including, section 5 the anti-pyramiding 
provisions of section 12(d)(1) [15 U.S.C. 80a-12(d)(1)] and the 
limitations on investments in securities-related issuers in section 
12(d)(3) [15 U.S.C. 80a-12(d)(3)]. See, e.g., ICI Comment Letter; 
Dechert Comment Letter; Seward & Kissel Comment Letter; Fidelity 
Comment Letter; Calamos Comment Letter; Nationwide Comment Letter.
    \168\ See Dechert Comment Letter; ICI Comment Letter.
    \169\ See, e.g., Stradley Comment Letter; ICI Comment Letter; 
Dechert Comment Letter; Seward & Kissel Comment Letter; Fidelity 
Comment Letter; Calamos Comment Letter; Nationwide Comment Letter.
    \170\ See, e.g., ICI Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    Commenters also stated that there would be substantial burden on 
funds, their sponsors, and their administrators to implement a 
continual or daily program for re-assessing portfolio investments for 
names rules compliance purposes.\171\ Commenters argued that the burden 
of implementing a continual monitoring program is not warranted given 
the asserted lack of identified significant harm to investors from 
portfolio drift and the burden of creating and maintaining such a 
program.\172\ These commenters stated that the burdens associated with 
a continual monitoring program would be particularly high because 
assessing portfolio investments' consistency with a fund's 80% 
investment policy is not necessarily straightforward, particularly 
given the expanded scope of the names rule, which would include terms 
that are not readily quantifiable.\173\ For example, commenters stated 
that some of the information that a fund would need to monitor whether 
a particular investment should be included in a fund's 80% basket may 
include metrics measured over a period of time that may be longer than 
the period of a single day.\174\ Some funds, for instance, may adopt 
investment strategies that involve a multi-year concept that commenters 
stated cannot be assessed on a single day.\175\ Commenters therefore 
urged the Commission to adopt a rule that would provide some discretion 
to determine whether a particular investment, evaluated over a period 
of time, is consistent with the fund's 80% policy.\176\ Similarly, 
commenters raised concerns about continually monitoring compliance with 
respect to certain securities, such as growth or value investments, 
where the name characteristics could change frequently.\177\ For 
example, securities may be bought that have characteristics meeting a 
particular fund's standards for inclusion in the fund's 80% basket at 
the time of purchase, but these characteristics may change from day to 
day. Commenters stated that assessing these securities' characteristics 
continually would require operational and compliance build-outs that 
would be substantial.\178\
---------------------------------------------------------------------------

    \171\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
Seward & Kissel Comment Letter; WisdomTree Comment Letter.
    \172\ See, e.g., Seward & Kissel Comment Letter, Nationwide 
Comment Letter; Fidelity Comment Letter. But see Dogwhistle Comment 
letter (suggesting an annual compliance testing requirement and that 
daily compliance testing is too frequent, but a time-of-investment 
test is not appropriate).
    \173\ See, e.g., SIFMA AMG Comment Letter; J.P. Morgan Asset 
Management Comment Letter; ICI Comment Letter; Dechert Comment 
Letter; Wellington Comment Letter.
    \174\ See, e.g., ICI Comment Letter; Wellington Comment Letter; 
Capital Group Comment Letter; SIFMA AMG Comment Letter.
    \175\ See, e.g., ICI Comment Letter; Wellington Comment Letter; 
Capital Group Comment Letter; SIFMA Comment Letter.
    \176\ See id.
    \177\ See, e.g., ICI Comment Letter; Seward & Kissel Comment 
Letter; WisdomTree Comment Letter.
    \178\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
Seward & Kissel Comment Letter; WisdomTree Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we are retaining the current rule's 
time-of-investment test that requires a fund to determine, for purposes 
of names rule compliance, whether an investment is within the fund's 
80% basket at the time of investment. While the time-of-investment test 
must be conducted only at the time that the investment is made, the 
final rule incorporates a process for periodic reassessment of fund 
investments in order to ensure that that the fund is invested 
consistent with the focus the fund's name suggests. Rather than 
adopting a rule that effectively would require daily or continual 
compliance monitoring, the final rule requires that a fund review its 
portfolio investments on an at-least quarterly basis to determine 
whether it continues to comply with the 80% investment requirement.
    The time-of-investment standard affords to the portfolio manager 
more flexibility than the proposed amendments, as we acknowledge that 
there may be certain fluctuations in a fund's portfolio and within the 
80% basket that naturally occur over time, and that may not be outside 
of investors' reasonable expectations. For example, a mid-cap equity 
fund may hold securities that at the time of investment qualified under 
the fund's 80% investment policy as mid-cap, but that may temporarily 
move into the large-cap category and back again. We understand that 
this type of drift is a natural fluctuation in a portfolio, as certain 
characteristics of securities' may not be static. We also appreciate 
that, for certain funds that are subject to the 80% investment 
requirement, this drift may occur relatively frequently, and so a 
standard that would require daily or continual compliance monitoring 
could be particularly burdensome and require very frequent portfolio 
re-balancing.\179\ While we recognize that drift may occur and that 
portfolio managers should have discretion in managing their portfolio 
in the best interest of the fund, we are adopting a quarterly review 
requirement to help ensure portfolio adjustments so that drift does not 
go unchecked. This quarterly time frame will require a fund to address 
drift more quickly, which in turn will help ensure greater consistency 
between the fund's investments and the focus its name suggests, as 
compared to a review period based on a longer periodic time frame (for 
example, an annual testing requirement as one commenter 
suggested).\180\
---------------------------------------------------------------------------

    \179\ See, e.g., SIFMA Comment Letter; J.P. Morgan Asset 
Management Comment Letter.
    \180\ See Dogwhistle Comment Letter.
---------------------------------------------------------------------------

    The combination of a time-of-investment test with a minimum 
quarterly review requirement balances the dynamic nature of funds' 
portfolio securities with compliance with the fund's 80% investment 
policy. The required time frame for review is consistent with the final 
rules' quarterly Form N-PORT reporting requirement, which requires 
funds (except in the case of money-market funds and BDCs) to report on 
Form N-PORT the value of the fund's 80% basket as well as each 
investment that is included in the fund's 80% basket.\181\ The required 
minimum quarterly review helps ensure that funds are reviewing their 
portfolios for names rule compliance on a periodic basis so that 
instances of drift can be identified without the burden of assessing 
each investment's inclusion in the 80% basket every day. The final 
amendments are designed to balance the costs associated with monitoring 
fund investments' inclusion in the 80% basket with the harm to 
investors that could result if a fund were permitted a longer time 
frame for reviewing its

[[Page 70453]]

portfolio.\182\ The time-of-investment test coupled with a quarterly 
portfolio review is designed to ensure that a fund's name more 
accurately communicates to investors important information about the 
fund's investments while providing funds with appropriate flexibility 
within a time-limited period.
---------------------------------------------------------------------------

    \181\ See infra section II.E.
    \182\ See infra section IV.D.2.
---------------------------------------------------------------------------

    One commenter also articulated concerns that are unique to funds 
that use the term ``tax-exempt'' in their name.\183\ This commenter 
requested clarification on how tax-exempt funds that apply the income 
test under the names rule should measure compliance with the 80% 
investment policy requirement under the proposed amendments.\184\ 
Specifically, this commenter urged the Commission to confirm that 
compliance with the income test would be based solely on income that 
the fund distributes. The final rule requires that a fund review its 
portfolio at least quarterly to determine whether it continues to 
comply with the 80% investment requirement. Accordingly, a tax-exempt 
fund applying the income test will be required to assess its portfolio 
on an at-least quarterly basis to determine whether the fund's assets 
are invested 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.
---------------------------------------------------------------------------

    \183\ ICI Comment Letter III. The commenter also suggested that 
tax-exempt funds using an income test be permitted to count taxable 
market discount toward their 80% baskets. The treatment of such 
taxable market discount is outside the scope of this rulemaking, as 
it was not addressed in the proposal, and, therefore, not addressed 
in the final amendments.
    \184\ The names rule currently allows, and the final amendments 
will continue to allow, a fund with ``tax-exempt'' in its name to 
adopt either an asset test or an income test to satisfy its 80% 
investment policy requirement. The income test requires that a fund 
invest its assets so that at least 80% of the income that it 
distributes will be exempt from federal income tax or from both 
federal and state income tax. See final rule 35d-1(a)(3)(i)(B).
---------------------------------------------------------------------------

b) Investing Consistent With 80% Investment Policy ``Under Normal 
Circumstances''
    The final amendments, like the current names rule, require a fund 
to invest in accordance with its 80% investments policy ``under normal 
circumstances.'' That is, under the final amendments, a fund's 80% 
policy applies under normal circumstances, but funds may depart from 
the fund's investment policy in other-than-normal circumstances. The 
proposed rule would have, in place of the rule's current standard that 
a fund's 80% investment policy apply ``under normal circumstances,'' 
included specific exceptions that address circumstances where 
departures would be permitted.\185\ Unlike the proposal, funds have 
flexibility under the final amendments to determine what constitutes 
other-than-normal circumstances where the fund could depart 
intentionally from the 80% requirement (for example, the reasons for 
departures that the proposed amendments included, or other 
circumstances where market conditions or fund operations are other-
than-normal).\186\ Under the final amendments, departure from the 
fund's 80% policy in other-than-normal circumstances is time-limited to 
90 consecutive days from the initial departure, whereas the proposal 
would have required a fund to be back in compliance generally within 30 
days.
---------------------------------------------------------------------------

    \185\ Under the proposed rule, temporary departures would have 
been 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 losses 
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. See proposed rule 35d-1(b).
    \186\ See supra footnote 160.
---------------------------------------------------------------------------

    The Commission received some comments supporting the proposed 
approach to change the current rule's ``under normal circumstances'' 
standard in favor of a more prescriptive approach. Commenters stated 
that the current standard has led to more uncertainty and less 
consistency in how fund investments correspond to a fund's name than 
the proposed approach would over extended periods of time.\187\ 
Conversely, the Commission also received many comment letters opposing 
the proposed approach of permitting departure from the 80% investment 
requirement only under the circumstances that the proposed amendments 
specified.\188\ Commenters stated that the proposed approach was overly 
prescriptive and would unnecessarily curb the ability of a fund's 
portfolio manager to act in the best interest of the fund.\189\ For 
example, in an effort to bring a fund back into compliance within the 
proposed 30-day period, fund managers may feel compelled either to 
divest or purchase an investment that may not be strategically in the 
best interest of the fund. In addition, a commenter argued that the 
Proposing Release did not cite evidence that the ``under normal 
circumstances standard'' has been abused or has resulted in the use of 
materially deceptive or misleading names.\190\ Commenters also argued 
that while the proposed amendments would permit departures from the 80% 
requirement only in the circumstances that the amendments specified, 
unforeseeable circumstances that the amendments did not contemplate--
and that any enumerated list of circumstances could not contemplate in 
an evergreen way--may present reasons for departing that could be 
appropriate in the interests of the fund and consistent with the goals 
of the names rule.\191\
---------------------------------------------------------------------------

    \187\ See, e.g., NASAA Comment Letter; Environmental Defense 
Fund Comment Letter.
    \188\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
J.P. Morgan Asset Management Comment Letter; CFA Institute Comment 
Letter; Comment Letter of U.S. Chamber of Commerce Center for 
Capital Markets Competitiveness (Aug. 12, 2022) (``USCOC Comment 
Letter''); Dimensional Comment Letter; WisdomTree Comment Letter; 
Calamos Comment Letter; MFDF Comment Letter; MFS Comment Letter; 
Capital Group Comment letter; Seward & Kissel Comment Letter; 
Fidelity Comment Letter; Comment Letter of Nasdaq, Inc. (Aug. 16, 
2022) (``Nasdaq Comment Letter''); Dechert Comment Letter; T. Rowe 
Comment Letter; Nationwide Comment Letter; Cato Institute Comment 
Letter.
    \189\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
J.P. Morgan Asset Management Comment Letter; Dimensional Comment 
Letter; MFS Comment Letter; Capital Group Comment letter; Fidelity 
Comment Letter; Dechert Comment Letter; T. Rowe Comment Letter; 
Calamos Comment Letter; Nationwide Comment Letter.
    \190\ See Cato Institute Comment Letter.
    \191\ See, e.g., SIFMA AMG Comment Letter; Dechert Comment 
Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

    Fund managers are fiduciaries to the funds they manage. Commenters 
advocated that, as such, portfolio managers should have discretion in 
determining when a fund needs to depart from its 80% investment policy. 
Some commenters supported retaining the current rule's ``under normal 
circumstances'' standard in order to give portfolio managers 
flexibility to act in the best interest of the fund and its 
shareholders, which can include temporarily departing from the fund's 
80% investment policy.\192\ In addition, some commenters stated that 
they believe that some investors may prefer investing in funds where 
the portfolio manager has discretion to depart from the investment 
focus denoted by the fund's name when the portfolio manager

[[Page 70454]]

believes the departure is in the best interest of the fund.\193\
---------------------------------------------------------------------------

    \192\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Dechert Comment Letter; CFA Institute Comment Letter; Stradley 
Comment Letter; USCOC Comment Letter; Cato Institute Comment Letter; 
Dimensional Comment Letter; Federated Comment Letter; T. Rowe 
Comment Letter; WisdomTree Comment Letter.
    \193\ See, e.g., SIFMA AMG Comment Letter; Dechert Comment 
Letter; Nationwide Comment Letter; T. Rowe Comment Letter; MFS 
Comment Letter; JP Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    Commenters suggested alternatives to the proposed approach, stating 
that if the Commission adopts a prescriptive list of permissible 
circumstances under which a fund may depart from the 80% policy, the 
list should be expanded, for example to permit departure for 
repositioning fund assets in connection with changes of sub-advisers 
and/or portfolio managers, and in periods leading up to material 
strategy changes.\194\ These commenters suggested the inclusion of a 
``catch-all'' provision, as well, permitting any departures the 
portfolio manager believes are reasonable. Commenters also provided 
alternatives that would permit additional drift beyond the 
circumstances that the proposed amendments specified, so long as the 
fund provided additional disclosure for the reasons why the fund may 
drift.\195\ Another suggested an alternative included allowing funds 
that use the term ``managed'' in their name to have greater flexibility 
to depart from the fund's 80% investment policy.\196\
---------------------------------------------------------------------------

    \194\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
SIFMA AMG Comment Letter.
    \195\ See, e.g., Capital Group Comment Letter; Nationwide 
Comment Letter.
    \196\ See, e.g., ICI Comment Letter and SIFMA AMG Comment 
Letter.
---------------------------------------------------------------------------

    After considering comments, we are adopting amendments that retain 
the current ``under normal circumstances'' provision. While we are 
retaining the current ``under normal circumstances'' standard, we are 
also adopting new limitations on how long a fund may depart from 80% 
under this provision, discussed below, which addresses the concerns 
raised by commenters that the current standard allows for investments 
not consistent with the fund's name over extended periods of time.\197\ 
Retaining the current ``under normal circumstances'' provision is 
designed to provide fund managers with flexibility to manage their 
portfolios while requiring that funds normally invest 80% of their 
assets consistent with their 80% investment policy.\198\
---------------------------------------------------------------------------

    \197\ Prolonged drift could result in fund names that have a 
tendency or capacity or deceive or mislead, regardless of whether 
such drift has resulted in actual deception of investors. See, e.g., 
Cato Institute Comment Letter; see also supra footnote 40.
    \198\ See 2001 Names Rule Adopting Release, supra footnote 8, at 
nn.37-40 and accompanying text.
---------------------------------------------------------------------------

    We acknowledge that there could be circumstances when it is in the 
best interest of the fund and its investors for the portfolio manager 
to have discretion to depart from the fund's 80% investment policy. 
This interest must be balanced, however, with the need for a fund's 
name to convey accurately to investors the underlying investments that 
correspond with the focus the fund's name suggests. Rather than require 
additional disclosure that acknowledges drift or to provide a separate 
standard for funds that include the term ``managed'' in their name, we 
are adopting a requirement to invest in accordance with the 80% 
requirement ``under normal circumstances,'' combined with a set time 
frame to come back to 80%, to balance these concerns. We are adopting, 
therefore, a limit on the length of time that a fund may depart in 
other-than-normal circumstances to 90 consecutive days after the 
initial departure.
    Although we are not adopting the proposed approach of delineating 
the circumstances in which a fund may depart intentionally from the 80% 
requirement, an intentional departure must be in other than ``normal'' 
circumstances, which could include but is not limited to the 
circumstances included in the proposed approach. These circumstances 
could include temporary departures that occur as a result of market 
fluctuations, index rebalancing, cash flows/inflows, or temporary 
defensive positions, among others.\199\ These circumstances do not, 
however, represent the extent of events or circumstances where a fund, 
in considering its obligations under the names rule and the 
prohibitions of section 35(d), may determine that other-than-normal 
circumstances exist, warranting a departure from 80%. The final rules' 
approach provides flexibility to depart under circumstances that may 
not have been included in the proposal's delineated reasons for 
departures. Although the question of whether circumstances are 
``normal'' is based on the facts and circumstances, if a fund were to 
deviate in purportedly other-than-normal circumstances serially or 
frequently, this may suggest that in fact those circumstances are 
``normal'' and otherwise raise questions about the appropriateness of 
the fund's name under section 35(d) if the fund's portfolio is not 
invested consistent with its name for prolonged periods of time.\200\ 
When a fund deviates from the 80% investment requirement due to other-
than-normal circumstances, as we discuss below, the fund is required to 
maintain a record documenting the date of the departure and the reason 
for the departure.\201\
---------------------------------------------------------------------------

    \199\ See 2001 Names Rule Adopting Release, supra footnote 8, at 
text preceding footnote 39 (``[The ``under normal circumstances'' 
standard] will permit investment companies to take ``temporary 
defensive positions'' to avoid losses in response to adverse market, 
economic, political, or other conditions.'').
    \200\ See infra section II.A.5 text accompanying footnotes 318-
321.
    \201\ See infra section II.F (discussing the requirement under 
the final amendments for funds to maintain records documenting the 
reasons for each departure).
---------------------------------------------------------------------------

c) Time to Come Back Into Compliance
    The final amendments require that funds come back into compliance 
with the 80% investment requirement as soon as reasonably practicable 
in the case of drift (i.e., where the fund identifies that its 
investments are not consistent with this requirement under the names 
rule, for example, as a result of inadvertent drift identified as part 
of the fund's quarterly review).\202\ In all circumstances, a fund must 
come back into compliance within 90 consecutive days, as measured from 
the time that the fund identifies a departure from the 80% investment 
policy (as part of its quarterly review or otherwise), or the time the 
fund initially departs, in other-than-normal circumstances, from the 
80% investment policy.\203\ Under the final amendments, consistent with 
the current rule, where a fund identifies that the 80% requirement is 
no longer met, the fund must make all future investments in a manner 
that will bring the fund into compliance with the fund's 80% investment 
policy. The Commission proposed to require funds to come back into 
compliance with the 80% investment policy within 30 days from the 
initial departure from 80%. We are modifying the proposed approach to 
respond to concerns raised by commenters.
---------------------------------------------------------------------------

    \202\ Final rule 35d-1(b).
    \203\ Id. Although the temporal limits in the final amendments 
start from the time that a departure is identified, a fund may not 
avoid coming into timely compliance, if the fund failed to identify 
departures because the fund did not perform the required quarterly 
review, or if the fund failed to perform quarterly reviews that are 
reasonably designed to identify departures.
---------------------------------------------------------------------------

    The Commission received some support for the proposed period for 
funds to come back into compliance.\204\ The Commission received many 
comments, however, arguing that a 30-day period was not an appropriate 
time limit on departures.\205\ While some

[[Page 70455]]

commenters stated that a 30-day period may be appropriate for some 
asset classes or in certain market conditions, these commenters 
contended that a 30-day period may be too short in certain market 
conditions or in unanticipated extenuating circumstances.\206\ For 
example, one commenter stated that while a fund may be able to remedy a 
departure from the 80% investment policy that is the result of 
unusually large flows within 30 days, a portfolio manager may need more 
time when divesting securities to accommodate when an index rebalances 
or where a strategy may need to be reconsidered given exogenous 
events.\207\
---------------------------------------------------------------------------

    \204\ See, e.g., PRI Comment Letter.
    \205\ See, e.g., SIFMA AMG Comment Letter; ICI Comment Letter; 
CFA Institute Comment Letter; Dechert Comment Letter; Cato Institute 
Comment Letter; WisdomTree Comment Letter; NASAA Comment Letter; 
MFDF Comment Letter; MFS Comment Letter; J.P. Morgan Asset 
Management Comment Letter; Seward & Kissel Comment Letter; Fidelity 
Comment Letter; Nationwide Comment Letter; Dimensional Comment 
Letter; Wellington Comment Letter; Capital Group Comment Letter.
    \206\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
Stradley Comment Letter; T. Rowe Comment Letter; MFDF Comment 
Letter; MFS Comment Letter; Invesco Comment Letter; SIFMA AMG 
Comment Letter; WisdomTree Comment Letter; Dimensional Comment 
Letter.
    \207\ See J.P. Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    Commenters stated that the proposed 30-day time period may require 
a fund to make forced purchases and sales at potentially undesirable 
prices or at inappropriate times.\208\ For example, if a small-cap 
security becomes a mid-cap security and therefore can no longer be 
included in the small-cap fund's 80% basket, the fund may be required 
to sell the holding within the proposed 30-day period, even though the 
portfolio manager believes that it is in the best interest of the fund 
to hold the security for a longer period.\209\ Commenters stated that 
forced purchases or sales could lead to additional adverse consequences 
for a fund, including the risks of front running from other market 
participants, unwanted capital gains or assorted tax efficiency 
implications, increased transaction costs, reduced diversification, 
fire sales, homogenization across funds with similar names, and an 
overall negative impact on fund performance, as well as market 
liquidity and market stability more largely.\210\
---------------------------------------------------------------------------

    \208\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
J.P. Morgan Asset Management Comment Letter; Dechert Comment Letter; 
Stradley Comment Letter; T. Rowe Comment Letter; USCOC Comment 
Letter; Cato Institute Comment Letter; Dimensional Comment Letter; 
Capital Group Comment Letter. Certain of these commenters stated 
that the 2001 Names Rule Adopting Release stated that funds should 
not be required to ``sell portfolio holdings that have increased in 
value'' in order to reattain compliance with their 80% policy. See, 
e.g., Dechert Comment Letter; ICI Comment Letter.
    \209\ These circumstances would arise only where, in the given 
example, the security grew sufficiently to become a mid-cap 
security, the fund manager preferred to continue to hold the 
security, and the fund manager had already made similar 
determinations with respect to other securities which collectively 
made up 20% of the value of the fund's assets.
    \210\ See, e.g., Dechert Comment Letter; Stradley Comment 
Letter; Nationwide Comment Letter; ICI Comment Letter; SIFMA AMG 
Comment Letter; T. Rowe Comment Letter; Dimensional Comment Letter; 
Nationwide Comment Letter; Fidelity Comment Letter; WidsomTree 
Comment Letter; Wellington Comment Letter.
---------------------------------------------------------------------------

    The current names rule effectively requires that funds make all 
future investments consistent with the fund's 80% policy once the fund 
identifies that its portfolio is out of compliance with the 80% 
investment requirement. Some commenters urged the Commission to 
reconsider the proposed 30-day period and instead maintain the current 
standard.\211\ Additionally, commenters suggested alternative time 
periods to require funds to come back into compliance with the 80% 
investment policy, e.g., 180 days.\212\
---------------------------------------------------------------------------

    \211\ See, e.g., Calamos Comment Letter; Nationwide Comment 
Letter.
    \212\ See, e.g., Fidelity Comment Letter.
---------------------------------------------------------------------------

    Several commenters suggested an alternative approach that would 
require funds to notify their board of directors if the fund falls out 
of compliance with the 80% investment policy for more than a specified 
period of time (e.g., 30, 60, or 90 days etc.).\213\ Some commenters 
suggested that after a certain period of time following a departure 
from 80%, a fund must provide a report to the board detailing how the 
fund will come back into compliance. Commenters stated that other rules 
under the Investment Company Act have similar board reporting 
requirements, which recognize the value of a board's oversight of fund 
management and the best interest of fund shareholders, and that the 
names rule may benefit from such a requirement.\214\ Under this 
alternative, commenters stated that they believed that funds would have 
more flexibility than under the proposed approach and that the board 
would be in the best position to judge whether a departure is 
reasonable.\215\
---------------------------------------------------------------------------

    \213\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
Stradley Comment Letter; Dimensional Comment Letter; SIFMA AMG 
Comment Letter; MDFS Comment Letter; MFS Comment Letter; Invesco 
Comment Letter.
    \214\ See ICI Comment Letter; SIFMA AMG Comment Letter; Dechert 
Comment Letter; MFS Comment Letter; see also Investment Company 
Liquidity Risk Management Programs, Investment Company Act Release 
No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 2016)] (``Liquidity 
Adopting Release'') 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 Adopting Release'').
    \215\ See, e.g., Dimensional Comment Letter; SIFMA AMG Comment 
Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    The amendments we are adopting are designed to help ensure that a 
fund will not stray from the investment focus its name suggests for a 
protracted period of time, regardless of external events or other 
circumstances that could affect the fund's portfolio investments. 
Investors' expectations for funds' investment focuses may not depend on 
whether market events negatively affect the investments in a fund's 
portfolio. For example, investments in passively-managed funds, such as 
index-based mutual funds and ETFs, have increased substantially in the 
past two decades, indicating that investors seek investment products 
that permit them to obtain specific types of investment exposure for 
their portfolios.\216\ Although investors may have different 
expectations regarding how long a fund may drift from the fund's 
investment focus, a prolonged period of drift would be inconsistent 
with the investor protection concerns that underlie the names rule and 
section 35(d) of the Investment Company Act.
---------------------------------------------------------------------------

    \216\ Proposing Release, supra footnote 2, at n.61 and 
accompanying text. 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 money market instruments. See id.; see 
also 2001 Names Rule Adopting Release, supra footnote 8, at n.8 and 
accompanying text.
---------------------------------------------------------------------------

    Taking these concerns into account, while considering comments 
received, we are extending the proposed time period that funds have to 
come back into compliance with the names rule from 30 to 90 consecutive 
days after the fund either identifies a departure or, in other-than-
normal circumstances, departs from the 80% investment requirement. We 
recognize, as certain commenters raised, that some investors may prefer 
allowing a fund 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. The final amendments provide funds 
with more flexibility and time both to recognize when a fund has 
drifted out of compliance and to correct the departure. This 90-day 
review period is also consistent with the quarterly Form N-PORT 
reporting requirement discussed below. The final amendments require a 
fund to assess whether the fund's portfolio is in compliance at least 
quarterly and provide the fund with an additional quarter to rectify 
any departure from the 80% investment requirement. At some point, 
however, departures may begin to change the nature of the fund 
fundamentally, which would undermine investor

[[Page 70456]]

expectations created by the fund's name. The time limits we are 
adopting are designed to prevent such a fundamental change without 
investor notification.
    We are not adopting, as suggested by some commenters, a board 
reporting obligation that would effectively provide additional time to 
resolve departures from the 80% requirement. Rather, the final approach 
directly provides funds with additional time, compared to the proposal, 
both to identify drift in their portfolios and to rectify departures 
from 80%. The increased flexibility for temporary departures that the 
final amendments afford to funds, compared to the proposed approach, 
addresses many of the concerns raised by commenters recommending that 
we adopt a board reporting obligation instead of setting specified time 
periods for funds to come back into compliance with the names rule. 
These comments were generally framed in terms of providing additional 
flexibility, as opposed to suggesting that a fund's board should have a 
specific oversight role when a fund departs from 80% for an extended 
period. The requirement that funds review their portfolios for names 
rule compliance quarterly in addition to a 90-day period to come back 
into compliance increases the flexibility of funds to accommodate 
instances of fund drift and intentional departures. This requirement 
also still includes a time certain for funds to resolve these 
departures in recognition of investors' reasonable expectation that a 
fund's investments will generally remain focused in the area that the 
fund's name indicates. In addition, a fund can seek exemptive relief 
from the Commission if the fund believes it would be appropriate and 
consistent with the protection of investors for the fund to depart for 
a limited additional period past 90 days. Any request for an exemptive 
order will be evaluated based on its particular facts and circumstances 
and must meet the standard under section 6(c) of the Investment Company 
Act, including that the exemption is necessary or appropriate in the 
public interest and consistent with the protection of investors.\217\ 
One example of an instance in which a fund might consider seeking 
relief would be where the fund anticipates resolving the departure, but 
cannot do so within 90 days and seeks to avoid changing the fund's name 
only to change it again in a short period of time.
---------------------------------------------------------------------------

    \217\ See Investment Company Act section 6(c) (providing the 
Commission with authority to conditionally or unconditionally exempt 
persons, securities or transactions from any provision of the Act if 
and to the extent that such exemption is necessary or appropriate in 
the public interest and consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
Act).
---------------------------------------------------------------------------

    In instances where the fund identifies that its investments are not 
consistent with this requirement under the names rule (for example, as 
a result of inadvertent drift identified as part of the fund's 
quarterly review), we are retaining the requirement that a fund must 
make all future investments in a manner that will bring the fund back 
into compliance with the 80% investment policy. We are also adopting, 
as proposed, the requirement that a fund must come back into compliance 
``as soon as reasonably practicable'' (with a 90-day outer limit) 
because we anticipate that most temporary departures caused by 
portfolio drift could be remedied in substantially less than 90 days, 
though this could depend on the specific facts and circumstances.\218\
---------------------------------------------------------------------------

    \218\ See also, e.g., J.P. Morgan Asset Management Comment 
Letter (``Although temporary non-compliance in the ordinary course, 
such as due to unusually large flows, should be readily fixable in 
less than 30 days, there are also circumstances in which more 
flexibility is warranted.''); MFDF Comment Letter (``While we agree 
that in most circumstances, a fund should be able to return to 
compliance within 30 days, it is difficult to anticipate every type 
of market volatility or other extenuating circumstance that might 
make this difficult to do while still protecting the interests of 
the fund's shareholders.'').
---------------------------------------------------------------------------

    We recognize that there are certain circumstances under which a 
fund may be unable to bring its portfolio back into compliance with the 
fund's 80% investment policy within the required 90-day period. As 
commenters stated, there may be events that preclude the ability of a 
fund to make investments or sell assets that would not be in the best 
interest of the fund but that may be required to come back into 
compliance with the names rule. If such an event occurred, the fund 
would need to change its name to better reflect the realities of its 
portfolio and the fund must provide shareholders with a notice of that 
change, which would provide information that would allow investors to 
understand the nature of the fund's portfolio.\219\ The final 
amendments, consistent with the proposal, effectively toll the time for 
a fund to get back into compliance following a departure from 80% that 
the rule otherwise would require, if a notice of a change in a fund's 
policy has been provided to fund shareholders.\220\ Once such a notice 
has been provided to shareholders, shareholders have a period of 60 
days to determine whether they would like to redeem their shares before 
the change in policy takes effect.
---------------------------------------------------------------------------

    \219\ See final rule 35d-1(a)(2)(ii), (b)(1)(iii), (d).
    \220\ See proposed rule 35d-1(b)(iv); final rule 35d-
1(b)(1)(iii).
---------------------------------------------------------------------------

(d) Fund Launches and Reorganizations
    We are adopting final rule amendments that permit funds to invest 
less than 80% of their assets in the 80% basket temporarily in order to 
reposition or liquidate assets in connection with a reorganization or 
to launch a fund.\221\ We are adopting these amendments substantially 
as proposed. For fund launches, the final amendments provide funds with 
a temporary period to depart from the 80% investment requirement that 
is not to exceed 180 consecutive days starting from the day the fund 
commences operations.\222\ The final rule amendments do not limit the 
time of departures associated with fund reorganizations.
---------------------------------------------------------------------------

    \221\ Final rule 35d-1(b)(1)(iii); see also final rule 35d-1(g) 
(defining the term ``launch'').
    \222\ Final rule 35d-1(g).
---------------------------------------------------------------------------

    The Commission received comments requesting that we extend the 
proposed period of time permitted for fund launches from 180 days to a 
longer period.\223\ Commenters stated that certain funds, for example 
``alts funds'' or certain illiquid funds, may have a longer ramp-up 
period that can extend beyond 180 days.\224\ One commenter stated that 
investors in these types of less-liquid funds will understand the 
nature of the fund they are investing in and understand that coming 
into compliance with the names rule within 180 days may not be in the 
interest of the fund.\225\ Another commenter stated that it is in the 
best interest of the fund manager to invest the assets of the fund and 
to establish the fund as quickly as possible and that a fund manager 
may reasonably need more than 180 days to come into compliance with the 
names rule.\226\ The Commission received one comment supporting the 
proposed approach to reorganizations and did not receive comments 
opposing this aspect of the proposal.\227\
---------------------------------------------------------------------------

    \223\ See, e.g., SIFMA AMG Comment Letter; USCOC Comment Letter; 
Invesco Comment Letter.
    \224\ See, e.g., SIFMA AMG Comment Letter; USCOC Comment Letter.
    \225\ See, e.g., SIFMA AMG Comment Letter.
    \226\ See, e.g., USCOC Comment Letter.
    \227\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    We understand that there may be variability in how long is needed 
to launch a new fund depending on the types of investments in which the 
fund seeks to invest. In some instances, it may be in shareholders' 
interest for funds to take additional time beyond the otherwise-
required 90-day temporary departures period to invest in a manner 
consistent with the fund's 80% investment policy, for example to avoid

[[Page 70457]]

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 are adopting the requirement that, 
consistent with current guidance, such a period should not exceed 180 
consecutive days.\228\ We understand, based on staff knowledge of 
industry practice, that this time frame is generally sufficient for 
funds to invest fully, consistent with their 80% investment policy, 
after the fund commences operations.\229\ Further, the final amendments 
generally require funds to be invested consistent with their 80% 
investment policy ``as soon as reasonably practicable,'' which may be a 
shorter time than 180 days. The amendments therefore do not permit any 
fund to exceed 180 consecutive days to invest its assets consistent 
with its 80% investment policy when launching a fund.
---------------------------------------------------------------------------

    \228\ See 2001 Names Rule Adopting Release, supra footnote 8, at 
n.39 and accompanying text.
    \229\ See also, e.g., PRI Comment Letter (supporting all of the 
proposed time frames for getting back into compliance).
---------------------------------------------------------------------------

    We recognize 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. Both reorganizations and 
launches may result in a fund holding assets in a way that is 
inconsistent with its 80% investment policy in connection with these 
fund life-cycle events. 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 the fund may hold cash in the interim. 
While we anticipate that, for most funds, codifying a required 180-day 
period for a fund to be fully invested consistent with its 80% 
investment policy will not result in significant operational changes, 
we acknowledge that may not be the case for all funds.
    Planned reorganizations may take longer to complete than 30 days or 
even 180 days. Moreover, such a planned action will be disclosed, and 
the reorganization is likely to be a permanent change to the nature of 
the investor's investment.\230\ Similarly, a change to a fund's 80% 
investment policy will result in a permanent change to the fund's 
investments, about which funds notify investors pursuant to the 
provisions of the names rule. Thus, we do not believe that changes in 
the fund's investment portfolio to support an 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 would still be required 
to be resolved as soon as reasonably practicable, consistent with any 
temporary departure under the rule.
---------------------------------------------------------------------------

    \230\ For example, when the board of an open-end fund determines 
to approve a reorganization, the fund would supplement its 
prospectus.
---------------------------------------------------------------------------

3. Considerations Regarding Derivatives in Assessing Names Rule 
Compliance
    Consistent with the proposal, we are adopting amendments that 
address the valuation of derivatives instruments for purposes of 
determining compliance with a fund's 80% investment policy, as well as 
the derivatives that a fund may include in its 80% basket. These 
amendments are designed to reflect the investment exposure derivatives 
investments create 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.\231\ The amendments are designed both to 
allow funds to use names that may more effectively communicate their 
investments and risks to investors, and to 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.
---------------------------------------------------------------------------

    \231\ See, e.g., Proposing Release, supra footnote 2, at nn.76-
78 and accompanying text.
---------------------------------------------------------------------------

    The proposed amendments included the requirement for funds to use a 
derivatives instrument's notional amount, rather than its market value, 
for the purpose of determining compliance with a fund's 80% investment 
policy.\232\ The proposal also included amendments to address the 
derivatives instruments that a fund may include in its 80% basket.\233\ 
As discussed below, commenters generally agreed that the names rule 
should specifically address funds' use of derivatives, although some 
commenters suggested modifications to the proposed approach.
---------------------------------------------------------------------------

    \232\ See proposed rule 35d-1(g).
    \233\ See proposed rule 35d-1(b)(2).
---------------------------------------------------------------------------

    We are adopting the proposed amendments with certain changes in 
response to comments. We discuss each element of the final amendments' 
provisions addressing derivatives below.
Use of Derivatives' Notional Amounts, With Currency Hedging Exclusion
    The final amendments generally require a fund to use notional 
amounts to value derivatives in assessing whether it has invested 80% 
of the value of its assets in accordance with the investment focus that 
the fund's name suggests.\234\ In a change from the proposal, however, 
the final amendments also require a fund to exclude from the 
calculation certain derivatives that hedge the currency risk associated 
with a fund's foreign-currency denominated investments. These 
derivatives therefore will not be included in the calculation of the 
fund's assets or the fund's 80% basket when determining if the fund is 
complying with its 80% investment policy. A fund must exclude a 
currency derivative if it: (1) is entered into and maintained by the 
fund for hedging purposes, and (2) the notional amounts of the 
derivatives do not exceed the value of the hedged investments (or the 
par value thereof, in the case of fixed-income investments) by more 
than 10 percent.
---------------------------------------------------------------------------

    \234\ See final rule 35d-1(g) (definitions of ``assets'' and 
``derivatives instrument''). The final amendments' approach, like 
the proposed approach, does not distinguish between derivatives 
instruments that are assets and derivatives that are liabilities of 
the fund. See Proposing Release, supra footnote 2, at n.83.
---------------------------------------------------------------------------

    The final amendments' approach of using notional amounts better 
reflects the investment exposure that derivatives investments create 
than the use of market values (as the Act would generally otherwise 
require by operation of its definition of the term ``value''), because 
a derivative instrument's market value may bear no relation to the 
investment exposure that the derivatives instrument creates.\235\ 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.\236\ The use of notional amounts furthers 
the goal of helping to ensure that a fund's investment activity is 
consistent with the investment focus its name communicates.\237\ 
Notably, using a

[[Page 70458]]

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, or could result in a fund being in 
compliance with its 80% investment policy despite having significant 
exposure to investments that are not suggested by the fund's name.\238\
---------------------------------------------------------------------------

    \235\ See Proposing Release, supra footnote 2, at paragraph 
accompanying nn.77-78; see also 15 U.S.C. 80a-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).
    \236\ 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.
    \237\ A fund's name may be materially deceptive or misleading 
under section 35(d) of the Investment Company Act, however, even if 
it complies with the 80% investment policy requirement (and uses 
notional amounts as the final amendments require in performing its 
compliance calculations). See infra section II.A.5.
    \238\ See Proposing Release, supra footnote 2, at paragraphs 
following n.78.
---------------------------------------------------------------------------

    Comments on the proposed mandatory approach to using notional 
amounts were mixed. Some commenters supported the proposed approach, 
stating that notional amounts are a more accurate reflection of funds' 
economic exposure, as compared to market values, and that exposure is 
likely what investors assume a fund name reflects.\239\ One commenter 
also expressed appreciation that the proposal attempts to provide a 
clear rule while also adjusting for accuracy in reflecting 
exposure.\240\ Other commenters generally supported the use of notional 
amounts but suggested changes to the proposed approach that would 
permit the use of market values under certain circumstances.\241\ For 
example, some commenters suggested that the rule should permit a fund 
to value each derivatives instrument consistent with a ``reasonable 
exposure metric'' and a method that best measures the economic exposure 
the derivatives instrument obtains synthetically, so long as the fund 
consistently applies the relevant metric and method.\242\ One commenter 
suggested an alternative approach that would require the use of 
notional amounts for derivatives that are included in a fund's 80% 
basket, but that would permit the use of market values for derivatives 
that are not included in the 80% basket, depending on the nature of the 
particular derivative.\243\
---------------------------------------------------------------------------

    \239\ See Consumer Federation of America Comment Letter; Capital 
Group Comment Letter; J.P. Morgan Asset Management Comment Letter; 
Ceres Comment Letter; Environmental Defense Fund Comment Letter; 
Comment Letter of Americans for Financial Reform Education Fund 
(Aug. 15, 2022) (``AFREF Comment Letter''); see also Comment Letter 
of Chris Barnard (June 8, 2022) (``Barnard Comment Letter'') 
(expressing support for ``an economic consideration that would look 
through the notional value of assets held in order to determine the 
economic impact of the fund exposures'').
    \240\ See Center for American Progress Comment Letter; see also 
SIFMA AMG Comment Letter (stating that, while not all SIFMA AMG 
members agree that notional value is the most appropriate valuation 
for every derivatives instrument in all cases, many funds 
``recognize the benefit of eliminating disparate valuation practices 
among funds with an 80% investment policy'').
    \241\ See, e.g., Capital Group Comment Letter; Fidelity Comment 
Letter; T. Rowe Comment Letter; Dechert Comment Letter; ICI Comment 
Letter.
    \242\ See Dechert Comment Letter; ICI Comment Letter; see also 
Capital Group Comment Letter.
    \243\ T. Rowe Comment Letter.
---------------------------------------------------------------------------

    Commenters suggesting these alternative approaches expressed 
particular concern about using notional amounts for derivatives 
transactions entered into to protect against risks posed by investments 
not suggested by a fund's name (i.e., investments not included in the 
80% basket).\244\ For example, a fund with ``U.S. equities'' in its 
name might invest a limited percentage of its assets in non-U.S. 
securities and then enter into derivatives to hedge risks associated 
with those securities. To comply with the fund's 80% investment policy, 
the value of the fund's U.S. equity investments in the fund's 80% 
basket must represent at least 80% of the value of the fund's 
``assets'' as defined in the rule. If the derivatives intended to hedge 
risks associated with the non-U.S. equity securities in this example 
were valued using notional amounts, however, this would increase the 
value of the fund's ``assets'' and therefore could have a potentially 
large impact on the denominator for purposes of names rule compliance, 
causing the fund to drop below the required 80% threshold.\245\ These 
commenters argued that this, in turn, could dissuade funds from 
entering into certain derivatives transactions that funds use for 
hedging or risk management purposes, whose impact on fund performance 
might be insignificant. One commenter, on the other hand, argued 
against an alternative approach that uses different valuation 
approaches for different derivatives because this would be less 
consistent and more complex than the proposed approach, which would 
likely result in inconsistencies in treatment, would complicate funds' 
compliance, and would raise examination challenges.\246\
---------------------------------------------------------------------------

    \244\ See Dechert Comment Letter; ICI Comment Letter; T. Rowe 
Comment Letter.
    \245\ If the fund in this example had invested $80 in U.S. 
equity securities and $20 in non-U.S. securities, and then hedged 
risks associated with the non-U.S. securities with derivatives with 
a notional amount of $20, the fund would no longer satisfy its 80% 
investment policy. The fund's $80 in U.S. equity securities would 
represent 67% of the fund's $120 in assets. See also Proposing 
Release, supra note 2, at nn.75-76 and accompanying text.
    \246\ Consumer Federation of America Comment Letter.
---------------------------------------------------------------------------

    After analyzing comments, we continue to believe that notional 
amounts are generally an appropriate measure of derivatives 
instruments' economic exposure.\247\ This approach is designed to 
provide a clear and consistent approach to derivatives valuation that 
will simplify names rule compliance because all funds will have a 
specific standard to follow when valuing derivatives for names rule 
purposes. This approach also promotes names that effectively 
communicate a fund's investments and risks because all funds will be 
using the same calculation methodology. The final amendments' 
requirement for funds to use notional amounts to value derivatives, in 
the context of names rule compliance, reflects these goals.
---------------------------------------------------------------------------

    \247\ But see infra footnote 259. We believe that the term 
``notional amount,'' which is also used in 17 CFR 270.18f-4 (``rule 
18f-4''), is understood by market participants and used as a means 
to reflect the market exposure a derivatives creates--meaning, for 
example, that if a derivative provides a return based on the 
leveraged performance of a reference asset, the notional amount must 
reflect the application of the leverage factor. See Derivatives 
Adopting Release, supra footnote 214, at text following n.496.
---------------------------------------------------------------------------

    However, we are adopting a modification to this approach in 
consideration of commenters' concerns that the proposed approach could 
limit the use of derivatives for hedging purposes. Take the example 
discussed above, where a U.S. equity fund may invest up to 20% of its 
assets in stocks of companies domiciled outside of the United States, 
consistent with the names rule. The fund in this example would not 
include the foreign stocks in its 80% basket, and therefore these 
foreign stocks would be in the denominator in the calculation that the 
fund would use to determine compliance with its 80% investment 
policy.\248\ Any related currency derivative that the fund holds for 
hedging purposes, therefore, also would be in the denominator. This 
currency derivative could have a high notional amount, even though it 
would be reducing, not increasing, the fund's exposure to risks 
associated with the fund's foreign securities. Holding the currency 
derivative therefore could significantly limit the extent to which the 
fund could invest outside of its 80% basket. One commenter stated that 
this approach could result in funds adopting more generic names, which 
would permit them to use derivatives with fewer constraints.\249\ A 
fund also could decide to leave its foreign-currency-denominated 
investments unhedged in lieu of breaching its 80% investment policy, 
increasing risks to the fund and its shareholders.
---------------------------------------------------------------------------

    \248\ See T. Rowe Comment Letter.
    \249\ See id.
---------------------------------------------------------------------------

    While we appreciate these concerns, we continue to believe the 
names rule's

[[Page 70459]]

approach to derivatives must be clear and consistently applied, and 
therefore we are not adopting a principles-based approach that, as some 
commenters suggested, would permit a fund to use any appropriate 
exposure metric when valuing derivatives in the context of names rule 
compliance. Instead, the final amendments require a fund, in 
calculating its assets for purposes of assessing names rule compliance, 
to exclude certain currency derivatives instruments that hedge currency 
risks associated with one or more specific foreign-currency-denominated 
equity or fixed-income investments held by the fund. A fund must 
exclude a currency derivative if it: (1) is entered into and maintained 
by the fund for hedging purposes, and (2) the notional amounts of the 
derivatives do not exceed the value of the hedged investments (or the 
par value thereof, in the case of fixed-income investments) by more 
than 10 percent.
    Excluding these derivatives from the names rule compliance 
calculation addresses concerns that including certain derivatives at 
their notional amounts in this calculation could limit the use of 
derivatives for hedging purposes. Limiting this exclusion to currency 
derivatives is designed to ensure that the exclusion will not result in 
the names rule calculation excluding instruments that create economic 
exposures that should be considered in assessing whether a fund's name 
is materially deceptive and misleading in light of its portfolio. The 
Commission has previously distinguished currency derivatives, when 
directly matched to particular investments held by the fund, as 
instruments that ``predictably and mechanically provide the anticipated 
hedging exposure.'' \250\ The provision in the final rule requiring 
that these derivatives must be entered into and maintained for hedging 
purposes, and that the notional amounts of these derivatives must not 
exceed the value of the hedged investments by more than 10 percent, 
similarly reflects an approach the Commission has taken in the past to 
define currency derivatives that qualify as hedges.\251\ These 
instruments therefore would not generally create economic exposures 
that could cause a fund's name to be materially deceptive or 
misleading.
---------------------------------------------------------------------------

    \250\ See Derivatives Adopting Release, supra footnote 214, at 
paragraph accompanying n.522. While the Commission's discussion in 
the Derivatives Adopting Release also characterized interest rate 
derivatives in this way, in addressing derivatives that may be 
excluded when calculating derivative exposure to determine 
eligibility for the limited derivatives user exception in rule 18f-
4, the policy considerations for interest rate derivatives in the 
context of the names rule are unique as discussed below.
    \251\ See id. at paragraphs accompanying and following nn.523-
526.
---------------------------------------------------------------------------

    On the other hand, other types of hedging transactions executed 
through derivatives are difficult to distinguish from transactions that 
create exposures that contribute to (or detract from) the investment 
focus that a fund's name suggests. For example, while a fund can use 
derivatives to hedge the interest rate risk that exists in interest-
bearing assets, similar derivatives instruments can be used to 
supplement a portfolio whose strategy reflects a particular conviction 
about the movement of interest rates. It therefore would not be 
appropriate to adopt an approach that requires exclusion of interest 
rate derivatives in this example, as opposed to currency derivatives 
whose hedging purpose under the final amendments is more 
straightforward to determine. While no commenter suggested the specific 
approach to currency derivatives that the final amendments include, 
this approach addresses commenters' concerns about ways in which the 
proposal could limit hedging activities, with one commenter 
specifically discussing hedging involving currency derivatives.\252\
---------------------------------------------------------------------------

    \252\ See Dechert Comment Letter; ICI Comment Letter; T. Rowe 
Comment Letter (discussing currency derivatives, as well as interest 
rate derivatives).
---------------------------------------------------------------------------

    We acknowledge that commenters suggesting alternative approaches 
generally favored the use of market values for certain derivatives, as 
opposed to excluding these derivatives from the names rule calculation. 
While derivatives' market values can often be quite low, such that the 
use of their market values would be functionally equivalent to 
excluding these derivatives from a names rule compliance calculation, 
there are circumstances where the market value of a derivative could be 
large.\253\ The use of market values under these circumstances, as well 
as an approach that permits but does not require the exclusion of 
currency derivatives used for hedging purposes, could therefore lead to 
inconsistent compliance calculation outcomes.
---------------------------------------------------------------------------

    \253\ While the market value of a derivative almost never will 
exceed its notional amount, as typically defined, a derivative can 
equal it, for example in the case of deep in-the-money options.
---------------------------------------------------------------------------

Calculating Notional Amounts for Purposes of Names Rule Compliance
    In calculating notional amounts, the final amendments, as proposed, 
will require a fund to convert interest rate derivatives to their 10-
year bond equivalents and to delta adjust the notional amounts of 
options contracts.\254\ A simple way to convert an interest rate 
derivative to its ten-year bond equivalent is to multiply the 
derivative's unadjusted notional amount by the ratio of the 
derivative's duration and the duration of the reference security. The 
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.\255\ 
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. Similarly, a fund will delta 
adjust an option by multiplying the option's unadjusted notional amount 
by the option's delta (i.e., the ratio of change in the value of the 
option to the change in value of the asset into which the option is 
convertible).\256\ The 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.
---------------------------------------------------------------------------

    \254\ See final rule 35d-1(g).
    \255\ See Proposing Release, supra footnote 2, at n.80 and 
accompanying text; see also Derivatives Adopting Release, supra 
footnote 214, at section II.E.1; AFREF Comment Letter (providing 
numeric examples of the utility of the proposed adjustments).
    \256\ See Derivatives Adopting Release, supra footnote 214, at 
n.500.
---------------------------------------------------------------------------

    Some commenters supported the proposed mandatory notional amount 
adjustments, arguing that these adjustments are standardized practices 
that will properly account for derivatives instruments' true 
exposures.\257\ Other commenters argued that the names rule should 
permit, but not require, the proposed adjustments.\258\ These 
commenters stated that rule 18f-4 permits the adjustments but does not 
require them, and therefore the names rule's approach would permit 
funds to benefit from compliance and operational efficiencies.\259\ One 
commenter also argued that there is no policy reason for different 
treatment between the names rule and rule 18f-4 because the permissive 
adjustments in rule 18f-4

[[Page 70460]]

``generate an accurate measure of the exposure created by a particular 
derivatives transaction.'' \260\ Another stated that requiring the 
proposed adjustments would prevent funds from ``taking a more 
conservative approach'' by deciding not to scale down the notional 
value of derivatives to their 10-year bond equivalents.\261\
---------------------------------------------------------------------------

    \257\ See AFREF Comment Letter; Center for American Progress 
Comment Letter; see also Consumer Federation of America Comment 
Letter (stating that it makes sense, for efficiency's sake, for the 
names rule to apply the same approach with regards to derivatives 
measurement that rule 18f-4 under the Act requires for purposes of 
considering funds' derivatives exposure in the context of the rule's 
limited derivatives user provision).
    \258\ See Dechert Comment Letter; ICI Comment Letter; SIFMA AMG 
Comment Letter; Fidelity Comment Letter.
    \259\ See SIFMA AMG Comment Letter; Fidelity Comment Letter.
    \260\ SIFMA AMG Comment Letter.
    \261\ Fidelity Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we are adopting the proposed mandatory 
adjustments. We continue to 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.\262\ For example, a deep out-of-the money option can have a 
large unadjusted notional amount, but will provide limited investment 
exposure to the underlying reference asset. It would not be consistent 
with the goal of requiring notional amounts when assessing names rule 
compliance to permit the fund in this example to use such an option's 
unadjusted notional amount to satisfy its 80% investment policy 
because, even if the option's unadjusted notional amount equaled or 
exceeded 80% of the value of the fund's assets, it is not providing a 
commensurate degree of investment exposure at that time. While 
permitting the adjustments rather than requiring them could allow a 
fund to take a ``more conservative'' approach in certain specific cases 
as one commenter suggested, it also could permit a fund to account for 
derivatives in its names rule compliance in a way that could be 
inconsistent with investors' expectations based on the fund's name. 
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. This potential 
gaming consideration is not applicable in the context of rule 18f-4, 
because including high unadjusted notional amounts in a fund's 
calculation of derivatives exposure for rule 18f-4 purposes could 
result in the possibility only of increased regulatory burden (for a 
fund not qualifying as a limited derivatives user under the rule).
---------------------------------------------------------------------------

    \262\ A fund's use of derivatives that results in a substantial 
portion of the fund's risks or returns being materially different 
from those 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 (including the use of derivatives' 
notional amounts and the required tailoring adjustments) could 
render a fund's name to be materially deceptive or misleading. See 
infra section II.A.5.
---------------------------------------------------------------------------

Reducing the Value of a Fund's Assets by Deducting Cash And Cash 
Equivalents and Certain U.S. Treasury Securities
    The final amendments will permit a fund, in determining compliance 
with its 80% investment policy, to deduct cash and cash equivalents and 
U.S. Treasury securities with remaining maturities of one year or less 
from assets (i.e., the denominator in the 80% calculation), up to the 
notional amounts of the fund's derivatives instruments.\263\ This 
represents a change from the proposal, which would have limited the 
deduction to cash and cash equivalents and would have required, not 
permitted, this deduction.
---------------------------------------------------------------------------

    \263\ Final rule 35d-1(g). The Commission has stated that items 
commonly considered to be cash equivalents include certain Treasury 
bills, agency securities, bank deposits, commercial paper, and 
shares of money market funds. See Proposing Release, supra footnote 
2, at n.86. U.S. Generally Accepted Accounting Principles (``U.S. 
GAAP'') define cash equivalents as short-term, highly liquid 
investments that are readily convertible to known amounts of cash 
and that are so near their maturity that they present insignificant 
risk of changes in value because of changes in interest rates. 
Generally, only investments with original maturities of three months 
or less qualify under that definition. See FASB Accounting Standards 
Codification Master Glossary, available at https://asc.fasb.org/glossary.
---------------------------------------------------------------------------

    The Commission stated in the Proposing Release that 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, which may not themselves provide market exposure. Rather, 
such cash and cash equivalents may effectively function as low-risk 
collateral for those derivatives instruments. Because the notional 
amount of the derivatives instruments for which the cash and cash 
equivalents effectively function as collateral is already included in 
the denominator of the 80% investment test, including the cash and cash 
equivalents held as such collateral could effectively ``double-count'' 
the fund's exposure.\264\
---------------------------------------------------------------------------

    \264\ See Proposing Release, supra footnote 2, at paragraphs 
accompanying nn.84-86.
---------------------------------------------------------------------------

    Commenters that addressed this aspect of the proposal generally 
supported it and encouraged the Commission to expand the types of 
assets that funds may deduct beyond cash and cash equivalents.\265\ 
Some commenters stated that the Commission should extend the proposed 
approach to allow funds to exclude any assets that they have posted as 
collateral under derivatives instruments and certain other asset 
types.\266\ These commenters provided examples of what this recommended 
broader approach would encompass, including other U.S. government 
securities such as U.S. Treasury securities with under five years to 
maturity, investment-grade corporate bonds with under three years to 
maturity, short-term bond fund shares, interests in other short-term 
investment funds, and repurchase agreements on cash equivalents or any 
of the foregoing types of instruments. One commenter discussed 
circumstances in which cash and cash equivalents provide investment 
exposure and therefore should not be deducted in a fund's 80% 
investment policy calculation, and another commenter suggested that the 
deduction of cash and cash equivalents be permissive instead of 
mandatory as proposed.\267\
---------------------------------------------------------------------------

    \265\ See Dechert Comment Letter; ICI Comment Letter; 
Dimensional Comment Letter.
    \266\ See Dechert Comment Letter; ICI Comment Letter.
    \267\ SIFMA AMG Comment Letter (stating that funds may employ 
investment strategies that seek exposure to the U.S. government 
through derivative instruments, as well as cash and cash 
equivalents, and it would be appropriate to permit cash and cash 
equivalents to be included in both the numerator and denominator of 
a fund's 80% investment policy calculation when such investments 
provide market exposure); T. Rowe Comment Letter (stating that if 
the Commission were to adopt the commenter's suggested alternative 
approach to the mandatory use of notional amounts, discussed in 
supra footnote 243 and accompanying text, this approach would not 
require the deduction of cash and cash equivalents to address 
potential double-counting of a fund's exposure, but if the 
Commission did not adopt the alternative approach, the deduction of 
cash and cash equivalents should be permissive and not mandatory).
---------------------------------------------------------------------------

    We agree that the deduction of cash and cash equivalents should be 
permissive and not mandatory. For funds that do not employ investment 
strategies that seek exposure through investments in cash and cash 
equivalents, the decision not to deduct cash and cash equivalents in a 
fund's 80% investment policy calculation always would be more 
conservative for purposes of meeting the required 80% threshold. That 
is, the denominator in the calculation (the fund's assets as defined in 
the names rule) for a fund that chooses not to deduct cash and cash 
equivalents would always be larger compared to an equivalent fund that 
chooses to deduct cash and cash equivalents from its assets. Choosing 
not to deduct cash and cash equivalents therefore would require 
proportionately more assets in the fund's 80% basket compared to an 
equivalent fund that chooses to deduct cash and cash

[[Page 70461]]

equivalents. Moreover, permitting a fund to choose not to deduct cash 
and cash equivalents reflects that there are circumstances in which 
cash and cash equivalents provide investment exposure that is 
consistent with the fund's name.
    We also agree that expanding the permissible deduction to encompass 
all U.S. Treasury securities with remaining maturities of one year or 
less (as opposed to those with original maturities of three months or 
less, which would qualify as ``cash equivalents'' for purposes of U.S. 
GAAP) would permit funds to exclude certain additional assets that 
effectively function as low-risk collateral for derivatives instruments 
but that do not introduce unexpected investment exposure or risk to the 
portfolio.\268\ U.S. Treasury securities with remaining maturities of 
one year or less have a significantly lower likelihood of a short-term 
price change (and the magnitude of any price change is likely 
significantly lower) than U.S. government securities with longer 
original and/or remaining maturities.\269\
---------------------------------------------------------------------------

    \268\ See supra footnote 263.
    \269\ See ISDA, Initial Margin Non-Cleared Margin Rules/Eligible 
Collateral Comparison by Jurisdiction (Jan. 5, 2023), available at 
https://www.isda.org/a/EqxgE/Eligible-Collateral-Comparison-010523.pdf (haircuts on U.S. debt securities with under 1 year 
residual maturity are substantially less than haircuts on U.S. debt 
securities with longer maturities).
---------------------------------------------------------------------------

    We decline, however, to expand the permissible deduction beyond 
cash and cash equivalents and U.S. Treasury securities with remaining 
maturities of one year or less. We are concerned that this approach 
could result in funds deducting investments from the names rule 
calculation that could introduce unexpected investment exposure or risk 
to the portfolio. For instance, if a fund with a name that suggests a 
focus in bonds with very short-term maturities were to use derivatives 
as part of its strategy, and held corporate bonds with longer 
maturities than its name suggests, deducting those bonds from the names 
rule calculation would result in deducting instruments that may be 
riskier than the assets in which the fund's name suggests a focus. The 
same consideration applies for Treasury securities with relatively long 
original and/or remaining maturities, as these securities similarly can 
introduce risk to a portfolio, in particular when interest rates rise. 
The deduction of these types of assets could result in the fund's 
investments providing investment exposure that is inconsistent with the 
fund's name, but is not reflected in names rule compliance assessments, 
which could mislead investors. The breadth of funds that could be 
subject to the 80% investment policy requirement makes it challenging 
to draw clear and consistent lines about what types of collateral--
other than cash and cash equivalents and U.S. Treasury securities with 
remaining maturities of one year or less--would not result in 
potentially misleading names if deducted from the names rule 
calculation.
Deduction of Closed-Out Derivatives Positions
    In a change from the proposal, the final amendments provide that a 
fund is permitted to exclude any closed-out derivatives positions when 
calculating assets for purposes of determining compliance with its 80% 
investment policy, if those positions result in no credit or market 
exposure to the fund.\270\ The proposed amendments did not address 
closed-out derivatives positions directly. However, the 2022 Proposal 
included a request for comment asking whether it is sufficiently clear 
that funds would eliminate from the names rule 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 instead whether the rule should address these positions.\271\
---------------------------------------------------------------------------

    \270\ Final rule 35d-1(g).
    \271\ See Proposing Release, supra footnote 2, at Request for 
Comment #33.
---------------------------------------------------------------------------

    Several commenters discussed this request for comment and stated 
that the Commission should exclude closed-out derivatives positions 
from the names rule calculation, but should not limit the exclusion of 
closed-out positions to those with the same counterparty.\272\ These 
commenters contrasted their suggested treatment with the treatment of 
closed-out positions in rule 18f-4 under the Act.\273\ Commenters 
recognized that rule 18f-4 does not permit funds to exclude offsetting 
positions across different counterparties in calculating derivatives 
exposure for purposes of determining whether a fund qualifies as a 
limited derivatives user.\274\ Commenters argued that the concerns 
underlying the approach in rule 18f-4, however, do not apply for 
purposes of the names rule, which is focused ``primarily on addressing 
the alignment between the investment exposures suggested by a fund's 
name and those resulting from the fund's investments and preventing the 
use of misleading fund names.'' \275\ One commenter argued that 
limiting excluded closed-out derivatives positions to those with the 
same counterparty would lead to economic inefficiencies and could be 
detrimental to a fund's returns.\276\
---------------------------------------------------------------------------

    \272\ See Dechert Comment Letter; ICI Comment Letter; T. Rowe 
Comment Letter; see also SIFMA AMG Comment Letter.
    \273\ See rule 18f-4(a).
    \274\ See Derivatives Adopting Release, supra footnote 214, at 
section II.E.
    \275\ Dechert Comment Letter; see also supra footnote 270.
    \276\ Dechert Comment Letter (suggesting that under the proposed 
approach, ``a fund might be compelled to transact with the 
counterparty with which it entered in the original derivatives 
transaction on less favorable terms, including pricing, or which 
poses more credit risk to the fund, than a different counterparty 
with which it could enter into an offsetting position at the time it 
needs to eliminate its exposure under the first transaction'').
---------------------------------------------------------------------------

    The final amendments permit funds to exclude closed-out derivatives 
positions from the names rule calculation if those positions result in 
no market exposure to the fund because these closed-out positions will 
not affect the fund's risks or returns. We agree that the concerns 
underlying rule 18f-4's provision on closed-out derivatives positions 
are not the same concerns underlying the names rule. Rule 18f-4 does 
not permit a fund to offset derivatives transactions with different 
counterparties for purposes of determining whether a fund qualifies as 
a limited derivatives user under that rule because netting these 
derivatives transactions could result in a fund having a large volume 
of open derivatives positions subject to their own margin and other 
requirements with various counterparties. This, in turn, could involve 
a scale of derivatives positions and related operational and 
counterparty risks that the Commission has stated it believes funds 
should manage as part of a derivatives risk management program. The 
goals of the names rule, on the other hand, address whether the 
exposures that a fund's portfolio creates align with the focus that the 
fund's name suggests. Reflecting these exposures for purposes of 
calculating names rule compliance does not depend on requiring offset 
positions to have the same counterparties. The final amendments, 
therefore, do not require that closed-out positions to be closed out 
with the same counterparty in order for a fund to exclude them from the 
calculation of its assets.
Derivatives Instruments Included in the 80% Basket
    The final amendments, substantially as proposed, 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 investment focus

[[Page 70462]]

suggested by the fund's name.\277\ This approach recognizes 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 and credit spread risk). 
Those instruments may have very high notional amounts, and 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.\278\
---------------------------------------------------------------------------

    \277\ Rule 35d-1(b)(2).
    \278\ See Proposing Release, supra footnote 2, at paragraphs 
following paragraph accompanying n.86. For example, if ABC Bond Fund 
invested $100 in bonds, $100 in interest rate swaps, and held no 
other assets, the fund would not satisfy its 80% investment policy 
if the interest rate swaps were not included in the fund's 80% 
basket ($100 in bonds/$100 in bonds + $100 in swaps = 50%).
---------------------------------------------------------------------------

    Commenters expressed support for the proposed approach, as it 
recognizes that funds often use derivatives instruments to provide 
complementary investment exposure to the investments suggested by a 
fund's name, including exposure to the market risk factors associated 
with such investments.\279\ Some commenters requested that the 
Commission acknowledge that funds may consider all derivatives that 
provide exposure to market risk factors associated with investments 
suggested by a fund name when testing names rule compliance, not just 
those enumerated risk factors discussed in the Proposing Release.\280\ 
Another commenter requested that the Commission expand the types of 
derivatives hedging instruments that may be included in a fund's 80% 
investment policy by allowing derivatives transactions that hedge the 
risks associated with one or more securities held by a fund, 
notwithstanding whether they are intended to hedge market risk factors 
associated with the investments suggested by the fund's name.\281\ This 
commenter provided as an example funds that invest in mortgage pass-
through securities, which commonly use U.S. Treasury futures and 
options to hedge against the impact of mortgage prepayments on the 
fund's duration (stating that using derivatives to manage duration in 
this manner may not align with the investments suggested in a fund's 
name or provide investment exposure to a market risk factor associated 
with an investment suggested by a fund's name).
---------------------------------------------------------------------------

    \279\ See SIFMA AMG Comment Letter; Dechert Comment Letter; 
Fidelity Comment Letter; ICI Comment Letter.
    \280\ See ICI Comment Letter; see also SIFMA AMG Comment Letter; 
Dechert Comment Letter; see also Proposing Release, supra footnote 
2, at section II.A.3 (discussing funds' use of derivatives 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).
    \281\ Fidelity Comment Letter.
---------------------------------------------------------------------------

    After considering comments, the final amendments do not expand the 
derivatives that may be included in a fund's 80% basket beyond the 
proposed approach. Under the proposed approach, 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 (in the case of, for example, interest rate 
derivatives) 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. On the other hand, 
derivatives used to manage the risks of the fund's portfolio as a whole 
can involve more complex hedging activities than transactions that 
provide investment exposure to one or more of the market risk factors 
associated with investments suggested by the fund's name.\282\ This, in 
turn, could create exposures that could be inconsistent with investors' 
reasonable expectations of the fund's investment activity.\283\
---------------------------------------------------------------------------

    \282\ See Derivatives Adopting Release, supra footnote 194, at 
n.530 and accompanying text.
    \283\ Including derivatives in the 80% basket to the extent that 
they negate the primary market risk factor associated with the 
assets in which the fund's name suggests an investment focus 
similarly could result in a fund's name being materially deceptive 
and misleading, notwithstanding the fund's adoption of an 80% 
investment policy and compliance with the requirements of the names 
rule. See supra footnote 262. For example, investors may reasonably 
expect the investments in which the ``XYZ Corporate Bond Fund'' 
focuses to reflect exposure to certain risks, such as credit risk. 
If this fund were to purchase credit default swaps or any other 
derivatives instruments that resulted in the elimination of all 
credit risk in its portfolio for an extended period of time, and 
were to include these derivatives in the fund's 80% basket, the 
fund's name could be materially deceptive and misleading because the 
fund would have eliminated the primary market risk factor associated 
with the assets in which the fund's name suggests a focus.
---------------------------------------------------------------------------

    We acknowledge that there may be transactions other than the ones 
that the Commission specifically addressed in the Proposing Release 
that provide investment exposure to one or more of the market risk 
factors associated with investments suggested by the fund's name, and 
the examples the Commission provided are not intended to be limiting. 
To help determine whether a derivatives instrument provides investment 
exposure to one or more of the market risk factors associated with a 
fund's name assets, the fund generally should consider whether the 
derivative provides investment exposure to any explicit input that the 
fund uses to value its name assets, where a change in that input would 
change the value of the security.\284\ For example, prepayment is an 
explicit risk factor in the price of a mortgage security, and 
therefore, in contrast to the concern that a commenter expressed, it 
would generally be appropriate for a fund whose name indicates a focus 
in mortgage securities to include derivatives in its 80% basket that 
manage the prepayment risk of these securities.
---------------------------------------------------------------------------

    \284\ See Good Faith Determinations of Fair Value, Investment 
Company Act Release No. 34128 (Dec. 3, 2020) [86 FR 748 (Jan. 6, 
2021)] (for a general discussion of valuation practices with respect 
to the fair value of a registered investment company or business 
development company).
---------------------------------------------------------------------------

Treatment of Short Positions
    Under the final amendments and as proposed, if a fund were to use 
derivatives instruments to obtain exposure to short positions in one or 
more reference assets, the fund would have to use these derivatives 
instruments' notional amounts for purposes of determining compliance 
with its 80% investment policy. That is, these investments 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. The final 
amendments, in a change from the proposal, also specify that a fund 
must value each physical short position using the value of the asset 
sold short.\285\ For example, if a fund sold short one share of a 
security for $100, the market value of the position would be $0 at that 
time because the fund has $100 in short sale proceeds but also a 
liability in the form of the obligation to return a share worth $100. 
If the fund had obtained the same short exposure via a swap, the 
notional amount would be $100. Valuing the physical short position at 
$100 for purposes of the names rule--the value of the asset sold 
short--provides comparable values for names rule purposes for the swap 
and physical short sale in this example.
---------------------------------------------------------------------------

    \285\ Final rule 35d-1(g).
---------------------------------------------------------------------------

    The 2022 Proposal included a request for comment asking about 
funds' current practices with respect to including short positions in 
their 80% baskets, and also whether the Commission should address the 
valuation of physical short sales for purposes of assessing names

[[Page 70463]]

rule compliance. Commenters who discussed these points advocated for 
the Commission explicitly to permit funds to include short positions in 
derivatives and physical short sales in their 80% baskets and to 
address the valuation of physical short sales.\286\ They stated that 
the Commission should adopt an approach that permits, but does not 
require, funds to include in their 80% baskets short positions in 
derivatives and physical short sales, where each of these provides 
short exposure to the investments suggested by the fund's name or to 
the market risk factors associated with those investments in their 80% 
baskets, regardless of whether the fund's name specifically suggests 
the use of short sales or short positions. Commenters stated that many 
funds currently take this approach when assessing names rule 
compliance.\287\ One commenter stated that funds use both long and 
short positions to obtain exposures suggested by a fund's name, and 
this commenter argued that the suggested approach would be consistent 
with the proposed approach of including derivatives instruments that 
provide investment exposure to a market risk factor associated with a 
fund's name.\288\ In addressing the valuation of physical short 
positions, commenters suggested that the Commission should permit funds 
to use the absolute notional amount or the absolute market value of the 
asset sold short under a physical short sale for purposes of valuing 
such transaction for names rule compliance.\289\ In addition, they also 
suggested a fund should be permitted to look through to the components 
of its open short sale positions to offset their investment exposure 
(i.e., the fund should be able to close out all or part of a short sale 
position) for purposes of compliance with its 80% investment policy.
---------------------------------------------------------------------------

    \286\ See ICI Comment Letter; SIFMA AMG Comment Letter; Dechert 
Comment Letter.
    \287\ ICI Comment Letter; Dechert Comment Letter.
    \288\ ICI Comment Letter.
    \289\ ICI Comment Letter; Dechert Comment Letter; see also SIFMA 
AMG Comment Letter (stating that, with respect to short positions, 
whether accomplished through the use of derivatives instruments or 
the physical short sale of a security or other asset, the Commission 
should require that funds use the notional value of such positions 
for purposes of determining names rule compliance).
---------------------------------------------------------------------------

    We agree that short positions, under certain circumstances, may 
qualify as investments that a fund may include in its 80% basket. For 
example, if a fund's name indicates that its investment focus includes 
short exposure to a particular type of investment, this inclusion would 
be appropriate. In other circumstances, however, the inclusion of short 
positions would not be appropriate where this would result in the 
fund's economic exposure departing significantly from investors' 
reasonable expectations based on the fund's name. For example, if a 
fund were named the ``XYZ Equity Fund,'' and half of the value of its 
80% basket were invested in long equity positions, and the other half 
were invested in short equity positions, the portfolio's net exposure 
would likely not be consistent with investors' expectations based on 
the fund's name.
    We agree that, to better reflect the exposures that physical short 
sales provide, the rule should address the valuation of physical short 
sales and use an approach where their valuation is consistent with the 
valuation of short positions obtained through a fund's use of 
derivatives. We are therefore adopting a change to the proposed 
definition of ``assets'' in the names rule, which specifies that a fund 
must value each physical short position using the value of the asset 
sold short.\290\ A fund would be able to reduce the value of its assets 
by excluding any cash and cash equivalents, and U.S. Treasury 
securities with remaining maturities of one year or less, up to the 
notional amount of the value of asset(s) sold short, just as a fund 
could exclude any cash and cash equivalents and such U.S. Treasury 
securities up to the notional amount of the fund's derivatives 
instruments, as discussed above.
---------------------------------------------------------------------------

    \290\ This approach is consistent with the valuation of physical 
short positions in rule 18f-4 under the Act. See definition of 
``derivatives exposure'' in rule 18f-4(a).
---------------------------------------------------------------------------

4. Unlisted Registered Closed-End Funds and BDCs
    The final rule will prohibit 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, from changing that 
policy unless authorized by a vote of the majority of the outstanding 
voting securities of the fund.\291\ However, in a modification from the 
proposal, under the final amendments such funds will be permitted to 
make changes to their 80% investment policies without this vote if the 
fund conducts a tender or repurchase offer in advance of the change, 
the fund provides at least 60 days' prior notice of any change in the 
policy in advance of that offer, that offer is not oversubscribed, and 
the fund purchases shares at their net asset value.\292\
---------------------------------------------------------------------------

    \291\ Final rule 35d-1(f). This approach has the same practical 
effect as the proposed approach, which would have required these 
funds to adopt their 80% investment policies as fundamental policies 
(policies that funds cannot change unless authorized by a vote of a 
majority of its outstanding voting securities). See proposed rule 
35d-1(a)(2)(ii); see also 15 U.S.C. 80a-13(a)(3).
    \292\ Final rule 35d-1(f)(4) (specifying that, in the event of a 
tender offer, the fund purchases shares at their net asset value). 
This provision in final rule 35d-1 addresses tender offers but does 
not specifically address the price at which repurchase offers must 
be conducted for a fund to be eligible for this exception because 
the Investment Company Act rules already address the price (net 
asset value) at which closed-end funds and business development 
companies conducting periodic repurchase offers are required to 
repurchase shares. See 17 CFR 270.23c-3 (``rule 23c-3''),
---------------------------------------------------------------------------

    Some commenters voiced general support for this element of the 
proposal, stating that it was an improvement from the current rule, 
whereby investors in these products generally have limited or no ready 
recourse if a fund were to change its investment policy, and that it 
would empower investors.\293\ Conversely, other commenters raised 
concerns regarding the proposed requirement, arguing that it would 
impede the ability of funds to change their investment strategies 
without conducting costly special shareholder votes.\294\ This, 
according to commenters, could place these funds at a competitive 
disadvantage relative to other funds.\295\ Furthermore, some commenters 
expressed that the requirement was unnecessary because it did not seem 
to address any identified harm to investors in these funds, stating 
that many closed-end funds and BDCs currently offer tender offer and 
repurchase programs as periodic sources of liquidity, and that 
investors in these products are already on notice through existing 
disclosures of any potential liquidity constraints.\296\ Some 
commenters also suggested that a blanket requirement on BDCs to adopt a 
fundamental policy was contrary to the congressional intent behind 
exempting BDCs from Investment Company Act provisions that otherwise 
require funds to disclose and have a shareholder vote on changes in 
fundamental policies.\297\ Some commenters suggested alternative 
approaches to address these concerns but also achieve the goals of the 
proposed amendments. For example, commenters suggested that the 
Commission require a vote only when all shareholders are not given an 
opportunity to sell or tender their shares back to the issuer after 
notice of a

[[Page 70464]]

change in the 80% investment policy, or require a shareholder vote only 
in the event that the next tender offer or repurchase program after 
such notice is oversubscribed.\298\
---------------------------------------------------------------------------

    \293\ Better Markets Comment Letter; NASAA Comment Letter.
    \294\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
SIFMA AMG Comment Letter; Comment Letter of Simpson Thacher and 
Bartlett, LLP (Aug. 30, 2022) (``Simpson Thacher Comment Letter'').
    \295\ SIFMA AMG Comment Letter; Invesco Comment Letter.
    \296\ SIFMA AMG Comment Letter; Simpson Thacher Comment Letter.
    \297\ Stradley Comment Letter; Dechert Comment Letter.
    \298\ See Dechert Comment Letter; Simpson Thacher Comment 
Letter.
---------------------------------------------------------------------------

    As an alternative to the requirement to make their 80% policies 
fundamental policies, the current names rule permits funds other than 
tax-exempt funds to provide shareholders with 60 days' prior notice of 
such changes. The Commission permitted funds to provide shareholders 
advance notice, in lieu of adopting a fundamental policy, because the 
advance notice would provide shareholders with sufficient time to 
decide whether to redeem their shares in the event that a fund decides 
to pursue a strategy involving a different investment focus.\299\ 
Unlike other funds subject to the rule, however, unlisted registered 
closed-end funds and BDCs do not issue redeemable shares or list their 
shares on a national securities exchange. As a result, shareholders in 
the affected funds generally have no ready recourse, such as the 
ability to redeem shares, if a fund were to change its investment 
policy and the investment focus that the fund's name indicates.\300\ In 
light of these investors' limited options to sell their shares readily, 
the proposed fundamental policy requirement for unlisted registered 
closed-end funds and BDCs aimed to ensure that investors in these funds 
would be able to vote on any changes to a fund's investment policy.
---------------------------------------------------------------------------

    \299\ 2001 Names Rule Adopting Release, supra footnote 8, at 
n.19 and accompanying text.
    \300\ See also Proposing Release, supra footnote 2, at n.99. For 
example, many of the tender offer and repurchase programs currently 
offered by unlisted registered closed-end funds and BDCs are 
periodic and limited, and are therefore unlikely to provide recourse 
where a large percentage of a fund's investors disapprove of a 
change.
---------------------------------------------------------------------------

    After considering comments, we do not agree that extending the 
notice period, as some commenters suggested, is a sufficient substitute 
to respond to the concerns that the proposed approach was designed to 
address.\301\ We recognize, however, that there could be alternative 
approaches to the proposed requirement that could address the 
Commission's concerns while decreasing the operational burdens that 
would accompany a requirement to conduct a shareholder vote for every 
instance in which a fund changes its 80% investment policy. We also 
recognize that where a fund does in fact give its investors the 
opportunity to sell their shares in connection with a fund's change of 
its 80% investment policy, the fund alleviates the concern that 
investors will be forced to hold investments that they wish to sell.
---------------------------------------------------------------------------

    \301\ See, e.g., Invesco Comment Letter; ICI Comment Letter. But 
see NASAA Comment Letter (stating that a longer notice period would 
be insufficient as it would not provide investors a voice in these 
decisions).
---------------------------------------------------------------------------

    The final amendments include a limited exception to the shareholder 
approval requirement for funds that conduct qualifying tender or 
repurchase offers in advance of a proposed change in policy.\302\ This 
exception is intended to function in a similar manner to the rule's 
general notice alternative by giving investors in unlisted registered 
closed-end funds and BDCs that use this alternative the opportunity to 
exit the fund prior to a fund's change in investment policy. This 
exception will provide funds with increased optionality in effecting 
changes to their investment policies compared to the proposed approach, 
and this approach is designed to mitigate commenter concerns that the 
proposed fundamental policy requirement would have put unlisted 
registered closed-end funds and BDCs at a competitive disadvantage 
against other types of funds.
---------------------------------------------------------------------------

    \302\ The final amendments do not frame the requirement to 
obtain shareholder approval under certain circumstances as the 
requirement to adopt a ``fundamental policy.'' See supra footnote 
297 and accompanying text (discussing commenters' concerns about the 
proposed approach that would require BDCs to adopt fundamental 
policies). While the final amendments do retain the requirement to 
obtain a shareholder vote under certain circumstances, which the 
proposed approach effectively would have required, we believe that 
this is an appropriate use of the Commission's authority under 
section 35(d), and in light of the fact that the requirement to seek 
a shareholder vote under the final amendments is triggered only 
where a fund chooses a name that conveys a particular investment 
focus. We also believe this is appropriate in the context of unique 
investor protection concerns for investors in unlisted funds 
including BDCs resulting from the general lack of readily available 
liquidity.
---------------------------------------------------------------------------

    To be eligible for this exception, a fund must conduct a tender or 
repurchase offer in accordance with all applicable Commission rules 
prior to any change in policy and provide shareholders with at least 60 
days' prior notice of any change in such policy in advance of the 
offer. In the case of tender offers, a fund must purchase shares at NAV 
in order to be eligible for the exception. The exception applies only 
insofar as the tender or repurchase offer is not oversubscribed.\303\ 
If a tender or repurchase offer is oversubscribed, suggesting that the 
shareholders are not supportive of the change, a fund therefore would 
then be required to conduct a shareholder vote prior to making the 
change to its investment policy that the notice describes, in 
accordance with the final rule. This change also gives a fund 
discretion to determine the number of shares it is willing to 
repurchase from shareholders after the notice of the change, in 
accordance with all applicable Commission rules. This will permit fund 
managers to weigh the risk of oversubscription, and the resulting need 
to have a special shareholder meeting to vote on the change, against 
the amount of liquidity they are willing to provide to shareholders.
---------------------------------------------------------------------------

    \303\ ``Oversubscribed'' in this case means shareholders have 
tendered or requested repurchase of a greater number of shares than 
the fund has offered to purchase (or ultimately purchases) in 
accordance with applicable Commission rules including rule 13e-4 
under the Exchange Act and rule 23c-3 under the Investment Company 
Act. See final rule 35d-1(g).
---------------------------------------------------------------------------

5. Effect of Compliance With an 80% Investment Policy
    We are adopting, substantially as proposed, a new provision in the 
names rule providing that a fund's name may be materially deceptive or 
misleading under section 35(d) of the Investment Company Act even if 
the fund adopts and implements an 80% investment policy and otherwise 
complies with the rule's requirement to adopt and implement the 
policy.\304\ The Commission has previously stated that the names rule's 
80% investment policy requirement is not intended to create a safe 
harbor from liability under section 35(d) for materially deceptive or 
misleading fund names, and we are codifying 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.\305\
---------------------------------------------------------------------------

    \304\ Final rule 35d-1(c). In addition, 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.
    \305\ See Proposing Release, supra footnote 2, at n.101.
---------------------------------------------------------------------------

    Many commenters supported this aspect of the proposal.\306\ Some 
commenters asserted that the codification is particularly important for 
fund names that articulate an ESG focus.\307\ One commenter urged the 
Commission to require funds that use ESG terms in their name to state 
clearly and prominently what percent of the fund is invested in 
securities that do not

[[Page 70465]]

comply with the investment criteria for the 80% basket.\308\ Other 
commenters suggested that fund names that imply a prohibition or 
absence of investments or issuers with certain characteristics should 
have an investment policy that prohibits these investments.\309\
---------------------------------------------------------------------------

    \306\ See, e.g., Better Markets Comment Letter; CFA Institute 
Comment Letter; Sierra Club Comment Letter; Fidelity Comment Letter; 
U.S. SIF Comment Letter.
    \307\ See, e.g., PRI Comment Letter; Comment Letter of As You 
Sow (Aug. 15, 2022) (``As You Sow Comment Letter''); Comment Letter 
of Blue Haven Initiative (Aug. 16, 2022) (``Blue Haven Comment 
Letter''); Comment Letter of Building a Sustainable Investment 
Community Comment Letter (Aug. 15, 2022) (``Building a Sustainable 
Investment Community Comment Letter'').
    \308\ Comment Letter of Corey Shapiro (Aug. 16, 2022) (``Shapiro 
Comment Letter'').
    \309\ See, e.g., CFA Institute Comment Letter; As You Sow 
Comment Letter; Blue Haven Comment Letter; Bonwood Comment Letter; 
Comment Letter of Change Finance (Aug. 15, 2022) (``Change Finance 
Comment Letter'').
---------------------------------------------------------------------------

    Several commenters, however, suggested that the Commission should 
provide more clarity or define precisely what types of investments 
would be considered inconsistent with the fund's name to the degree 
that the name would be materially deceptive or misleading despite the 
fund's compliance with an 80% investment policy.\310\ In response to an 
example in the 2022 Proposal that a fund that complies with the names 
rule but makes a substantial investment that is ``antithetical'' to the 
fund's investment focus would have a materially deceptive or misleading 
name, commenters expressed that the proposed provision poses 
significant risks of second-guessing because evaluating whether an 
investment is antithetical to a fund's name is highly subjective.\311\ 
Commenters also suggested that the uncertainty related to the provision 
would decrease portfolio management discretion and flexibility in 
managing the fund's portfolio, as this uncertainty would give rise to 
concern about violating the rule.\312\ A few commenters asserted that 
absent a claim in a fund's name that the fund will not invest in a 
particular type of investment, a fund should have flexibility as long 
as it discloses how it will invest its 20% basket.\313\
---------------------------------------------------------------------------

    \310\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Dechert Comment Letter; Capital Group Comment Letter; PRI Comment 
Letter.
    \311\ See, e.g., J.P. Morgan Asset Management Comment Letter; 
Federated Hermes Comment Letter; Stradley Comment Letter; see also 
Fidelity Comment Letter (expressing particular concern with the 
statements provided in the 2022 Proposal, asserting that ``the 
current regulatory landscape, which requires certain specific 
disclosures under Form N-1A and provides for further registration 
statement liability through other securities laws, appropriately 
addresses any potential liability for material omissions or 
misstatements in the registration statement'').
    \312\ See, e.g., MFS Comment Letter; Stradley Comment Letter; 
Capital Group Comment Letter; Fidelity Comment Letter (stating that 
``the 20% portion of the fund's portfolio that is not subject to the 
Names Rule is a diversification tool in managing fund assets'').
    \313\ See SIFMA AMG Comment Letter; MFS Comment Letter.
---------------------------------------------------------------------------

    After considering the comments on the proposed provision, we 
continue to believe that a fund's name could be materially deceptive or 
misleading for purposes of section 35(d) even if that fund has complied 
with the names rule's 80% investment policy requirement. For example, 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 a 
substantial portion of the fund's risks or returns is materially 
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 ``green energy and fossil fuel-
free'' fund making a substantial investment in an issuer with fossil 
fuel reserves, or a ``conservative income 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 lower-yielding bonds).\314\ 
To the extent a fund uses its 20% basket to invest in assets that are 
materially inconsistent with the investment focus or risk profile 
reflected by the fund's name, the fund's name would be materially 
deceptive or misleading under section 35(d). While we appreciate 
commenters' expressed concerns, the provision is designed to codify the 
existing relationship between the names rule and section 35(d) and not 
to create new requirements or standards with respect to the selection 
of investments in a fund's 20% basket that are not now present. For 
these reasons, this provision will not require certain disclosures 
related to the percent of a fund's assets invested in securities that 
do not comply with the investment criteria for the 80% basket, nor will 
this provision include an explicit prohibition on investments that are 
inconsistent with the activity that a fund's name communicates, as 
suggested by a few commenters.
---------------------------------------------------------------------------

    \314\ See Proposing Release, supra footnote 2. As another 
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. Id. 
Further, as discussed above, a fund of funds or other acquiring fund 
can reasonably rely upon the entire value of its investment in an 
appropriate acquired fund as a general matter. See supra paragraph 
following paragraph accompanying footnotes 139-140. However, if an 
acquiring fund was aware that an underlying fund has changed its 
investments such that it is not following the acquiring fund's 
investment focus, that acquiring fund's name may be materially 
misleading or deceptive if it continues to include the value of the 
investment in the acquired fund in its 80% basket.
---------------------------------------------------------------------------

    Relatedly, the 2022 Proposal discussed situations where a fund may 
be invested 80% or more in a market index referenced in the fund's 
name, but that underlying index may have components that are 
contradictory to the index's name.\315\ 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 
in that the index's name would suggest an investment focus that the 
fund does not follow. A few commenters agreed that this example could 
lead to materially deceptive or misleading fund names, asserting that 
terms used in the name of index funds can communicate an investment 
focus to investors, therefore such funds should not be allowed to 
circumvent the technical holding requirements of the names rule.\316\ 
Other commenters, however, expressed that index funds should not be 
required to determine compliance with an 80% investment policy 
regarding investments that the name of an index indicates, but rather 
the fund should comply with the rule by investing 80% of its assets in 
the components of the underlying index.\317\ Some of these commenters 
expressed that fund managers may have visibility into index 
methodologies, but they do not determine the particular investments 
that an index includes, making it challenging to deviate from an index 
if their principal objective is to track its returns.\318\ In addition, 
some commenters suggested that applying the rule to index funds in the 
manner the Commission's example described could increase tracking error 
between index funds and indices, while increasing costs and the 
likelihood of potential confusion for investors if funds have to 
deviate from the methodologies of the underlying index.\319\
---------------------------------------------------------------------------

    \315\ See Proposing Release, supra footnote 2, at n.102 and 
accompanying discussion.
    \316\ PIABA Comment Letter; Dogwhistle Comment Letter.
    \317\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Dechert Comment Letter; Fidelity Comment Letter; Invesco Comment 
Letter.
    \318\ See SIFMA AMG Comment Letter; BlackRock Comment Letter; 
Dechert Comment Letter (stating that ``[w]hile fund sponsors conduct 
initial and ongoing periodic due diligence on index providers, index 
funds rely upon the index providers, on a daily basis, to construct 
the index. Funds make clear disclosures concerning their use of 
indices, and we believe investors have established a clear 
understanding of how index funds operate in the decades since their 
introduction'').
    \319\ See Comment Letter of State Street Global Advisors (Aug. 
16, 2022) (``State Street Comment Letter''); ICI Comment Letter; 
WisdomTree Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that a fund that is invested 80% or more in 
an index included in the fund's name can be materially deceptive and 
misleading if a meaningful nexus does not exist

[[Page 70466]]

between the components of the underlying index and the investment focus 
suggested by the index's name.\320\ We acknowledge that many investors 
that invest in index funds are seeking exposure to a particular index 
and that funds will have names that reflect the index that they track. 
However, terms used in fund names, including index funds, can 
communicate an investment focus that creates a reasonable expectation 
among investors that the fund will hold investments that support that 
focus. While we recognize the practical constraints and potential for 
investor confusion raised by commenters, we believe permitting index 
funds not to consider the relationship between the terms in their name 
and the investment focus such terms convey undermines the investment 
protection concerns that underlie the names rule and section 35(d). If 
a fund's name indicates an investment focus, such as investments in a 
specified industry, investors reasonably will expect that there is a 
meaningful nexus between fund's investments and the fund's investment 
focus--regardless of whether the fund executes its strategy by 
selecting companies in the specified industry or tracking an index that 
identifies such companies. As a result, consistent with rule 38a-1, 
index funds should generally adopt and implement written policies and 
procedures reasonably designed to ensure that indexes selected by a 
fund do not have materially misleading or deceptive names 
themselves.\321\ While index funds should generally implement written 
policies and procedures ensuring that they comply with the requirements 
of section 35(d), in response to commenters, we are confirming that the 
terms in a market index referenced in an index fund's name would not be 
subject to an 80% investment policy test that would be in addition to 
the fund's policy to invest at least 80% of its assets in the index's 
components required under the rule.
---------------------------------------------------------------------------

    \320\ See Proposing Release, supra footnote 2, at n.102 and 
accompanying discussion.
    \321\ See supra footnote 119.
---------------------------------------------------------------------------

B. Prospectus Disclosure Defining Terms Used in Fund Name

    We are adopting amendments to funds' registration forms--
specifically, Form N-1A, Form N-2, Form N-8B-2, and Form S-6--that each 
fund that is required to adopt and implement an 80% investment policy 
must 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.\322\ We are also 
adopting a requirement that funds must tag most of the new information 
that will be included under the final amendments, using a structured 
data language (specifically Inline eXtensible Business Reporting 
Language or ``Inline XBRL'').\323\ The final 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. We are adopting these 
amendments substantially as proposed.
---------------------------------------------------------------------------

    \322\ See instructions to Item 4(a)(1) and Item 9(b)(1) of Form 
N-1A; instruction to Item 8(2) of Form N-2; and instruction to Item 
11 of Form N-8B-2.
    \323\ See General Instruction C.3.(g) of Form N-1A; General 
Instruction I of Form N-2; General Instruction 2.(l) of Form N-8B-2; 
and General Instruction 5 of Form S-6. For purposes of the final 
disclosure requirements, ``terms'' 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 do not need to be defined.
---------------------------------------------------------------------------

    Commenters generally supported the proposed prospectus disclosure 
requirements.\324\ We did not receive any comments opposing this 
proposed requirement. In particular, the Commission received comments 
supporting the proposal's approach that allows funds the flexibility to 
use reasonable definitions when defining the terms in their names, as 
there may be more than one reasonable definition for a particular 
term.\325\ Commenters also supported requiring funds to disclose the 
specific, non-proprietary criteria used to select the investment terms 
used in the fund's name.\326\ Without this proposed disclosure, these 
commenters stated, funds are not required to convey the key information 
about the fund's holdings, risks, characteristics, or strategies 
associated with the fund's 80% investment policy.
---------------------------------------------------------------------------

    \324\ See, e.g., ICI Comment Letter; CFA Institute Comment 
Letter; SIFMA AMG Comment Letter; Public Citizen Comment Letter; 
Comment Letter of IRI (Aug. 16, 2022) (``IRI Comment Letter''); 
Fidelity Comment Letter; LTSE Comment Letter.
    \325\ See, e.g., ICI Comment letter; CFA Institute Comment 
Letter; SIFMA AMG Comment Letter.
    \326\ See, e.g., CFA Institute Comment Letter; SIFMA AMG Comment 
Letter.
---------------------------------------------------------------------------

    The final prospectus disclosure requirements will provide investors 
with important information to determine whether a particular investment 
meets an investor's needs and goals. These requirements are additive to 
current names rule and other disclosure requirements.\327\ Despite the 
protections afforded by the Commission's anti-fraud rules, the final 
prospectus disclosure requirements will help ensure that investors are 
given important information about how a fund manager understands how 
the terms used in the fund's name connect to the fund's 80% investment 
policy.\328\ These funds must disclose in their prospectuses the 
specific criteria used by the fund to select these investments. 
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.\329\
---------------------------------------------------------------------------

    \327\ However, the names rule does currently include this 
requirement for funds with names suggesting investment in particular 
countries or geographic regions. The final amendments replace this 
provision with a general requirement to define terms used in the 
fund's name whenever the fund's name suggest an investment focus 
requiring an 80% investment policy.
    \328\ See, e.g., Public Citizen Comment Letter.
    \329\ See supra section I.B (discussing growth in the breadth of 
fund investment strategies over the past two decades).
---------------------------------------------------------------------------

    We understand, based on staff experience with fund disclosure, that 
it is currently common practice for funds to include prospectus 
disclosure that describes the fund's 80% investment policy and that 
defines the terms in the fund's name.\330\ The amendments we are 
adopting codify certain best practices of some funds that currently 
provide disclosure defining terms used in a fund's name. The disclosure 
requirement, however, does not otherwise alter or address disclosure 
that funds currently provide, for example in response to prospectus

[[Page 70467]]

disclosure requirements regarding the fund's investment policies.
---------------------------------------------------------------------------

    \330\ When the Commission adopted the names rule in 2001, 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. See 2001 
Names Rule Adopting Release, supra footnote 8, at nn.15 and 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); Fidelity Comment 
Letter (stating that it is currently common practice for mutual 
funds to include prospectus disclosure that describes the fund's 80% 
policies and defines any terms that their names include in plain 
English, including funds whose names do not currently require such 
disclosures).
---------------------------------------------------------------------------

    In addition, we are modifying the proposed disclosure requirement 
for open-end funds registered on Form N-1A to provide that definitions 
of terms in the fund's name must be summarized in the summary section 
of the prospectus and disclosed in the statutory prospectus.\331\ We 
proposed to require funds to provide this disclosure solely in the 
summary section of the prospectus. The modifications in the final 
amendments reflect that the principal investment strategies disclosure 
in the summary section of the prospectus is intended to summarize 
disclosure that appears later in the statutory prospectus. 
Specifically, the Form N-1A requirement for principal investment 
strategies disclosure that appears in the summary prospectus (Item 4(a) 
of Form N-1A) provides that, based on the information given in response 
to the Form N-1A requirement for principal investment strategies 
disclosure that appears in the statutory prospectus (Item 9(b) of Form 
N-1A), a fund must summarize how it intends to achieve its investment 
objectives by identifying the fund's principal investment strategies.
---------------------------------------------------------------------------

    \331\ See Instruction to Item 4(a)(1) of Form N-1A; Instruction 
8 to Item 9(b)(1) of Form N-1A.
---------------------------------------------------------------------------

    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 under the final rule, however, may not be 
inconsistent with their plain English meaning or established industry 
use.\332\ As discussed above, what constitutes ``reasonable'' in 
context could vary depending on the fund name, but requires that 
definition have a meaningful nexus between the term used in the fund's 
name and the fund's investment focus.\333\ For instance, when the 
investment focus relates to an industry, we recognize that 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. As there could be multiple reasonable definitions of the same 
term that multiple funds use in their names, each fund required to 
adopt an 80% investment policy must disclose how it interprets these 
terms to help investors better distinguish among funds.\334\
---------------------------------------------------------------------------

    \332\ See final rule 35d-1(a)(2)(iii) and 35d-1(a)(3)(ii); see 
also Proposing Release, supra footnote 2, at text following n.112.
    \333\ See supra section II.A.1.c). 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.
    \334\ This disclosure, like other disclosure in funds' 
prospectuses, should avoid ``excessive detail, technical or legal 
terminology, and complex language.'' See General Instruction C.1.(c) 
to Form N-1A.
---------------------------------------------------------------------------

    As proposed, we are requiring that all funds subject to the new 
prospectus disclosure requirements tag information we are requiring 
funds to disclose on their registration forms in a structured, machine-
readable data language, specifically Inline XBRL.\335\ We received a 
comment supporting the proposed Inline XBRL tagging requirement, 
stating that the XBRL standard is well-suited to narrative disclosures 
and will enhance the ability of those interested in using the data to 
extract disclosures quickly and to compare disclosures across entities 
more easily.\336\ One commenter discussed that, as the Commission 
recognized in the Proposing Release, the proposed Inline XBRL tagging 
requirement would be new for UITs, as UITs are not currently subject to 
structured data tagging requirements.\337\ This commenter requested 
that the Commission except UITs from the Inline XBRL tagging 
requirement, as most UIT unitholders are not familiar with Inline XBRL 
and introducing this requirement to UITs would be costly.
---------------------------------------------------------------------------

    \335\ Many funds are already required to tag certain 
registration statement disclosure items using Inline XBRL. See 
Proposing Release, supra footnote 2, at n.115.
    \336\ See Comment Letter of XBRL US (Aug. 16, 2022) (``XBRL 
Comment Letter''); but see SIFMA AMG Comment Letter (stating that 
the costs associated with Inline XBRL tagging as proposed would be 
significant).
    \337\ See, e.g., Invesco Comment Letter.
---------------------------------------------------------------------------

    We are adopting the Inline XBRL tagging requirements substantially 
as proposed.\338\ These requirements 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.\339\ Many 
funds are already required to tag certain registration statement 
disclosure items using Inline XBRL. While UITs do not currently have 
experience with tagging in Inline XBRL, after considering comments 
received, we are adopting the proposed requirements because we 
anticipate that tagging names rule disclosure for all funds that are 
subject to this disclosure requirement will benefit investors, other 
market participants, and the Commission by making the tagged 
disclosures more readily available and easily accessible for 
aggregation, comparison, filtering, and other analysis.\340\ This 
requirement will 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 facilitates 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.
---------------------------------------------------------------------------

    \338\ While the proposal did not distinguish between names-
related information that open-end funds would disclose in their 
summary prospectuses versus their statutory prospectuses, the final 
amendments do make this distinction. See supra paragraph 
accompanying footnote 331 and accompanying text. Only the summary 
prospectus disclosure would be tagged in Inline XBRL format; 
however, the disclosure that open-end funds provide in their 
statutory prospectuses also would be reported on Form N-PORT, where 
it would be tagged in XML format. See infra section II.E.2.
    \339\ This 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, as well as 
references 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 adopting conforming 
amendments to rule 485 and rule 497 under the Securities Act. The 
final amendments incorporate technical changes to the proposed 
amendments, but the tagging requirements that the final amendments 
effectuate are designed to be the same as under the proposed 
amendments. 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.
    \340\ See infra section IV.D.2 at footnotes 566-568 and 
accompanying text (for a discussion of the costs for UITs to comply 
with the new Inline XBRL requirement).
---------------------------------------------------------------------------

C. Plain English/Established Industry Use Requirement

    For funds that are required to adopt an 80% investment policy, we 
are requiring 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.\341\ This requirement is designed to provide investors 
with a better understanding of the fund and its investment objectives

[[Page 70468]]

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.
---------------------------------------------------------------------------

    \341\ Final rule 35d-1(a)(2)(iii) and (3)(ii).
---------------------------------------------------------------------------

    We received many comments supporting the proposed requirement.\342\ 
Commenters expressed support for a requirement that would address 
reasonable, plain-English definitions for terms used in a fund's name 
as a means of providing additional clarity to fund shareholders.\343\
---------------------------------------------------------------------------

    \342\ See, e.g., J.P. Morgan Asset Management Comment Letter; 
Comment Letter of Delbert L. Coonce, Jr. (Aug. 15, 2022) (``Coonce 
Comment Letter''); Comment Letter of John Rosenmiller (Aug. 15, 
2022) (``Rosenmiller Comment Letter''); Building a Sustainable 
Investment Community Comment Letter; Comment Letter of Peter 
Vandermark (Aug. 15, 2022) (``Vandermark Comment Letter''); Comment 
Letter of Rodney Smith (Aug. 15, 2022) (``Smith Comment Letter''); 
Comment Letter of Jim Metzinger (Aug. 15, 2022) (``Metzinger Comment 
Letter''); Change Finance Comment Letter; Comment Letter of Steve 
Wardwood (Aug. 15, 2022) (``Wardwood Comment Letter''); Public 
Citizen Comment Letter; Comment Letter of Veris Wealth Partners 
(Aug. 15, 2022) (``Veris Comment Letter''); Feinberg Comment Letter.
    \343\ See, e.g., Fidelity Comment Letter (``We believe the 
requirement that the definition be reasonable and in plain English, 
along with the existing anti-fraud provisions under the securities 
law, will provide sufficient clarity to shareholders, without 
stifling innovation and opportunities for investment advisers to 
differentiate their investment strategies.''); CFA Institute Comment 
Letter.
---------------------------------------------------------------------------

    We received several comments requesting clarification on this 
requirement. One commenter asked how the Commission will determine 
whether a term is consistent with its ``plain English'' or 
``established industry use'' meaning.\344\ Another commenter requested 
clarification about circumstances where the plain English or 
established industry meaning of a word could be inaccurate or 
misleading.\345\ For clarity on this point, commenters suggested that 
the final rule be modified to allow funds to use only any 
``reasonable'' definition of the terms of its name.\346\
---------------------------------------------------------------------------

    \344\ See, e.g., Calamos Comment Letter.
    \345\ See, e.g., Public Citizen Comment Letter.
    \346\ See, e.g., Seward & Kissel Comment Letter and WisdomTree 
Comment Letter.
---------------------------------------------------------------------------

    One commenter stated that some plain English meanings may lack 
clarity in an investment context and that funds should be required to 
include a description of how terms relate to the fund's 80% investment 
focus.\347\ Another commenter similarly stated that certain terms like 
``sustainable'' or ``socially responsible'' are evolving, and investors 
need to understand how funds define those terms.\348\ As one commenter 
stated, certain terms have meanings that changed over time, and certain 
terms, particularly in the ESG context, may develop new meanings as 
markets and the investment management industry continue to evolve.\349\
---------------------------------------------------------------------------

    \347\ See CFA Institute Comment Letter.
    \348\ See Public Citizen Comment Letter.
    \349\ See J.P. Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    Some commenters conveyed concern about the proposed plain English 
and established industry use requirement. One commenter stated that the 
plain English standard already applies to prospectus disclosure, and it 
should therefore not be separately required in the names rule.\350\ One 
commenter suggested that there may still be deviations in how funds 
define terms even with this requirement. As a result, investors will 
still need to read the prospectus for clarity about the terms used in 
the fund's name, mitigating any positive impact of the 
requirement.\351\ Commenters expressed specific concerns about the 
proposed ``established industry use'' standard. Commenters stated that 
this standard is nebulous, as industries and terminology can change 
over time, thereby altering the understood meaning of the term under 
established industry use.\352\ Additionally, the Commission received a 
comment expressing concern that the relationship between the ``plain 
English'' standard and the ``established industry use'' standard is 
potentially contradictory and opaque.\353\ One commenter cautioned that 
the established industry use standard could contribute to greenwashing 
for terms that have been widely used in inconsistent ways because the 
standard could permit funds to use terms consistent with industry 
practice when the usage of the term for the particular fund is 
misleading.\354\ For example, this commenter stated that the term 
``impact'' is used in many fund names with a range of meanings within 
the fund industry, and therefore funds should disclose the definitions 
of the terms used in the name as well as the criteria used to select 
the investments the terms describe.
---------------------------------------------------------------------------

    \350\ See Seward & Kissel Comment Letter.
    \351\ See, e.g., Calamos Comment Letter.
    \352\ See, e.g., Fidelity Comment Letter; Seward & Kissel 
Comment Letter.
    \353\ See Seward & Kissel Comment Letter.
    \354\ See Consumer Federation of America Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we are adopting this requirement as 
proposed. We recognize that certain terms may be defined in multiple 
reasonable ways. Accordingly, the final amendments are intended to 
support these differences while providing that the use of terms that 
are inconsistent with their terms' plain English meaning or established 
industry use would mislead investors. Whether a fund is using a term 
consistent with its plain English meaning or established industry use 
could be derived from a variety of sources, including, but not limited 
to, the dictionary, prior public disclosures, industry codes or 
classifications, and/or a colloquial understanding of the term. 
Regardless of this requirement, funds that use terms in a materially 
misleading manner, for example, by using a term that has a plain 
English meaning or established industry use but then defining that term 
in disclosure in a materially different way, would generally violate 
section 35(d) of the Act and potentially other provisions of the 
Federal securities laws.
    Under the final amendments, funds are required to include in their 
prospectus disclosure the definitions of the terms used in the fund's 
name, and as discussed above funds have flexibility in defining the 
terms under the policy that a fund adopts under the names rule.\355\ 
The plain English/established industry use requirement is designed to 
prevent materially deceptive and misleading names in light of the 
flexibility that funds otherwise have to define the terms in their 
names. A name would be considered materially deceptive or misleading if 
the fund's prospectus disclosure defines a given term in the name 
inconsistent with the term's plain English meaning or established 
industry use, even if that disclosure correctly describes the fund's 
80% investment policy.\356\ While the final amendments require that the 
fund's prospectus disclosure and the terms used in a fund's name not be 
inconsistent, we recognize that prospectus disclosure may--and at times 
is required to--provide further information about the terms used in the 
name. For example, a ``solar energy'' fund's prospectus will need to 
provide additional context to what the name term ``solar energy'' 
means. This disclosure may not, however, otherwise change the plain 
English understanding of what solar energy means, for example, to 
include a type of alternative energy company that does not include 
solar energy.
---------------------------------------------------------------------------

    \355\ See instructions to Item 4(a)(1) and Item 9(b)(1) of Form 
N-1A; instruction to Item 8(2) of Form N-2; and instruction to Item 
11 of Form N-8B-2; see also supra paragraph accompanying footnotes 
92-94.
    \356\ Final rule 35d-1(a)(2)(iii) and (3)(ii).
---------------------------------------------------------------------------

    The final rules' prospectus disclosure requirements provide 
additional context to the terms used in a name. Prospectus disclosure 
which, as a commenter highlighted, also has a plain English

[[Page 70469]]

requirement, is separate from the plain English meaning and established 
industry use requirement we are adopting for fund names, which is 
specifically focused on the meaning of terms used in the fund's 
name.\357\ The plain English requirements applicable to prospectus 
disclosures are focused on making prospectuses simpler, clearer, and 
more useful to investors.\358\ Further, while a fund's disclosure in 
its prospectus provides important information about how a fund defines 
the terms used in its name and the criteria used to select investments 
consistent with the fund's 80% investment policy, the plain English 
requirement in the names rule addresses the goal that the name itself 
is reasonably communicative and clear to an investor based on the plain 
English or established industry use of terms that appear in the name. 
The plain English and established industry use requirement is not meant 
to be static and is designed to acknowledge that the language used in a 
fund's name may evolve as industries change and grow and the words used 
to describe funds and their investment focuses likewise change. While 
we recognize commenters' concerns about the ``established industry 
use'' of a term evolving over time, we are adopting this standard as 
proposed in recognition that certain terms in fund names might not have 
a plain English meaning, but still convey a particular focus to 
investors. The reference to ``established industry use'' is not 
designed to prevent a fund from defining a name term in reference to an 
emerging or developing definition, or from defining a name term in a 
way that is subject to industry debate. The fact that members of an 
industry have different conceptions of a term's definition, and that 
members of a particular industry are in good faith actively debating or 
discussing a definition, would be an indication that the definition is 
consistent with established industry use. That is, members of an 
industry need not coalesce on a standard, singular definition of a term 
for the term to be consistent with ``established'' industry use.
---------------------------------------------------------------------------

    \357\ See, e.g., 17 CFR 230.421(d) and General Instruction B.4 
of Form N-1A.
    \358\ See Plain English Disclosure, Securities Act Release No. 
7497 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)].
---------------------------------------------------------------------------

    Further, we recognize that certain fund name terms used in a way 
that is standard within the fund industry could be less communicative 
to reasonable investors if they must be translated into ``plain 
English.'' Regarding the relationship between the ``plain English'' and 
``established industry use'' standards, we are adopting a requirement 
that includes both standards in recognition that the established 
industry use of a particular term may not be the same meaning given to 
the term in in a plain English context. The meaning of a term in 
reference to a specific industry or investment strategy, however, may 
be clear within the terminology of a particular industry or sector. For 
example, an equity fund could use the term ``high beta'' in its name, 
which is understood within the industry, and the investing public, to 
mean that the fund seeks to invest in stocks with high sensitivity to 
market movements, although arguably this term has no ``plain English'' 
usage. As another example, a fund might define the term ``value'' in 
its 80% investment policy by referring to financial metrics that are 
specific to value investing, and therefore may not be viewed as 
reflecting the plain English meaning of the term ``value.'' The 
``established industry use'' requirement is therefore an important 
corollary to the ``plain English'' requirement. The use of certain fund 
name terms, whose meanings are communicative to investors interested in 
investing in funds focused in a particular industry or using a strategy 
that uses a specific industry-specific lexicon, could be limited if we 
were to adopt a plain English requirement without alternatively 
permitting fund name terms to be consistent with their established 
industry use.

D. Modernizing the Rule's Notice Requirement

    Consistent with the current rule, the final rule amendments will 
continue to require that, unless a fund's 80% policy is a fundamental 
policy, notice must be provided to shareholders of any change in the 
fund's 80% policy.\359\ The amendments to the names rule's notice 
requirement we are adopting, substantially as proposed, are designed to 
specify further the content and delivery of the notice, and address 
more directly the needs of investors who elect electronic delivery. 
These changes reflect the Commission's commitment to adapting and 
modernizing the way in which information is disseminated to the 
investing public in response to changes in the industry and 
technology.\360\ As an additional modification, the final amendments, 
as proposed, will also require notices to describe not only a change to 
the fund's 80% investment policy, but also an accompanying change in 
the fund's name.
---------------------------------------------------------------------------

    \359\ Final rule 35d-1(a)(2)(ii) and final rule 35d-1(d); see 
also final rule 35d-1(g) (defining the term ``fundamental policy'').
    \360\ See, e.g., 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); Optional internet Availability of 
Investment Company Shareholder Reports, Investment Company Act 
Release No. 33115 (June 5, 2018) [83 FR 29158 (June 22, 2018)], at 
n.18; Exchange-Traded Funds, Investment Company Act Release No. 
33646 (Sept. 25, 2019) [84 FR 57162 (Oct. 24, 2019)] (``ETF Adopting 
Release''), at n.229 (encouraging ETFs to consider whether there are 
technological means to make their disclosure more accessible).
---------------------------------------------------------------------------

    The Commission proposed to modernize the current notice 
requirements in several ways. Specifically, the proposed approach 
would: (1) clarify the current requirement that the notice must be 
provided separately from any other documents; (2) update the legend 
requirements alerting the investor to a change in investment policy 
and/or name; (3) specify the content that the notices include; and (4) 
specify notices that may be delivered electronically. We are adopting 
each of these requirements as proposed, as detailed below.
    The Commission received limited comments in response to these 
proposed requirements. Some commenters generally supported the proposed 
requirements, stating, for example, that the proposal would provide 
greater flexibility and clarity with respect to how the notice 
requirements translate to an electronic setting.\361\ One supporting 
commenter recommended that the Commission further modernize shareholder 
notice requirements by allowing funds to post notice of certain policy 
changes on their websites rather than doing so through paper or email 
communications.\362\
---------------------------------------------------------------------------

    \361\ See Fidelity Comment Letter; J.P. Morgan Asset Management 
Comment Letter; Dogwhistle Comment Letter; Environmental Defense 
Fund Comment Letter; PRI Comment Letter.
    \362\ See Fidelity Comment Letter. This commenter stated that 
electronic postings should be considered to be sufficient notice 
where a change does not materially impact the risk profile of the 
fund. Another commenter similarly advocated for a one-time exception 
from the notice requirements for funds whose policies are not 
``meaningfully'' changing. Dogwhistle Comment Letter.
---------------------------------------------------------------------------

Amendments Clarifying That Notice Be Provided Separately From Other 
Documents
    The final amendments, as in the current rule, will continue to 
require the notice to be provided in plain English and delivered 
``separately from any

[[Page 70470]]

other documents.'' \363\ Further, as proposed, the final amendments 
specifically provide that if the notice is delivered in paper form, it 
may be provided in the same envelope as other written documents.\364\ 
This 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.
---------------------------------------------------------------------------

    \363\ While the requirement in the final rule 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. See final rule 35d-1(d)(1); rule 
35d-1(c)(1) (``the notice will be provided in plain English in a 
separate written document''). This 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). See Proposing Release, supra footnote 2, at 
paragraph accompanying nn.131-132.
    \364\ Final rule 35d-1(d)(1).
---------------------------------------------------------------------------

Amendments Updating Legend Requirement
    Similar to the current notice requirement and as proposed, the 
final amendments require 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].'' \365\ This requirement represents a change from the current 
rule by requiring a fund to prominently indicate to investors any 
changes made to its name that accompany a change in investment policy 
in addition to changes made to the policy itself. This new requirement 
is 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.
---------------------------------------------------------------------------

    \365\ Final rule 35d-1(d)(2).
---------------------------------------------------------------------------

    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.\366\ Under the final rule, for any notice that is provided in 
paper form, this required statement must also appear on the envelope in 
which the notice is delivered.\367\ This expansion of the current 
requirement is designed to help draw shareholders' attention to an 
important document that provides them information about the change in 
the fund's investment policy and, if applicable, the fund's name.
---------------------------------------------------------------------------

    \366\ Rule 35d-1(c)(3).
    \367\ Final rule 35d-1(d)(2)(i).
---------------------------------------------------------------------------

Amendments to Notice Content Requirements
    The final amendments include certain new requirements designed to 
incorporate greater specificity on content the notices include. 
Substantially as proposed, the final amendments will 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.\368\ These requirements are designed to codify certain best 
practices of some funds, help facilitate funds' compliance with the 
notice requirement, and increase specificity 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.
---------------------------------------------------------------------------

    \368\ Final rule 35d-1(d)(3).
---------------------------------------------------------------------------

Amendments Providing Specificity for Notices That May Be Delivered 
Electronically
    The final amendments also include certain requirements designed to 
address the needs of investors who elect to receive notice 
electronically. Substantially as proposed, for notices that are 
provided electronically, the final rule will require that the statement 
appear on the subject line of the email communication that includes the 
notice.\369\ 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 aspect of the 
final amendments is also intended 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.
---------------------------------------------------------------------------

    \369\ Final rule 35d-1(d)(2)(ii). As the Commission discussed at 
proposal, the Commission's current guidance regarding electronic 
delivery does not prohibit names rule notices from being delivered 
electronically. See Proposing Release, supra footnote 2, at n.136. 
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. Id.
---------------------------------------------------------------------------

    As proposed, the final amendments do not permit funds to post 
notices to their websites as an alternative to sending notice directly 
to shareholders. As the Commission discussed in the Proposing Release, 
requiring delivery of notice directly to shareholders, rather than 
permitting funds to post notices to websites, increases the likelihood 
that an investor would see and read the notice. This requirement will 
play an important role in helping investors make informed decisions in 
light of any changes to a fund's investment focus, portfolio holdings, 
risks and returns.

E. Form N-PORT Reporting

    We are adopting amendments to Form N-PORT to include new reporting 
items for registered management investment companies and exchange-
traded funds organized as a unit investment trust (``UIT''), other than 
money market funds or small business investment companies, 
(collectively, ``N-PORT funds'') regarding the 80% investment policy 
that such a fund adopts in compliance with the names rule.\370\ As 
proposed, the final rules require N-PORT funds that are required to 
adopt an 80% investment policy to report on Form N-PORT: (1) whether 
each investment in the fund's portfolio is in the fund's 80% basket; 
and (2) the value of the fund's 80% basket, as a percentage of the 
value of the fund's assets.\371\
---------------------------------------------------------------------------

    \370\ All N-PORT funds 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 Adopting Release, supra 
footnote 47. As BDCs and money market funds are not subject to Form 
N-PORT reporting requirements generally, they will not be subject to 
the final amendments to Form N-PORT. This approach is consistent 
with the proposal, and we did not receive any comments on this 
aspect of the proposal. See Proposing Release, supra footnote 2, at 
nn.146-147 and accompanying text. Exchange-traded funds organized as 
a UIT will have to comply with the Form N-PORT reporting 
requirements only if their initial deposit occurs after the 
effective date of the final amendments. See infra section II.G. 
Other UITs are not subject to reporting on Form N-PORT.
    \371\ See Item B.9 and Item C.2 of Form N-PORT. Consistent with 
the final amendment's approach to derivatives generally, when 
responding to Item B.9, the percentage that the fund reports in 
response to Item B.9.b must reflect the use of notional amounts of 
funds' derivatives instruments with certain adjustments, as well as 
the value of assets sold short with respect to physical short 
positions. This percentage also must reflect any reduction of the 
value of the fund's assets resulting from, as applicable, those 
exclusions provided in final rule 35d-1(g). See instruction to Item 
B.9 and supra section II.A.3.
---------------------------------------------------------------------------

    In light of some of the changes to the proposed names rule 
amendments that we are adopting, and in response to

[[Page 70471]]

comments, the final Form N-PORT amendments modify the proposed 
reporting approach by requiring reported information for the third 
month of each quarter, instead of for every month. Given that the final 
amendments will not require continual names rule compliance monitoring 
as proposed, and instead will require that funds review their 
portfolios for compliance no less than quarterly, the reporting time 
frame in the final Form N-PORT requirements therefore reflects the 
period for review that will otherwise be mandated by the final 
amendments.\372\
---------------------------------------------------------------------------

    \372\ The rationale for the required period for reporting this 
information on Form N-PORT is based on the period of the quarterly 
review requirement under the names rule and not the required period 
for filing Form N-PORT. Although the Commission has separately 
proposed to increase the frequency with which funds file reports on 
Form N-PORT, that proposal, if adopted, would not affect the 
requirement adopted in this release for funds to report names-
related information on Form N-PORT on a quarterly basis, providing 
the information for the third month in each fiscal quarter. See, 
e.g., Open-End Fund Liquidity Risk Management Programs and Swing 
Pricing; Form N-PORT Reporting, Investment Company Act Release No. 
34746 (Nov. 2, 2022) [87 FR 77172 (Dec. 16, 2022)].
---------------------------------------------------------------------------

    We are also adopting certain changes to the proposed approach to 
names-related information that funds will report on Form N-PORT, which 
we discuss in more detail below: (1) adding a new reporting item, in 
which funds will report the definitions of terms used in the fund's 
name; and (2) not adopting the proposed requirement that funds report 
the number of days that 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 below, the final amendments to Form N-PORT are 
designed to provide market-wide insight with respect to those 
registered investment companies, other than money market funds and BDCs 
that are subject to the 80% investment policy requirement for the 
Commission, its staff, and market participants.
1. Investments To Be Included in a Fund's 80% Basket
    As proposed, we are adopting a new Form N-PORT reporting item that 
requires N-PORT funds 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. Such N-PORT funds must 
provide this new information, along with the other information they are 
currently required to report, for each of their portfolio investments 
on Form N-PORT, and as proposed the new information will be publicly 
available. In a change from the proposal, we are adopting a requirement 
that each N-PORT fund that is subject to the 80% investment policy 
requirement must also report the definitions of the terms used in the 
fund's name, including the specific criteria the fund uses to select 
the investments the term describes, if any.\373\ These reporting 
requirements are designed to provide investors as well as the 
Commission and its staff insight into the types of investments a fund 
includes in its 80% basket.
---------------------------------------------------------------------------

    \373\ The final amendments also require disclosure of these 
definitions in funds' prospectuses. See supra section II.B.
---------------------------------------------------------------------------

    The Commission received several comments broadly supporting the 
proposed Form N-PORT reporting requirements collectively.\374\ One of 
these commenters stated that the proposed requirements would help 
investors and other market participants understand which factors or 
elements that a portfolio investment exhibits are consistent with a 
fund's 80% policy.\375\ The Commission received several comments that 
objected generally to the collective proposed Form N-PORT reporting 
requirements.\376\ Commenters stated that the proposed reporting 
requirements would be of little benefit to investors, as investors are 
more prone to review prospectus disclosure rather than information 
included on Form N-PORT.\377\ The Commission received a comment 
questioning the rationale for the proposed reporting requirements given 
the name rule's unique role in addressing materially deceptive and 
misleading names, distinct from other disclosure requirements.\378\ 
Commenters stated that the costs and operational burdens of the 
proposed requirements, in light of these concerns and particularly with 
respect to the names that would be included in the proposed expanded 
scope of the 80% investment policy requirement, would be significant 
and questioned whether they would be warranted.\379\
---------------------------------------------------------------------------

    \374\ See, e.g., Comment Letter of Nate Regan (June 15, 2022) 
(``Regan II Comment Letter''); Center for American Progress Comment 
Letter; PRI Comment Letter; Fidelity Comment Letter.
    \375\ See PRI Comment Letter.
    \376\ See, e.g., SIFMA AMG Comment Letter; T. Rowe Comment 
Letter; J.P. Morgan Asset Management Comment Letter; USCOC Comment 
Letter; Nationwide Comment Letter; Federated Comment Letter; 
WisdomTree Comment Letter; MFS Comment Letter; Invesco Comment 
Letter; Capital Group Comment Letter; Seward & Kissel Comment 
Letter; Dimensional Comment Letter.
    \377\ See, e.g., Nationwide Comment Letter; SIFMA AMG Comment 
Letter; Federated Comment Letter; WisdomTree Comment Letter; MFS 
Comment Letter; Invesco Comment Letter; Capital Group Comment 
Letter; J.P. Morgan Asset Management Comment Letter; Dimensional 
Comment Letter.
    \378\ See SIFMA AMG Comment Letter; see also Proposing Release, 
supra footnote 2, at nn.4-6 and accompanying text.
    \379\ See, e.g., MFS Comment Letter; J.P. Morgan Asset 
Management Comment Letter; T. Rowe Comment Letter.
---------------------------------------------------------------------------

    The Commission received several comments specific to the proposed 
requirement that N-PORT funds report whether each investment is counted 
towards the fund's 80% basket. One included a general comment stating 
that this proposed reporting requirement would benefit investors and 
other market participants.\380\ Several other commenters objected to 
this reporting requirement.\381\ These commenters expressed concern 
about the costs and burden of tagging each investment on a monthly 
basis.\382\ The Commission also received a comment that the Commission 
should not require funds to classify 100% of their portfolio when the 
rule requires that only 80% of a given fund's portfolio be invested 
consistent with the funds 80% investment policy.\383\
---------------------------------------------------------------------------

    \380\ See Center for American Progress Comment Letter.
    \381\ See, e.g., ICI Comment Letter; Nationwide Comment Letter; 
Federated Comment Letter; J.P. Morgan Asset Management Comment 
Letter; Fidelity Comment Letter; WisdomTree Comment Letter; Capital 
Group Comment Letter; MFS Comment Letter; SIFMA AMG Comment Letter.
    \382\ See MFS Comment Letter.
    \383\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Some commenters questioned the usefulness of this reporting item 
because Form N-PORT disclosure is by its nature backward-looking, and 
so the reported information may not accurately represent what the 
fund's portfolio looks like at the present time.\384\ Several 
commenters stated that how a fund categorizes individual investments in 
its portfolio is subjective and therefore not comparable across 
funds.\385\ Without additional disclosure regarding how a fund may 
categorize individual investments, we received comment asserting that 
this disclosure may be confusing to investors.\386\ Separately, a 
commenter stated that whether each investment qualifies as an 80% 
basket investment under a fund's 80% investment policy may change on a 
more frequent basis than the proposed monthly reporting period and that 
the disclosure requirement therefore may overwhelm investors with 
outdated information that would not help compare funds in a meaningful 
way.\387\
---------------------------------------------------------------------------

    \384\ See, e.g., SIFMA AMG Comment Letter; Wellington Comment 
Letter.
    \385\ See, e.g., ICI Comment Letter; J.P. Morgan Asset 
Management Comment Letter; SIFMA AMG Comment Letter; Dimensional 
Comment Letter.
    \386\ See Capital Group Comment Letter.
    \387\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Some commenters stated that the proposed new reporting item would

[[Page 70472]]

require the build-out of new systems, for daily testing and validation 
of names rule compliance information, and for mapping this information 
over for reporting on Form N-PORT.\388\ Additionally, commenters stated 
that the new reporting requirements would consume compliance resources 
to the extent compliance personnel would have to attend to the new 
reporting requirements, which would impact other compliance 
activities.\389\ Some commenters stated that funds may need to hire 
third-party vendors for supplemental and specially tailored data on 
their portfolio investments, in order to comply with the proposed new 
reporting requirements.\390\ The use of third-party vendors may, 
according to these commenters, lead to the homogenization in how funds 
define certain terms.
---------------------------------------------------------------------------

    \388\ See, e.g., T. Rowe Comment Letter; Invesco Comment Letter; 
Seward & Kissel Comment Letter.
    \389\ See, e.g., Nationwide Comment Letter; Federated Comment 
Letter; Capital Group Comment Letter.
    \390\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    The requirement for an N-PORT fund to report whether each 
investment is included in the 80% basket helps the Commission and 
investors to have insight into how funds invest consistent with their 
80% investment policies. The final amendments to Form N-PORT will 
complement the required prospectus disclosure defining terms used in 
fund names by providing additional information that is designed to 
increase investor understanding of a particular fund's investment 
focus, which will assist investors in making investment choices that 
better match their investment preferences. While the new information 
that funds would report on Form N-PORT is backward looking in that it 
reflects, on a quarterly basis, how funds have implemented their 80% 
policies, investors and third-party users who provide services to 
investors could also use this information to understand on a going-
forward basis how funds may continue to implement their 80% investment 
policies consistent with the fund's name. While investors may not be 
directly accessing Form N-PORT, third-party service providers that 
investors look to for assistance in selecting investments, such as 
broker-dealers, investment advisers, and those that provide investment 
information for analysis to fund investors, will be able to use this 
information to analyze how a fund invests consistent with its name. We 
recognize that the benefits of these new reporting requirements will 
come with costs, as complying with the new reporting requirements will 
entail new compliance activities, and potentially also systems and 
operational modifications and the use of third-party service providers. 
The Form N-PORT reporting requirements may generate costs of adding new 
data tags for the new reporting items. By requiring less frequent Form 
N-PORT reporting and reducing the amount of names-related information 
that must be reported on N-PORT than was proposed, however, the final 
amendments should, on balance, have lower costs compared to the 
proposal.\391\
---------------------------------------------------------------------------

    \391\ See infra section IV.D.2.
---------------------------------------------------------------------------

    We also recognize that funds with similar names and investment 
focuses may reasonably make different determinations regarding whether 
an investment is appropriately within the 80% basket. Some funds may 
have an investment focus where the selection of 80% basket investments 
involves some degree of subjectivity. The reporting requirement we are 
adopting provides transparency that should help investors and other 
market participants providing transparency to investors, as well as 
Commission staff, understand what specific portfolio investments a fund 
may consider to be consistent with the fund's 80% investment policy and 
those that they do not. The Commission, investors, and these other 
market participants will also have the ability to examine, across N-
PORT funds with similar investment focuses, whether these funds may be 
characterizing particular investments similarly. For example, investors 
interested in funds with a growth investment focus will better be able 
to compare across funds with similar names to determine whether 
specific investments are characterized similarly or differently, and 
therefore invest according to their specific preferences.
    In a change from the proposal, we are adopting an accompanying 
reporting requirement to provide necessary context for this reporting. 
Under the final amendments to Form N-PORT, a fund subject to the 80% 
investment policy requirement must report the definitions of the terms 
used in the fund's name, including the specific criteria the fund uses 
to select the investments that the term describes, if any. This 
required reporting leverages the same disclosure that funds will also, 
under the final amendments, be required to include in their 
prospectuses.\392\ This requirement addresses comments the Commission 
received expressing concern that the portfolio-specific information 
that would be required under the proposal lacked context.\393\ We are 
requiring this information in both Form N-PORT and in the fund's 
prospectus to ensure that a user of the investment categorization 
information in Form N-PORT is not required to look to two documents to 
understand how investments are categorized by the fund, and how funds 
define the terms used in their names and the specific criteria the fund 
uses to select the investments (which gives context for the investment 
categorizations). With this additional information, investors will be 
able to better contextualize how the specific investments made by the 
fund adhere to the fund's stated criteria for how investments are 
selected consistent with the fund's 80% investment policy.
---------------------------------------------------------------------------

    \392\ Given that funds can leverage efficiencies in reporting 
the information that they will include in their prospectuses in 
response to the final rules' disclosure requirements, we anticipate 
that the burden of this additional reporting item should be minimal. 
See infra section V.D.
    \393\ See, e.g., Capital Group Comment Letter; J.P. Morgan Asset 
Management Comment Letter.
---------------------------------------------------------------------------

2. Investment Company Act Names Rule Investment Policy
    We are adopting, as proposed, the requirement for N-PORT funds that 
adopt an 80% investment policy to report on Form N-PORT the value of 
the fund's 80% basket as a percentage of the value of the fund's 
assets.\394\ This reporting requirement is designed to increase the 
effectiveness of the Commission's oversight of funds' compliance with 
the names rule as well as provide investors meaningful information 
about how funds comply with the names rule. This information also may 
allow investors to make investment choices that are more consistent 
with their investment preferences. As discussed below, we are not, 
however, adopting the proposed requirement that an N-PORT fund report 
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.
---------------------------------------------------------------------------

    \394\ 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 must report a single percentage that reflects its 
multi-element investment focus. See supra paragraph accompanying 
footnotes 139-140. For example, a ``Wind and Solar Fund'' would 
report the percentage of its assets invested in wind and solar 
companies combined, rather than reporting separate percentages for 
each of wind and solar.
---------------------------------------------------------------------------

    The Commission received some comments specific to the proposed 
requirement that N-PORT funds report the value of the fund's 80% basket 
as a percentage of the value of the fund's assets. Some commenters 
stated that this proposed reporting requirement

[[Page 70473]]

would lead to inappropriate comparisons among funds.\395\ These 
commenters stated that, because funds may have different 80% investment 
policy formulations, despite having the same or similar terms in their 
names, comparisons about the percentage of funds' assets invested in 
their 80% baskets would not provide useful information to investors.
---------------------------------------------------------------------------

    \395\ See, e.g., SIFMA AMG Comment Letter; Dimensional Comment 
Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

    We recognize that there are various reasonable ways in which funds 
with a similar name could implement the 80% investment requirement, and 
the Form N-PORT reporting requirements provide an important window into 
exactly how funds implement their 80% investment policies. 
Understanding how different funds with the same or similar terms in 
their names may have different strategies that invest more or less of 
the fund's assets outside of their 80% basket may provide investors 
with important information that better enables investors to select the 
investment that best meets their investment goals.\396\ The reported 
information is designed to provide an additional data point that 
supplements other reported and disclosed information about how a fund 
invests in accordance with the focus its name suggests. This other 
reported and disclosed information, including the definitions of funds' 
name terms, will provide context that helps ensure that information 
reported about the percentage of a fund's portfolio invested in 80% 
basket assets is not misleading.
---------------------------------------------------------------------------

    \396\ See Proposing Release, supra footnote 2, at n.145 and 
accompanying text for examples of how this may be the case.
---------------------------------------------------------------------------

    With respect to the proposed requirement that a fund report 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, 
the Commission received one supporting comment.\397\ This commenter 
stated that the proposed reporting requirement would assist 
shareholders in comparing different funds as well as the Commission in 
its role overseeing fund's compliance with the names rule. The 
Commission received many comments, however, opposing this proposed 
reporting requirement.\398\ For example, a commenter stated that 
monitoring individual securities on a daily basis for name rule 
compliance--which would de facto be a necessary corollary of the 
proposed reporting requirement--would be operationally onerous and 
should not be required by the final rule.\399\ The Commission also 
received feedback that this proposed reporting requirement would be 
confusing, as the information would be reported without context and may 
raise unnecessary concern from investors.\400\ Commenters also 
suggested that it was inappropriate to utilize Form N-PORT as a 
compliance tool.\401\ Relatedly, a commenter stated that requiring the 
proposed reporting of departures below 80%, without also requiring 
reporting that would provide context of the investment team's judgment, 
could create legal risk for the fund and result in the fund manager 
taking more conservative portfolio management approaches despite the 
fact that the names rule permits certain departures.\402\ At a minimum, 
one commenter suggested that these reporting items, like similar ones 
for liquidity and derivatives reporting, should be non-public.\403\
---------------------------------------------------------------------------

    \397\ See Fidelity Comment Letter.
    \398\ See, e.g., ICI Comment Letter; Nationwide Comment Letter; 
J.P. Morgan Asset Management Comment Letter; Capital Group Comment 
Letter; MFS Comment Letter.
    \399\ See, e.g., J.P. Morgan Asset Management Comment Letter. 
The commenter who supported this reporting item also suggested a 
longer compliance monitoring period than what was proposed. See 
Fidelity Comment Letter.
    \400\ See, e.g., ICI Comment Letter and J.P. Morgan Asset 
Management Comment Letter; Capital Group Comment Letter; MFS Comment 
Letter; see also ICI Comment Letter III (discussing particular 
challenges for certain tax-exempt funds that apply the income test 
pursuant to rule 35d-1(a)(3)(i)(B)).
    \401\ See, e.g., USCOC Comment Letter.
    \402\ See J.P. Morgan Asset Management Comment Letter.
    \403\ See ICI Comment Letter.
---------------------------------------------------------------------------

    We are not adopting this proposed reporting requirement. The 
temporary departures provision we are adopting as part of the final 
names rule amendments does not require funds to monitor names rule 
compliance on a continual basis, but instead adopts a time-of-
investment test with a minimum quarterly review of the investments in 
the fund's portfolio. A requirement to report 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 would be inconsistent with this approach to 
temporary departures, because it would require daily compliance 
monitoring.

F. Recordkeeping

    Consistent with the proposed amendments, the final rule will 
require funds that are subject to the 80% investment policy requirement 
to maintain certain records documenting their compliance with the rule, 
including changes that reflect the final rule's approach to temporary 
departures.\404\ As a modification to the proposal, the final 
amendments do not include the proposed requirement for funds that do 
not adopt an 80% investment policy to maintain a written record of 
their analysis that the policy is not required under the names rule.
---------------------------------------------------------------------------

    \404\ Final rule 35d-1(b)(3).
---------------------------------------------------------------------------

    We are adopting recordkeeping requirements designed to enable 
Commission staff, as well as a fund's compliance personnel, to evaluate 
a fund's compliance with the names rule. Neither the current rule nor 
the general recordkeeping rule under the Act includes a recordkeeping 
requirement specific to names rule compliance-related topics. 
Consistent with the proposal, under the final amendments, funds that 
are required to adopt an 80% investment policy will be required to 
maintain written records documenting their compliance with the names 
rule. Specifically, these funds will be required to maintain: \405\
---------------------------------------------------------------------------

    \405\ The new Form N-PORT reporting requirements would not 
satisfy the record-keeping requirements of rule 35d-1(b)(3). The 
Form N-PORT requirements reflect a snapshot of the fund's 
investments at the end of the reporting period. The recordkeeping 
requirement, however, reflects the fund's ongoing names rule 
compliance activity.
---------------------------------------------------------------------------

     Written records, at the time the fund invests its assets, 
documenting (1) whether the investment is included in the fund's 80% 
basket and, if so, the basis for including that investment in the 80% 
basket; and (2) the value of the fund's 80% basket, as a percentage of 
the value of the fund's assets; \406\
---------------------------------------------------------------------------

    \406\ These recordkeeping requirements apply as well to any 
derivatives that a fund includes in its 80% basket (either because 
the derivatives instrument provides investment exposure to 
investments suggested by the fund's name, or investment exposure to 
one or more of the market risk factors associated with the 
investment focus that the fund's name suggests). See supra section 
II.A.3.
---------------------------------------------------------------------------

     Written records documenting the fund's review of its 
portfolio investments' inclusion in the fund's 80% basket, to be 
conducted at least quarterly, including whether each investment is 
included in the fund's 80% basket and the basis for including each 
investment in the 80% basket;
     If during this review or otherwise the fund identifies 
that the 80% requirement is no longer met due to drift, written records 
documenting the date this was identified and the reason for any 
departures from the 80% investment policy; \407\
---------------------------------------------------------------------------

    \407\ As a technical change to the proposed rule text, the final 
amendments do not specify that a fund's reason for any departure 
must be ``pursuant to paragraphs (b)(1)(2)'' of the rule. This is 
because final rule amendments do not address specific circumstances 
under which temporary departures from the 80% investment requirement 
would be permitted. See supra section II.A.2.
---------------------------------------------------------------------------

     If there was a departure from the 80% requirement in 
other-than-normal

[[Page 70474]]

circumstances, written records documenting the date of any such 
departure and reason why the fund departed (including why the fund 
determined that circumstances are other-than-normal); and
     Any notice sent to the fund's shareholders pursuant to the 
rule.
    All of 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.\408\
---------------------------------------------------------------------------

    \408\ The six-year retention period under the final amendments 
is designed to be generally consistent with other recordkeeping 
retention periods provided in rules under the Act. See, e.g., rule 
31a-1; rule 2a-7. This consistency with other retention periods will 
likely reduce the compliance burden of the recordkeeping 
requirements under the final amendments.
---------------------------------------------------------------------------

    Functionally, under these recordkeeping requirements, each time a 
fund procured an investment, the fund would record the basis for 
including that investment in the 80% basket and the value of the 80% 
basket. A fund would also make or update such records in connection 
with its quarterly review reassessing the characteristics of 
investments in the fund's 80% basket (or any time the fund otherwise 
determines that certain investments' characteristics are inconsistent 
with the fund's 80% investment policy).\409\
---------------------------------------------------------------------------

    \409\ See supra paragraph following footnote 165; supra 
paragraph following footnote 174.
---------------------------------------------------------------------------

    Some commenters expressed general support for the proposed 
recordkeeping requirements, stating that these requirements would allow 
Commission staff to better understand and evaluate funds' compliance 
with the names rule, as well as encourage good governance and internal 
controls.\410\ The majority of commenters, however, expressed 
opposition to the proposed recordkeeping requirements. Several 
commenters stated that the proposed requirement to maintain 
documentation of each investment included in a fund's 80% basket would 
be overly burdensome on funds' compliance and management 
personnel.\411\ Certain commenters stated that they expected this 
requirement to be particularly burdensome in light of the increased 
scope of the names rule's 80% investment policy requirement.\412\ One 
of these commenters stated that the requirements would necessitate 
portfolio management personnel devoting significant time to documenting 
the basis for each investment, including short-term investments.\413\ 
Other commenters stated that some of the proposed recordkeeping 
requirements may not be easily automated, including the requirement to 
state the basis for including each investment in the 80% basket.\414\ 
Some commenters also argued that this requirement would reduce a fund's 
capacity to focus on other aspects of compliance.\415\
---------------------------------------------------------------------------

    \410\ See J.P. Morgan Asset Management Comment Letter; 
Environmental Defense Fund Comment Letter.
    \411\ See ICI Comment Letter; T. Rowe Comment Letter; USCOC 
Comment Letter; Invesco Comment Letter; Federated Comment Letter; 
Dechert Comment Letter; SIFMA AMG Comment Letter; Seward & Kissel 
Comment Letter.
    \412\ ICI Comment Letter; T. Rowe Comment Letter; USCOC Comment 
Letter; Federated Comment Letter; SIFMA AMG Comment Letter; Dechert 
Comment Letter.
    \413\ Dechert Comment Letter.
    \414\ Invesco Comment Letter; Seward & Kissel Comment Letter.
    \415\ Invesco Comment Letter; Federated Comment Letter; Dechert 
Comment Letter.
---------------------------------------------------------------------------

    After considering commenters' input, the final amendments retain 
the proposed requirement for funds required to adopt 80% policies to 
maintain documentation of each investment it includes in the 80% 
basket.\416\ The records resulting from this requirement will enable 
our staff to evaluate a fund's treatment of specific investments, and 
the interaction of such investments with the overall operation of a 
fund's 80% investment policy. This information will allow our staff to 
identify deficiencies and assess compliance of the overall rule as 
amended.
---------------------------------------------------------------------------

    \416\ Final rule 35d-1(b)(3).
---------------------------------------------------------------------------

    As discussed above, the final rule's requirements related to 
temporary departures from the 80% requirement are different from what 
was proposed, particularly by retaining the time-of-investment test; 
requiring a quarterly, as opposed to continual, review; and creating 
different requirements for departures in other-than-normal 
circumstances as opposed to drift discovered during this quarterly 
review. We are providing more detail in the final rule to reflect these 
changes and make clear which records funds must maintain and when funds 
must create them under the final amendments. For example, the final 
rule provides specific requirements on which records a fund will be 
required to maintain pursuant to its quarterly review reassessing the 
characteristics of each investment in the fund's 80% basket (or any 
time the fund otherwise determines that certain investments' 
characteristics are inconsistent with the fund's 80% investment 
policy).\417\
---------------------------------------------------------------------------

    \417\ See supra paragraph following footnote 165; supra 
paragraph following footnote 174.
---------------------------------------------------------------------------

    These changes also help to address questions as to when funds 
should make records under the final rule. Some commenters, discussing 
expected burdens, anticipated the need to monitor a fund's 80% basket 
on a daily basis to comply with the proposed recordkeeping 
requirements.\418\ As adopted, the frequency with which records under 
the final rule will be made would be at the time of investment, as well 
as when the fund engages in an activity that the rule requires which 
triggers a record (e.g., conducts a quarterly review), consistent with 
the changes to the temporary departure requirements. Making records at 
each of these times will produce documentation supporting the fund's 
compliance with the rule and its 80% investment policy at the time a 
fund invests its assets, and in reflection of the fact that the fund's 
80% basket and investments included in the 80% basket could change 
following initial investment, as provided in the rule. The frequency of 
records will, as a practical matter, vary based on the specific 
activities and compliance needs of the fund, and many funds would make 
certain of these records daily in order to reflect ongoing investment 
activity. For example, if a fund (for instance, an actively-managed 
fund whose portfolio turns over regularly, or a fund that frequently 
buys and sells portfolio assets in response to high or volatile 
investor flows) were making investments daily, that fund would keep 
daily records. These records would document whether the investments 
made each day are included in the fund's 80% basket (and, if so, the 
basis for that determination) and of the value of the fund's 80% 
basket, as a percentage of the value of the fund's assets.
---------------------------------------------------------------------------

    \418\ USCOC Comment Letter; T. Rowe Comment Letter.
---------------------------------------------------------------------------

    As discussed above, the final amendments will require funds to 
conduct at-least quarterly--rather than continual--assessment of 
portfolio investments' inclusion in the 80% basket. This modification, 
in turn, could mitigate some of the anticipated costs of certain of the 
recordkeeping obligations compared to the proposal to the extent these 
anticipated costs assumed continual monitoring and assessment of 
portfolio investments, as well as recordkeeping requirements that would 
reflect this continual monitoring. We recognize that the recordkeeping 
requirements under the final amendments will still entail certain 
costs, particularly those associated with those records that certain 
funds (those

[[Page 70475]]

that make investments on a daily basis) would make daily under the 
final rules and records that may not easily lend themselves to 
automation (due to the nature of certain investments, or otherwise). We 
continue, however, to anticipate that much of the required 
recordkeeping would be able to be at least partially automated.\419\ We 
also recognize that there may be multiple reasonable approaches to 
documenting the basis for an investments' inclusion in a fund's 80% 
basket in compliance with the final amendments.
---------------------------------------------------------------------------

    \419\ See infra section IV.D.2; see also, e.g., J.P. Morgan 
Asset Management Comment Letter (stating that, for funds within the 
current scope of the names rule, ``routine testing for compliance 
can be done in a highly automated fashion,'' and stating that 
``bespoke automated processes'' have already been developed for 
funds the sponsor offers that use ESG-related terms in their names, 
but expressing concern that for certain names that would be brought 
within the proposed broadened scope, compliance testing would be 
relatively more manual. But see supra footnote 71 and accompanying 
text (discussing commenters who suggested that it would be 
challenging to establish automated compliance monitoring solutions 
for terms in fund names where subjective criteria are part of the 
decision-making process). As the Commission stated in the Proposing 
Release, records that do not lend themselves to automation would 
need to be created on an as-needed basis.
---------------------------------------------------------------------------

    As proposed, the final amendments will not prescribe the particular 
form of documentation required to be maintained but will instead 
provide flexibility in how a fund documents the information delineated 
in the recordkeeping requirement. Funds, however, should generally 
maintain appropriate documentation that would be sufficient for a third 
party to verify the matter covered by each record and would be readily 
available to Commission staff.
    The final rule will not include a requirement for funds that do not 
adopt 80% investment policies to maintain a written record of their 
analysis as to why such policy is not required.\420\ Numerous 
commenters opposed this requirement.\421\ While one commenter expressed 
general support for this provision, several others voiced general 
opposition, asserting that requiring funds to demonstrate affirmatively 
that a rule does not apply would be inconsistent with the general 
character of the Federal securities laws.\422\ One commenter stated 
that this requirement would not provide a meaningful benefit to 
shareholders, and another expressed concern that it could potentially 
imply that funds' boards of directors were required to make or approve 
a finding that the fund is not required to adopt an 80% policy.\423\
---------------------------------------------------------------------------

    \420\ Final rule 35d-1(b)(3).
    \421\ See Comment Letter of Independent Directors Council (Aug. 
16, 2022) (``IDC Comment Letter''); ICI Comment Letter; Seward & 
Kissel Comment Letter; Dechert Comment Letter; SIFMA AMG Comment 
Letter; USCOC Comment Letter; Invesco Comment Letter.
    \422\ See J.P. Morgan Asset Management Comment Letter. But see 
ICI Comment Letter; Seward & Kissel Comment Letter; Dechert Comment 
Letter.
    \423\ See Invesco Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we have determined that this provision 
is not necessary to motivate proper determinations of when a fund is 
required to adopt an 80% policy. Moreover, the obligations imposed on 
funds through the substantive operation of the names rule as amended 
will continue to provide safeguards by generally requiring funds to 
adopt 80% investment policies where a fund name contains terms 
suggesting that the fund focuses in investments that have, or 
investments whose issuers have, particular characteristics. In 
addition, a fund with a name that appears to Commission staff to be 
within the scope of the 80% investment policy requirement, but that 
determines not to adopt an 80% investment policy, would nonetheless be 
responsible for sharing its analysis as to why it is not in violation 
of the names rule if requested by the Commission's examinations and 
enforcement staff.\424\
---------------------------------------------------------------------------

    \424\ It would be appropriate for such a fund to compile a 
written analysis at the time it receives any such request from 
staff. This would be consistent with final rule's recordkeeping 
requirements, which do not include a requirement for funds that do 
not adopt 80% investment policies to maintain a written record of 
their analysis as to why such policy is not required. To be clear, 
the lack of a requirement to maintain a record of the analysis does 
not mean the fund would not be required to determine the 
applicability of the 80% investment policy requirement in the first 
instance.
---------------------------------------------------------------------------

G. Unit Investment Trusts

    The 2022 Proposal included exceptions for UITs that made their 
initial deposit of securities prior to the proposed amendments' 
effective date. Specifically, the Commission proposed to except these 
UITs from the requirements to adopt an 80% investment policy and 
maintain written records relating to the rule, unless the UIT already 
adopted--or was required to adopt at the time of the initial deposit--
an 80% investment policy under the current rule.\425\ This proposed 
approach was designed to be generally consistent with the treatment of 
UITs under the current names rule, and also to retain the existing 
exception from the 80% investment policy requirements for UITs that 
pre-date the original rule. In a modification from the 2022 Proposal, 
the final amendments will simply provide that the 80% investment policy 
and recordkeeping requirements will apply to UITs only at the time of 
initial deposit. This modification is designed to accommodate the 
practical realities that UITs would encounter if required to comply 
with the new provisions in the final amendments that require periodic 
review and potential rebalancing of a fund's portfolio.
---------------------------------------------------------------------------

    \425\ See generally Proposing Release, supra footnote 2, at 
nn.159-162 and accompanying text.
---------------------------------------------------------------------------

    Commenters expressed broad support for the proposed 
exceptions.\426\ These commenters suggested, however, that for UITs 
that do not qualify for the exemption, the requirements of the names 
rule should apply only at the time of initial deposit and not on an 
ongoing basis. As these commenters observed, UITs typically maintain a 
fixed and transparent portfolio of securities and are limited in how 
and under what circumstances they can acquire or sell securities in 
their portfolio. These commenters therefore asserted that UITs are 
marketed as pro rata portions of a fixed portfolio and investors 
generally understand that security weightings will change during the 
life of the UIT due to market fluctuations. These commenters suggested 
that maintaining compliance with the temporary departure provisions of 
the proposed amendments could result in a UIT having to rebalance its 
portfolio post-deposit, which could create potential operational and 
legal issues.
---------------------------------------------------------------------------

    \426\ See ICI Comment Letter; SIFMA AMG Comment Letter; Invesco 
Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we are modifying the proposed 
approach to better align the rule's new requirements with the way in 
which UITs are constructed. Unlike the current rule, the final 
amendments will require a fund to review its portfolio assets' 
inclusion in its 80% basket as least quarterly and will also require 
that, if a fund drifts out of compliance with its 80% basket, the fund 
must come back into compliance within 90 days.\427\ Because UITs are 
passively managed vehicles with fixed portfolios, it would be 
challenging for them to adjust their portfolios to comply with the new 
portfolio maintenance and testing requirements in the final amendments. 
If UITs were required to comply with the new requirements for temporary 
departures, portfolio changes could result over time that could be 
inconsistent with the requirements of UITs' governance documents or 
investor expectations.\428\ Accordingly, we have modified the proposed 
exceptions for UITs to provide that the 80% investment policy and 
recordkeeping

[[Page 70476]]

requirements will apply only at the initial deposit.\429\
---------------------------------------------------------------------------

    \427\ See final rule 35d-1(b)(1)(i); see also supra section 
II.A.2.
    \428\ See Proposing Release, supra footnote 2, at n.160 and 
accompanying text.
    \429\ See final rule 35d-1(e). Functionally, UITs that have made 
their initial deposit prior to the compliance date of the final 
amendments, including those that would have been subject to the 
exception in the 2022 Proposal because they pre-date the original 
rule, will not be required to adopt a new 80% investment policy or 
comply with the recordkeeping requirements in the final amendments.
---------------------------------------------------------------------------

    As a result, UITs that have names that are implicated by the final 
amendments and whose initial deposit occurs after the compliance date 
of the final amendments will need to adopt an appropriate 80% 
investment policy, including making such a policy fundamental or 
providing notice to investors in the event of a change of the policy, 
if appropriate. However, such UITs will not be required to engage in 
the monitoring and other requirements associated with the final 
amendments' temporary departure requirements nor will they be required 
to keep records under the final amendments beyond the initial deposit. 
Also consistent with the proposal, all UITs will be subject to the 
rule's other requirements under the final amendments, as applicable, as 
well as those of the Federal securities laws generally, including 
section 35(d) of the Investment Company Act.\430\ For example, all UITs 
will continue to be subject to the prohibition on names that suggest a 
guarantee by the U.S. Government regardless of the date of initial 
deposit.\431\ Consistent with the 2022 Proposal, we continue to believe 
that the ability to provide prospectus disclosure is not precluded by 
the fixed nature of a UIT's portfolio.\432\ As a result, UITs will be 
subject to the plain English requirements and the prospectus disclosure 
requirements, including the requirement to tag newly required 
information in the prospectus using Inline XBRL.\433\
---------------------------------------------------------------------------

    \430\ A few commenters suggested that the Commission should 
expressly exclude from the 80% investment policy requirement sub-
accounts of insurance company separate accounts classified as UITs 
that fund variable annuity contracts and variable life insurance 
contracts when the sub-account invests in a single, designated 
underlying fund and has substantially the same name as the 
corresponding underlying fund. See Dechert Comment Letter; IRI 
Comment Letter; Comment Letter of Committee of Annuity Insurers 
(Aug. 16, 2022). These UITs should comply with the 80% investment 
policy requirement at initial deposit if they use a term in their 
name that suggests an investment focus. See also supra discussion in 
section II.A.1.c) (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, provided that 
the acquired fund has an 80% investment policy, unless it knows that 
the underlying fund is not investing consistent with the acquiring 
fund's investment focus).
    \431\ See final rule 35d-1(a)(1). In addition, ETFs organized as 
a UIT will be subject to the Form N-PORT reporting requirements 
regarding a fund's 80% investment policy post-deposit, consistent 
with their current reporting obligations. See supra section II.E. 
Other UITs will not be required to make these reports as they are 
not required to report on Form N-PORT generally. See supra footnote 
371.
    \432\ See Proposing Release, supra footnote 2, at section II.H.
    \433\ See supra sections II.B and II.C. One commenter stated 
that the Inline XBRL tagging requirements would introduce new costs 
for UITs without significant benefit to investors. See Invesco 
Comment Letter. But see XBRL US Comment Letter (supporting the 
proposed requirement that all funds subject to the new disclosure 
requirements provide these disclosures in Inline XBRL format, for 
the reasons discussed at supra footnote 336 and accompanying text, 
and expressing that UITs can avail themselves of the same 
applications and processes used by other fund types that report 
information using Inline XBRL data language). These costs and 
benefits are discussed in more depth in infra section IV.D.
---------------------------------------------------------------------------

H. Compliance Dates

    The compliance date for the final amendments is [FILL IN date 24 
months following amendments' effective date] for larger entities, and 
[FILL IN date 30 months following amendments' effective date] for 
smaller entities.\434\ We are adopting this tiered compliance period to 
provide existing funds with adequate time to prepare to come into 
compliance with the final amendments. We proposed a one-year compliance 
period for all funds that would be subject to the amendments, 
regardless of asset size, and we solicited comment on whether the 
transition period should be shorter or longer, and whether it should be 
the same for all funds. We received comments on this aspect of the 
proposal, with many commenters stating that a one-year compliance 
period is an inadequate timeframe given the legal, compliance, and 
operational challenges associated with implementing the various 
components of the rule.\435\ Some commenters specifically stated that 
funds will need time to evaluate the impact of the amendments, 
determine necessary changes, and seek board and/or shareholder approval 
of any required changes to funds' names or investment strategies.\436\ 
Other commenters stated that service providers assisting with ongoing 
assessment of funds' portfolios will need time to develop and update 
systems necessary to support the rule.\437\ One commenter stated that 
many small funds would be particularly burdened by heavy legal and 
compliance costs.\438\
---------------------------------------------------------------------------

    \434\ For purposes of the final rules' tiered compliance period, 
larger entities are funds that, together with other investment 
companies in the same ``group of related investment companies'' (as 
such term is defined in rule 0-10 under the Investment Company Act 
[17 CFR 270.0-10]) have net assets of $1 billion or more as of the 
end of the most recent fiscal year, and smaller entities are funds 
that together with other investment companies in the same ``group of 
related investment companies'' have net assets of less than $1 
billion as of the end of the most recent fiscal year. This standard 
is consistent with prior Commission approaches for tiered compliance 
dates based on asset size for rules affecting registered investment 
companies. See, e.g., Investment Company Reporting Modernization 
Adopting Release, supra footnote 47; Liquidity Adopting Release, 
supra footnote 214; Inline XBRL Filing of Tagged Data, Securities 
Act Release No. 10514 (June 28, 2018) [83 FR 40846 (Sep. 17, 2018)]. 
In our experience, this threshold is a reasonable means of 
distinguishing larger and smaller entities for purposes of tiered 
compliance dates for rules affecting investment companies. We 
estimate that, as of December 2022, 77% of registered investment 
companies would be considered to be larger entities. This estimate 
is based on data reported in response to Items B.5, C.9, and F.11 on 
Form N-CEN. We estimate that, as of March 2023, 48% of BDCs would be 
considered to be larger entities. This estimate is based on data 
from Refinitiv BDC Collateral.
    \435\ See ICI Comment Letter; SIFMA AMG Comment Letter; 
Federated Comment Letter; TIAA-Nuveen Comment Letter; IRI Comment 
Letter; MFS Comment Letter; Invesco Comment Letter; Nasdaq Comment 
Letter; J.P. Morgan Asset Management Comment Letter; Fidelity 
Comment Letter; Dechert Comment Letter; Capital Group Comment 
Letter; XBRL US Comment Letter.
    \436\ See ICI Comment Letter; SIFMA AMG Comment Letter; TIAA-
Nuveen Comment Letter; J.P. Morgan Asset Management Comment Letter; 
Fidelity Comment Letter; Dechert Comment Letter; Capital Group 
Comment Letter.
    \437\ See ICI Comment Letter; Fidelity Comment Letter; Dechert 
Comment Letter; Capital Group Comment Letter.
    \438\ See Freeman Capital Management Comment Letter.
---------------------------------------------------------------------------

    After consideration of commenters' concerns, we are adopting a 
compliance period of 24 months following the final amendments' 
effective date for larger entities, and 30 months following the final 
amendments' effective date for smaller entities. The tiered compliance 
period we are adopting is designed to strike the appropriate balance 
between allowing funds adequate time to adjust their compliance 
practices, and allowing investors and shareholders to benefit from the 
amended names rule framework. This tiered compliance period also 
recognizes commenter concerns related to the operational challenges 
associated with compliance with the final amendments. In considering 
the adequacy of this compliance period, we also have considered that 
certain funds' current investment policies may already be in line with 
the final amendments or could be readily conformed without material 
change.\439\ Furthermore, certain provisions of the final amendments 
will reduce both the initial and ongoing costs associated with 
compliance compared to the proposed amendments from which some 
commenter concerns

[[Page 70477]]

stemmed. We anticipate that smaller entities will benefit from having 
an additional six months to come into compliance with the final 
amendments, based on feedback from commenters and to the extent that 
smaller entities may face additional or different challenges in coming 
into compliance with the amendments than larger entities.
---------------------------------------------------------------------------

    \439\ See infra section IV.D.2.
---------------------------------------------------------------------------

    We disagree with the commenter who asserted that the amended rule 
is impermissibly retroactive.\440\ The compliance period that we are 
adopting ensures that the rule amendments will operate and will be 
enforced prospectively. That regulated entities may have to take action 
to come into compliance with the rule does not make that rule 
retroactive.\441\
---------------------------------------------------------------------------

    \440\ See Stradley Comment Letter.
    \441\ See Mobile Relay Assocs. v. FCC, 457 F.3d 1, 11 (D.C. Cir. 
2006) (``It is often the case that a business will undertake a 
certain course of conduct based on the current law, and will then 
find its expectations frustrated when the law changes. This has 
never been thought to constitute retroactive lawmaking, and indeed 
most economic regulation would be unworkable if all laws disrupting 
prior expectations were deemed suspect.'') (internal quotation marks 
omitted).
---------------------------------------------------------------------------

    Staff in the Division of Investment Management are reviewing its 
no-action letters and other statements addressing compliance with the 
names rule to determine which letters and other staff statements, or 
portions thereof, should be withdrawn in connection with the final 
amendments. Some of these letters and other staff statements, or 
portions thereof, may be moot, superseded, or otherwise inconsistent 
with the final rule and, therefore, may be withdrawn by the staff. The 
staff's review includes, but is not necessarily be limited to, the 
staff no-action letters and other staff statements listed below.
     Frequently Asked Questions about Rule 35d-1;
     Disclosure by Funds Investing in Government Sponsored 
Enterprises (staff letter to the ICI, Oct. 17, 2003);
     IM Guidance Update, No. 2013-12, Fund Names Suggesting 
Protection from Loss (Nov. 2013).

III. Other Matters

    Pursuant to the Congressional Review Act,\442\ the Office of 
Information and Regulatory Affairs has designated the final amendments 
as a ``major rule'' as defined by 5 U.S.C. 804(2). If any of the 
provisions of these rules, or the application thereof to any person or 
circumstance, is held to be invalid, such invalidity shall not affect 
other provisions or application of such provisions to other persons or 
circumstances that can be given effect without the invalid provision or 
application.
---------------------------------------------------------------------------

    \442\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. 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 \443\ 
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 final rule amendments, including the benefits 
and costs to investors and other market participants as well as the 
broader implications of the final rule amendments for efficiency, 
competition, and capital formation.
---------------------------------------------------------------------------

    \443\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    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 final 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, 
the costs for investors to search for funds and monitor them to ensure 
that their investments are consistent with their preferences will 
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.

B. Broad Economic Considerations

    As discussed in section I above, we believe that a fund's name is 
one 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. To the extent that investors value and can determine 
whether a fund's investments comport with the fund's name, there are 
reputational incentives for funds to hold such assets.\444\ However, it 
is costly for individuals or third parties to analyze and monitor the 
extent to which every fund invests in assets consistent with an 
investment focus suggested by its name, or even to discover the 
reputation of each fund. As a result, it may be more efficient for 
investors to be able to rely on certain regulatory standards addressing 
the relationship between a fund's name and its investments than to rely 
on third parties or individual analyses for these purposes. Investors 
within a fund also differ in their preferences, and this variability 
mitigates an adviser's incentive to cater to those types of 
preferences, such as preferences over risk or correlation with 
particular market factors.
---------------------------------------------------------------------------

    \444\ See Zycher Comment Letter.
---------------------------------------------------------------------------

    Further, an adviser has an incentive for the fund to hold 
investments different from those suggested by the fund's name to the 
extent that doing so would lead to increased assets under management 
and increased fee revenues. For example, a fund may be incentivized to 
depart from the investment focus suggested by its name in an attempt to 
outperform its peers and attract greater inflows and may act on this 
incentive within regulatory and market constraints. Holding investments 
not consistent with the investment focus that a fund's name suggests 
could lead to investors holding investments that are inconsistent with 
their goals and risk tolerances.
    Some commenters believed that the current names rule needs to be 
amended.\445\ Some of these commenters stated, for example, that the 
current scope of the 80% investment policy provision does not cover all 
instances in which fund names create the reasonable expectation that a 
fund will invest in a certain way.\446\ Funds that suggest an 
investment focus but that are not currently covered by the names rule 
are popular. For example, funds with ``growth'' or ``value'' in their 
name make up over 15% of funds.\447\
---------------------------------------------------------------------------

    \445\ For a fuller discussion, see section I.B.
    \446\ See supra footnote 26 and accompanying text.
    \447\ Based on an analysis of fund names as of Dec. 2022.
---------------------------------------------------------------------------

    In addition, derivatives have become a more common tool used by 
funds since the inception of the names rule, and many funds that use 
derivatives do so in ways that amplify, rather than hedge, their non-
derivative positions.\448\ Because the market value of derivatives

[[Page 70478]]

tends to be small relative to the exposures they create, certain 
derivatives may currently provide funds a way to create large exposures 
not suggested by a fund's name without falling out of compliance with 
an 80% investment policy if derivatives are valued using their market 
value.\449\
---------------------------------------------------------------------------

    \448\ See R. Kaniel, and P. Wang, Unmasking Mutual Fund 
Derivative Use, CEPR Discussion Paper 17755 (2022) (``Kaniel 
Paper''). The authors find that 26% of active equity mutual funds 
use derivatives. Of these, 63% have derivative returns that 
correlate positively with their non-derivative returns. The median 
correlation was 0.25. For comparison, J Koski and J Pontiff, How are 
Derivatives Used? Evidence from the Mutual Fund Industry, Journal of 
Finance, Volume 54(2), 791-816 (1999) finds that only 21% of similar 
funds use derivatives.
    \449\ See Kaniel Paper. The authors find that, among funds that 
use derivatives, derivatives are, on average, 2% of the market value 
of those funds. By contrast, derivatives make up, on average, 21% of 
those same funds' gross notional exposure. See also supra footnote 
238 and accompanying text (stating that using a derivatives 
instrument's market value for purposes of assessing names rule 
compliance could result in a fund being in compliance with its 80% 
investment policy despite the fund having significant exposure to 
investments that are not suggested by the fund's name).
---------------------------------------------------------------------------

    Researchers have studied whether a fund's name can drive investor 
behavior above and beyond the investment strategy of the fund. That is, 
they have studied whether an incentive exists for managers to use names 
to attract fund flows in ways that are not reflected in the investment 
allocation of the fund. Research has found that fund names have an 
impact on fund flows in different types of environments.\450\ 
Researchers have also found that certain funds have changed their names 
to suggest changes in style, but the funds do not subsequently change 
styles.\451\ 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 fund 
managers may alter funds' investment styles 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.\452\ Research findings also suggest that funds' 
name changes that do not also involve a style change may be intentional 
and aimed at attracting investors.\453\ 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.\454\
---------------------------------------------------------------------------

    \450\ See e.g., S. El Ghoul, and A. Karoui, What's in a (Green) 
Name? The Consequences of Greening Fund Names on Fund Flows, 
Turnover, and Performance, Finance Research Letters, Volume 39, 
101620 (2021). The authors find that, following a fund name change 
suggesting socially responsible investment, fund inflows increase 
but there is a statistically insignificant change in fund exposure 
to socially responsible investment. See also 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 
their funds as socially responsible yet do not make tangible 
investment decisions consistent with that portrayal. See also C. Wu 
and W. Chen, What's an AI Name Worth? The Impact of AI ETFs on Their 
Underlying Stocks, Finance Research Letters, Volume 46 (B), 102474 
(2022). The authors compare returns between the stocks in two 
different kinds of AI ETFs: those with and without ``AI'' in their 
name. They find that the constituent stocks of the group with ``AI'' 
in the name has a higher cumulative abnormal return than the 
constituent stocks of the group without ``AI'' in the name, and 
attribute this to differential fund flows to the different groups.
    \451\ 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, Volume 60, 2825-2858 
(2005) (``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, Volume 
84, 123-134 (2017) (``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.
    \452\ See Anne-Florence Allard et al., When Mutual Fund Names 
Misinform (working paper, 2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3628293. 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.
    \453\ See Espenlaub Paper, supra footnote 451. The researchers 
find that ``superficial'' name changes result in increased fund 
flows but do not result in either higher performance or lower fees. 
See also Cooper Paper, supra footnote 451. 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.
    \454\ See Cooper Paper, supra footnote 451.
---------------------------------------------------------------------------

    Some commenters disputed the relevance of this research to the 
proposed amendments to the names rule, claiming that it predates the 
current names rule, misuses terms like ``growth'' and ``value,'' and 
does not demonstrate that investors have been misled.\455\ While some 
of this evidence does predate the current names rule, it also reflects 
styles that are not within the scope of the current names rule but are 
in the scope of the amended rule (i.e., growth and value funds). As 
such, we do not anticipate that the current names rule impacted the 
main findings of these studies. Further, we believe that the totality 
of the academic research, both before and after the enactment of the 
names rule, suggests that fund names affect investor behavior above and 
beyond what can be explained by a fund's returns, risk level, 
correlation with market risk factors, or classification by third 
parties. This is not to suggest that names are solely determinative in 
investor decisions. While the above research is consistent with some 
investors unknowingly choosing funds that invest in assets outside of 
the investment focus suggested by their names, this is not the only 
possible explanation for the given findings. For example, funds with 
names that superficially suggest popular styles may be included more 
often in investors' initial screenings for funds, and investors may 
nonetheless disproportionately choose these funds after investigating 
them more thoroughly despite this fact. However, this would still 
suggest inefficiencies in the investor-fund matching process that could 
be improved by more precise naming and establishes the existence of an 
incentive for managers to choose names that maximize fund flows, even 
if the chosen name is not indicative of the investment practice of the 
fund. The academic research cited generally does not distinguish 
whether funds were purchased directly by investors or by a fiduciary or 
other intermediary. However, the rule is intended to increase search 
efficiency for both retail investors and fiduciaries.
---------------------------------------------------------------------------

    \455\ See ICI Comment Letter and SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    Some commenters also criticized the proposed amendments for the 
costs they would impose on funds and, by extension, investors. 
Prevalent among these were concerns that the expansion of the scope of 
the rule would encompass many funds whose names have terms that are 
defined at least partially by managerial judgment.\456\ These funds, 
commenters argued, would have significantly higher costs of compliance 
with the names rule than would funds that are already scoped into the 
rule. In particular, commenters were worried that automated processes 
could not be implemented that would categorize each asset and determine 
whether it fell in its 80% basket.\457\ These concerns were heightened 
because the approach in the proposing release effectively would have 
required funds to do this categorization continually (and in some 
circumstances daily) in order to determine the number of days that a 
fund was out of

[[Page 70479]]

compliance with its 80% investment policy.
---------------------------------------------------------------------------

    \456\ See, e.g., ICI Comment Letter, SIFMA AMG Comment Letter; 
J.P. Morgan Asset Management Comment Letter.
    \457\ See, e.g., ICI Comment Letter, J.P. Morgan Asset 
Management Comment Letter; T. Rowe Comment Letter.
---------------------------------------------------------------------------

    The final amendments have taken several steps to mitigate costs for 
most funds relative to the amendments in the proposing release. For 
example, the final rule does not include a requirement for continual or 
daily monitoring to reassess the characteristics of the investments in 
the fund's 80% basket, alleviating the need for daily recategorization. 
However, a fund must review its portfolio investments on a quarterly 
basis to determine whether or not the fund's investments continue to be 
consistent with its 80% investment policy. As is true under the 
baseline, a fund must also categorize an asset at its time of 
investment. If a fund is trading each of its assets daily then the cost 
mitigation described above would not apply.

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. The economic analysis appropriately 
considers existing regulatory requirements, including recently adopted 
rules, as part of its economic baseline against which the costs and 
benefits of the final rule are measured.\458\
---------------------------------------------------------------------------

    \458\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C. 
Cir. 2022). This approach also follows SEC staff guidance on 
economic analysis for rulemaking. See Staff's ``Current Guidance on 
Economic Analysis in SEC Rulemaking'' (March 16, 2012), available at 
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic 
consequences of proposed rules (potential costs and benefits 
including effects on efficiency, competition, and capital formation) 
should be measured against a baseline, which is the best assessment 
of how the world would look in the absence of the proposed 
action.''); Id. at 7 (``The baseline includes both the economic 
attributes of the relevant market and the existing regulatory 
structure.''). The best assessment of how the world would look in 
the absence of the proposed or final action typically does not 
include recently proposed actions, because doing so would improperly 
assume the adoption of those proposed actions.
---------------------------------------------------------------------------

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 December 2022, there were 9,533 mutual funds (excluding money 
market funds) with approximately $21,861 billion in total net assets, 
2,735 ETFs organized as an open-end fund or as a share-class of an 
open-end fund with approximately $8,843 billion in total net assets, 
748 registered closed-end funds with approximately $389 billion in 
total net assets, and 45 UITs with approximately $812 billion in total 
net assets.\459\ There also were 355 money market funds with 
approximately $5,556 billion in total net assets.\460\ Finally, as of 
December 2022, there were 125 BDCs with approximately $138 billion in 
total net assets.\461\
---------------------------------------------------------------------------

    \459\ Estimates of the number of registered investment companies 
and their total net assets are based on an analysis of Form N-CEN 
filings as of Dec. 31, 2022. 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 of Form N-
CEN). For UITs, we count only 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 of 
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 of Form N-CEN).
    \460\ Estimates of the number of money market mutual funds and 
their total net assets are based on an analysis of Form N-MFP 
filings as of Dec. 31, 2022.
    \461\ Estimates of the number of BDCs and their net assets are 
based on an analysis of Form 10-K and Form 10-Q filings as of Dec. 
31, 2022. Our estimate includes BDCs that may be delinquent or have 
filed extensions for their filings.
---------------------------------------------------------------------------

    The final rule amendments would also affect current and prospective 
individual investors who invest in funds. According to an association 
representing registered funds, as of 2022, 71.7 million (54.7%) U.S. 
households and 120.5 million individuals owned shares in U.S. 
registered investment companies.\462\ Median mutual fund assets of 
mutual fund-owning households were $125,000 with the median number of 
mutual funds held being three.\463\ Moreover, registered funds play an 
important role in individuals' retirement savings. 72% of households 
had tax-advantaged retirement savings with $10.1 trillion invested in 
mutual funds either through defined contribution plans or IRAs.\464\
---------------------------------------------------------------------------

    \462\ See Investment Company Institute, 2023 Factbook (2023) 
(``2023 ICI Factbook'') available at https://icifactbook.org/pdf/2023-factbook.pdf.
    \463\ Id.
    \464\ Id.
---------------------------------------------------------------------------

2. 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. Several commenters stated that the name of a fund is vital to 
an investor's decision-making process and can have a large impact on 
its fund flows.\465\ 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 investment strategy. For 
example, the words ``equity'' or ``stock''--terms that convey an 
investment type and therefore subject funds to the existing names 
rule's 80% investment policy requirement--appear in 1,393 fund names 
(approximately 10.6% of non-money market funds).\466\ The words 
``growth,'' ``income,'' and ``value''--terms that do not convey an 
investment type--appear in 1,167 (8.9% of non-money market funds), 
1,472 (11.2%), and 829 (6.3%) fund names, respectively.\467\
---------------------------------------------------------------------------

    \465\ See, e.g., Better Markets Comment Letter, Consumer 
Federation of America Comment Letter, Center for American Progress 
Comment Letter.
    \466\ Based on an analysis of fund names as of Dec. 2022.
    \467\ 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'' (2.5% of funds), 
``high yield'' (2.0% of funds), and ``emerging markets'' (3.5% of 
funds).
---------------------------------------------------------------------------

    A review of fund filings suggests that approximately 82% of funds 
have investment policies specifying a minimum percentage of investments 
consistent with a certain fund focus,\468\ while 67% of all funds have 
such a policy with a minimum threshold of 80% or higher.\469\ Certain 
funds also specify investment maximums as a

[[Page 70480]]

percentage of fund assets.\470\ The review also found that 60% of funds 
are required under the current names rule to maintain an 80% investment 
policy.\471\
---------------------------------------------------------------------------

    \468\ 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 Dec. 
31, 2022. Specifically, 497 and 485BPOS fund prospectuses filed in 
2021 or 2022 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 ten funds could not be identified in the 497 
and 485BPOS fund prospectuses filed in 2021 or 2022. Therefore, 
these ten 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 IV.C.3
    \469\ 22% of funds that have investment policies specifying a 
minimum percentage of investments consistent with a certain fund 
focus specify a percentage less than 80%. While 67% of funds have an 
investment policy requiring at least 80% of fund investments be 
consistent with a certain investment strategy, we estimate that 60% 
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.
    \470\ 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.
    \471\ See section IV.C.3 for details on the current regulatory 
requirement.
---------------------------------------------------------------------------

    Funds' use of derivatives has grown in the time since the names 
rule was originally adopted in 2001, with 26% of funds now having some 
derivatives exposure.\472\ Funds use derivatives in a variety of ways, 
including increasing or hedging their exposure to certain risk factors. 
Funds primarily do this through the use of futures and swaps contracts 
but other derivatives, such as options, are also widely used.\473\ For 
example, a fund may wish to hedge the currency risk of a foreign asset 
through the use of a forward contract or its interest rate risk using a 
swap. Similarly, a fund may gain exposure to certain equities or 
commodities through the use of forward and option contracts. Funds also 
use derivatives for cash management purposes when fund flows are 
high,\474\ for tax efficiency,\475\ or to arbitrage market mispricing.
---------------------------------------------------------------------------

    \472\ See supra footnote 448 and accompanying text.
    \473\ See Kaniel Paper.
    \474\ See, e.g., A. Frino, A. Lepone, and B Wong, Derivative 
Use, Fund Flows and Investment Manager Performance, Journal of 
Banking & Finance, Volume 33, 925-933 (2009).
    \475\ For example, 60% of futures contracts profits may be taxed 
at the long-term capital gains rate regardless of duration of the 
investment.
---------------------------------------------------------------------------

3. Current Regulatory Framework
    As discussed above, section 35(d) of the Act authorizes the 
Commission to define certain fund names or titles as materially 
deceptive or misleading.\476\ The current names rule applies to a 
registered investment company and any series of the investment 
company.\477\ The 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.\478\ The names rule also provides that a fund's 80% investment 
policy applies ``under normal circumstances'' \479\--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.\480\ 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.\481\ The names rule also requires 
a fund with a name suggesting that the fund focuses its investments in 
a particular country or geographic region to disclose in its prospectus 
the specific criteria used by the fund to select these 
investments.\482\
---------------------------------------------------------------------------

    \476\ See supra section I.A.
    \477\ Rule 35d-1(d)(1).
    \478\ See rule 35d-1(a)(2)(i), (a)(3)(i).
    \479\ Id.
    \480\ Alternatively, at least 80% of the income that it 
distributes will be exempt. See rule 35d-1(a)(4); see also supra 
footnote 15.
    \481\ See rule 35d-1(a)(2)(ii), (a)(3)(iii). An 80% investment 
policy relating to a tax-exempt fund, however, must be a fundamental 
policy.
    \482\ Rule 35d-1(a)(3)(ii).
---------------------------------------------------------------------------

    The current names rule has no express provision for how derivatives 
are to be treated in a fund's 80% calculation. In practice however, 
funds typically use a derivative's market value consistent with the 
definition of the term ``value'' in the Investment Company Act.\483\
---------------------------------------------------------------------------

    \483\ 2020 Request for Comment, supra footnote 20.
---------------------------------------------------------------------------

    A review of fund names suggests that approximately 60% of funds 
have names that implicate the 80% investment policy requirement, but 
that approximately 67% of funds have an investment policy that covers 
at least 80% of investment assets.\484\
---------------------------------------------------------------------------

    \484\ This estimate is based on a random stratified sample of 
100 fund names. See supra footnote 468.
---------------------------------------------------------------------------

    The 80% investment policy requirement generally applies at the time 
when an investment company invests its assets.\485\ If an investment 
causes a fund to no longer satisfy its 80% investment policy, then all 
future investments must be made in a manner that will bring the fund 
back into compliance with the 80% investment policy.\486\
---------------------------------------------------------------------------

    \485\ Rule 35d-1(b); see also 2001 Names Rule Adopting Release, 
supra footnote 8.
    \486\ Rule 35d-1(b). As described in greater detail in the 
Proposing Release, supra footnote 2, funds' compliance with the 
baseline rule is facilitated by Commission staff review of funds' 
initial registration statements, post-effective amendments, proxy 
statements, and annual reports. Likewise, the names rule's 80% 
investment policy requirement has never been intended to create a 
safe harbor from liability under section 35(d) for materially 
deceptive or misleading fund names generally. See supra section 
II.A.5; see also 2001 Names Rule Adopting Release, supra footnote 8, 
(stating that the Division would ``continue to scrutinize investment 
company names not covered by the proposed rule . . . and [i]n 
determining whether a particular name is misleading, the Division 
w[ould] consider whether the name would lead a reasonable investor 
to conclude that the company invests in a manner that is 
inconsistent with the company's intended investments or the risks of 
those investments''). Funds that anticipate oversight may be more 
likely to take steps to align their investment practices with the 
terminology used in these funds' names.
---------------------------------------------------------------------------

    Because the current rule applies to all registered investment 
companies, it applies to UITs as well as mutual funds and registered 
closed-end investment companies.\487\ UITs are passively managed 
vehicles that operate pursuant to a trust indenture or a similar 
document and have fixed portfolios. They are also generally subject to 
the 80% investment policy requirement of the current names rule at the 
time of investment. However, UITs that have made an initial deposit of 
securities before the compliance date of the original rule are exempted 
from this requirement.\488\
---------------------------------------------------------------------------

    \487\ 2001 Names Rule Adopting Release, supra footnote 8.
    \488\ Rule 35d-1(b).
---------------------------------------------------------------------------

    BDCs, while not registered investment companies, are subject to 
requirements of section 35(d) of the Act, and thus the names rule, by 
operation of section 59 of the Act.\489\ Accordingly they must meet the 
current rule's 80% investment policy requirement including to either 
adopt the required 80% investment policy as a fundamental policy or 
provide shareholders 60 days' advance notice for any change in the 
investment policy.\490\ Unlisted registered closed-end funds and BDCs, 
however, do not issue redeemable shares or list their shares on a 
national securities exchange. Shareholders in an unlisted registered 
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.\491\
---------------------------------------------------------------------------

    \489\ See supra footnote 13 (citing 15 U.S.C. 80a-58).
    \490\ Rule 35d-1(a)(2)(ii), (a)(3)(iii).
    \491\ See Proposing Release, supra footnote 2, at n.99 and 
accompanying text.
---------------------------------------------------------------------------

    All registered management investment companies (other than money 
market funds and small business investment companies), as well as ETFs 
organized as UITs, 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 final amendments are designed to modernize and enhance the 
investor protections that the names rule currently provides. The final 
amendments are designed to improve, and broaden the scope of, the 
requirement for certain funds to adopt a

[[Page 70481]]

policy to invest at least 80% of their assets in accordance with the 
investment focus that the fund's name suggests. These amendments 
further the name rule's objective of preventing fund names from 
misrepresenting a fund's investments and risks by ensuring that a 
fund's investment activity is consistent with the investment focus its 
name communicates. The final amendments also 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. The 
distinction in the current rule between a type of investment--which 
implicates the 80% requirement under the baseline--and an investment 
strategy--which does not implicate this requirement--is not useful from 
an investor protection perspective because any fund name that may 
connote a particular investment focus can result in reasonable investor 
expectations regardless of whether the fund's name describes a strategy 
or a type of investment. 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. For 
example, funds may passively hold assets whose characteristics change, 
such as a small-cap firm becoming a mid-cap firm. Since funds are 
currently required only to assess assets at the time of investment, 
changes in the relative value of the assets of a fund could allow a 
fund's portfolio to drift such that its holdings no longer reflect the 
investment focus suggested by its name, which could mislead new or 
existing investors. Additionally, the investor protections provided by 
the names rule are not designed to address funds' increasing use of 
derivatives.
    The benefits associated with the final amendments may vary based on 
funds' current practices. We estimate that 82% of funds, and over half 
of funds not currently subject to 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.\492\ Depending on the extent to which those practices 
differ across funds or differ from the final amendments' requirements, 
the benefits realized by fund investors, as detailed below, may vary 
across fund investors.
---------------------------------------------------------------------------

    \492\ See supra footnote 468 and accompanying text.
---------------------------------------------------------------------------

    Generally, the final rules should increase investor confidence that 
funds' portfolios are aligned with the investment focus suggested by 
their names. The provisions are intended to align fund investments with 
the preferences of investors. To the extent that funds change their 
behavior and invest in assets more suited to investor preferences, 
allocation efficiency will increase.
    One commenter questioned the general benefits of the amendments on 
the basis of a lack of enforcement actions or lawsuits arising from the 
current names rule.\493\ We disagree with this assessment. There are a 
number of factors that determine whether and when the Commission brings 
enforcement actions, meaning the presence or absence of such actions 
does not necessarily indicate whether rulemaking is or is not 
justified. For the reasons discussed throughout, including the 
Commission and staff's experience with the names rule over the past two 
decades and developments in the fund industry, the Commission believes 
that this rulemaking is justified.\494\
---------------------------------------------------------------------------

    \493\ See SIFMA AMG Comment Letter.
    \494\ See supra section II.A.1.
---------------------------------------------------------------------------

    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 that fund investments are consistent with their expectations 
based on the fund's name, or they may choose to reduce or eliminate 
their investments in funds. Similarly, uncertainty about fund holdings 
despite the fund's name 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 final amendments would extend the provisions of the 
names rule to a broader set of fund names.
    Specifically, we estimate that approximately 8,100 (60%) funds are 
currently subject to the names rule's 80% investment policy requirement 
and that our final amendments would increase this number to 
approximately 10,300 (76%) funds.\495\ We believe that investors in 
these additional funds would benefit to the extent that the scope 
expansion helps ensure that a fund's investment activity is consistent 
with the investment focus its name communicates and, thus, the investor 
expectations the name creates.
---------------------------------------------------------------------------

    \495\ See supra footnotes 468-469. The percentage estimate is 
applied to the total number of funds (13,541) listed in section 
IV.C.1.
---------------------------------------------------------------------------

    Temporary Departures. The final amendments will continue to 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. The final rule requires that a fund must invest in 
accordance with its 80% investment policy under normal circumstances. 
Funds must review their portfolios on a quarterly basis for compliance 
with the 80% investment requirement. In instances where a fund 
identifies that its portfolio is out of compliance with the 80% 
investment requirement, the fund must make future investments in a 
manner that would bring the fund into compliance as soon as reasonably 
practicable and in all circumstances within 90 consecutive days of the 
fund's identification that the requirements are no longer met. If the 
fund departs from the requirements in other-than-normal circumstances, 
the fund is not required to come back into compliance as soon as 
reasonably practicable but must come back into compliance within 90 
consecutive days of the initial departure.
    In addition, funds are permitted under the final rule to 
temporarily depart from the 80% investment requirement in connection 
with a reorganization (for which the final rule does not specify a 
required time frame for accompanying temporary departures) or a fund 
launch (departure not to exceed the period of 180 consecutive days) or 
when a notice of a change in a fund's policy in certain circumstances 
has been provided to fund shareholders.\496\
---------------------------------------------------------------------------

    \496\ See supra section II.A.2 for a full description of the 
requirement.
---------------------------------------------------------------------------

    The current rule requires a fund to determine at the time it 
invests whether the security is appropriately included in the fund's 
80% basket. As a result, a fund that does not frequently trade could 
potentially have assets that comported with the name of the fund at the 
time of investment, but whose characteristics have changed with time. 
As a result, the requirement in the final rule for a fund to reassess 
the characteristics of a fund's assets on a quarterly basis will 
benefit investors by

[[Page 70482]]

ensuring that funds cannot passively drift such that their name no 
longer reflects their holdings for a prolonged period.
    The final rule will also benefit investors by imposing a limit to 
the amount of time that a fund can invest less than 80% of the value of 
its assets in accordance with the fund's investment focus in other-
than-normal circumstances. The new deadline gives a predictable 
timeline for discrepancies to be resolved, during which funds can 
investigate a name change and shareholders can determine whether to 
redeem their shares. Some commenters highlighted the benefit of 
increased investor protection that this would produce.\497\ For 
example, the final rule would disallow a departure for longer than 90 
consecutive days to address a market disruption. This will benefit 
investors to the extent that such a departure would 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.
---------------------------------------------------------------------------

    \497\ See, e.g., NASAA Comment Letter; Center for American 
Progress Comment Letter; Consumer Federation of America Comment 
Letter.
---------------------------------------------------------------------------

    Because UITs are passively managed vehicles that have fixed 
portfolios, it would be difficult to adjust their portfolios to comply 
with the rule's portfolio composition requirements.\498\ Accordingly, 
UITs are exempted from this provision and the associated benefits 
discussed above do not apply to UITs.
---------------------------------------------------------------------------

    \498\ See supra footnote 428.
---------------------------------------------------------------------------

    Considerations Regarding Derivatives in Assessing Names Rule 
Compliance. The final amendments 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 final amendments generally 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.\499\ The final amendments also, in a 
change from the proposal, require a fund to exclude from the 
calculation derivatives transactions that it uses to hedge currency 
risk associated with one or more specific foreign-currency-denominated 
equity or fixed-income investments held by the fund provided that: (1) 
such currency derivatives are entered into and maintained by the fund 
for hedging purposes, and (2) the notional amounts of such derivatives 
do not exceed the value of the hedged investments (or the par value 
thereof, in the case of fixed-income investments) by more than 10 
percent. The final amendments will permit a fund, in determining 
compliance with its 80% investment policy, to deduct cash and cash 
equivalents and U.S. Treasury securities with remaining maturities of 
one year or less from assets (i.e., the denominator in the 80% 
calculation) up to the notional amounts of the fund's derivatives 
instruments, as well as any closed-out positions if those positions 
result in no credit or market exposure to the fund.\500\ The final 
amendments also 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 the investment focus 
suggested by a fund's name.
---------------------------------------------------------------------------

    \499\ Interest-rate derivatives must be adjusted to their 10-
year bond equivalent, and options must be delta-adjusted. Physical 
short positions must instead use the value of the asset sold short. 
See discussion in supra section II.A.3.
    \500\ See final rule 35d-1(g).
---------------------------------------------------------------------------

    As discussed above, a derivatives instrument's ``value,'' as 
defined in the Act, will not be the same as the investment exposure 
created by the derivatives instrument.\501\ 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, as is allowed 
under the baseline. The final amendments will 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. The final amendments 
also provide clarity to funds and investors on how to value derivatives 
for the purpose of the 80% investment test, and make the test a more 
effective tool in assessing names rule compliance. Comments on 
different aspects of the proposed approach to using notional amounts 
were mixed; however, commenters largely agreed that using an approach 
that better reflects the economic exposure obtained by a derivatives 
instrument, rather than the market value, would result in the benefits 
outlined for this aspect of the rule.\502\
---------------------------------------------------------------------------

    \501\ See discussion in supra section II.A.3.
    \502\ See, e.g., Consumer Federation of America Comment Letter; 
Capital Group Comment Letter; J.P. Morgan Asset Management Comment 
Letter.
---------------------------------------------------------------------------

    Unlisted Registered Closed-End Funds and BDCs. Unlisted registered 
closed-end funds and BDCs do not issue redeemable shares or list their 
shares on a national securities exchange. Under the baseline, 
shareholders in an unlisted registered 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. 
Under the final rule amendments, unlisted registered closed-end funds 
and BDCs will not be permitted to change their 80% investment policies 
without shareholder approval unless an appropriate liquidity event is 
offered a certain time prior to the implementation of such a 
change.\503\ This rule will increase investor protections by requiring 
that investors have a choice when a fund takes action to change its 80% 
investment policy, either in the form of a vote or in the ability to 
disinvest.
---------------------------------------------------------------------------

    \503\ See supra section II.A.4 for a discussion of the rule 
requirement.
---------------------------------------------------------------------------

    The proposed rule would have required that 80% investment policies 
for unlisted registered closed-end funds and BDCs be fundamental 
policies. We believe that the final rule's approach to unlisted 
registered closed-end funds and BDCs achieves the same investor 
protection benefits that the proposal would have provided relative to 
the current rule, because investors who no longer wish to invest in a 
fund after a change in investment policy will be able to either vote on 
such a change or liquidate their position. For most investors, we 
assume that the ability to liquidate is at least as strong a recourse 
as the ability to vote in this context.
    Effect of Compliance with an 80% Investment Policy. We are adopting 
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 and implements an 80% investment policy and otherwise complies 
with the rule's requirement to adopt and implement the policy.\504\ The

[[Page 70483]]

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 provision we are adopting codifies this position.\505\ 
We anticipate that investors will benefit from this codification of the 
prior guidance to the extent that it deters funds from investing in a 
way such that the source of a substantial portion of the fund's risks 
or returns is materially different from that which an investor 
reasonably would expect based on the fund's name, as communicated to 
investors. It may also lead funds to consider further ways in which 
their names could be materially deceptive and misleading even outside 
of compliance with the 80% investment policy requirement and modify 
their names and/or investment practices accordingly.
---------------------------------------------------------------------------

    \504\ See supra section II.A.5 and final rule 35d-1(c).
    \505\ See supra section II.B; see also 2001 Names Rule Adopting 
Release, supra footnote 8, section II.A.1.
---------------------------------------------------------------------------

    Prospectus Disclosure. We are also adopting amendments to funds' 
registration forms that would require each fund that is required to 
adopt and implement an 80% investment policy to disclose in its 
prospectus the definitions of the terms used in its name, including the 
specific criteria the fund uses to select the investments that the 
terms describe, if any.\506\ These provisions are intended to help an 
investor understand whether the investment focus the name suggests is 
consistent with the investor's investment goals and risk tolerance. The 
final amendments will 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.\507\
---------------------------------------------------------------------------

    \506\ See Proposing Release, supra footnote 2, at n.104 and 
accompanying text.
    \507\ See section II.B, section II.C, section II.E, and section 
II.F 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 final amendments will require funds to tag most of the new 
prospectus disclosure in Inline XBRL, a structured, machine-readable 
data language.\508\ This requirement is designed to make the tagged 
prospectus 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.\509\ 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 final rule's Inline XBRL 
requirements will provide fund investors with increased insight into 
term definitions and investment selection criteria at specific funds 
and across funds, asset managers, and time periods.\510\ An Inline XBRL 
requirement is designed to ensure that all disclosures on these forms--
including both structured and unstructured disclosures--will be human-
readable, because Inline XBRL enables a single document to include both 
human-readable and machine-readable disclosure.
---------------------------------------------------------------------------

    \508\ See supra section II.B. For Forms N-2, N-8B-2, and S-6, 
all new prospectus disclosures will be tagged in Inline XBRL. For 
Form N-1A, the new summary prospectus disclosures in Item 4 will be 
tagged in Inline XBRL. While the new statutory prospectus 
disclosures in Item 9(b) will not be tagged in Inline XBRL, this 
disclosure will be reported on Form N-PORT, where it will be tagged 
in XML format.
    \509\ See, e.g., Birt, J., Muthusamy, K. & P. Bir, XBRL and the 
Qualitative Characteristics of Useful Financial Information, 
Accounting Research Journal, 30 (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, Journal of 
Business Finance & Accounting (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, Volume 52, Issue 2, 
Abacus, 259 (2016) (finding XBRL filings have larger relative 
informational value than HTML filings).
    \510\ The SEC's fund XBRL data are frequently accessed; for 
example, during the final week of Jun. 2023, over 37,000 investment 
company XBRL files were accessed via EDGAR. EDGAR access data is 
available at https://www.sec.gov/about/data/edgar-log-file-data-sets. As another example, the Commission's quarterly XBRL datasets 
for mutual fund prospectus risk/return summaries garnered over 
13,000 pageviews from June 2022 to June 2023, according to a Google 
Analytics query of the Commission's XBRL dataset web page. The web 
page is available at https://www.sec.gov/dera/data. Even if some 
pageviews are not from investors themselves, investors may 
indirectly benefit from the processing of XBRL data by 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 (Mar. 17, 2019), available at https://www.xbrl.org/news/bloomberg-lists-bse-xbrl-data/; Hoitash, R & U. 
Hoitash, Measuring accounting reporting complexity with XBRL, The 
Accounting Review, Volume 93, 259-287 (2018). Also, in contrast to 
XBRL financial statements (including footnotes), which consist of 
tagged quantitative and narrative disclosures, the 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 as a selection 
criterion a specific upper limit of company revenues from industries 
the fund deems incongruent with its definition of ``ESG''--those 
values will 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.
---------------------------------------------------------------------------

    Plain English/Established Industry Use Requirement. We are also 
requiring 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. Because terms may inherently have 
multiple meanings, and the amended rule provides flexibility to funds 
to define the terms in their name, this provision will provide a 
safeguard to investors by helping to ensure that these chosen 
definitions are within a term's plain English meaning or established 
industry use.
    While many commenters agreed with the benefits of this requirement, 
some stated that this benefit may be mitigated in certain instances; 
for example, if the name uses terms that evolve over time, or if the 
plain English meaning of a term differs from its established industry 
use. These commenters suggested that investors would need to look at 
the prospectus disclosure to reasonably understand these terms and so 
there would be no additional benefit to requiring that terms in the 
name comport to either their plain English meaning or established 
industry use.\511\ While investors should look to prospectus disclosure 
to understand how terms in a fund's name are defined, this provision 
would still benefit investors in those circumstances by allowing them 
to more quickly search for funds that match their investment goals by 
more effectively filtering for funds with names that could be related 
to their desired investment allocation.
---------------------------------------------------------------------------

    \511\ See supra footnotes 357-358 and accompanying text for a 
discussion responding to the issues raised by these commenters.
---------------------------------------------------------------------------

    New Form N-PORT Reporting Requirements. We are also amending Form 
N-PORT to include new reporting

[[Page 70484]]

items.\512\ 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) with respect to each portfolio investment, 
whether the investment is included in the fund's 80% basket, (2) the 
value of the fund's 80% basket, as a percentage of the value of the 
fund's assets, and (3) the definitions of terms used in the name and 
any selection criteria associated with these terms. The new information 
that funds will be required to report on Form N-PORT filings will 
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, investors and 
other potential users will 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 intend that entities providing services to investors, 
such as investment advisers, broker-dealers, and entities that provide 
information and analysis for fund investors, will also utilize and 
analyze the new information that will be required by the final 
amendments to Form N-PORT to monitor fund investments for consistency 
with investment focuses suggested by fund names. The analysis done by 
these parties will make it easier for all investors to determine 
whether or not a fund's investment strategy is consistent with their 
goals and preferences. Accordingly, whether directly or through third 
parties, the final new disclosure on Form N-PORT is intended to benefit 
all fund investors.
---------------------------------------------------------------------------

    \512\ As discussed above, the final 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 final amendments to Form N-PORT. See supra 
footnote 370.
---------------------------------------------------------------------------

    Recordkeeping. The final amendments require funds to maintain 
certain records if the fund is required to adopt an 80% investment 
policy.\513\ While the amendments do 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 and would be readily 
available to Commission staff. These requirements will provide our 
staff, and a fund's compliance personnel, the ability to evaluate the 
fund's compliance with the proposed amendments and thereby will benefit 
investors.
---------------------------------------------------------------------------

    \513\ See final rule 35d-1(b)(3). The recordkeeping requirements 
will apply to UITs only at the time of initial deposit, and with 
respect to any notice sent to shareholders.
---------------------------------------------------------------------------

    Notice Requirement. The final amendments also protect investors by 
modifying the current notice requirements when a fund chooses to change 
its investment policy. The final amendments are designed to specify 
further the content and delivery of the notice, and address more 
directly the needs of investors who elect electronic delivery. The rule 
change benefits shareholders by requiring more prominent notice, and by 
requiring notice of both policy changes and corresponding name changes. 
This is intended to help ensure that investors are aware of any name 
and/or policy change, including to help prevent confusion when 
investors begin receiving fund materials referring to the new name. The 
rule change also benefits funds by expressly permitting use of email 
for notices and by permitting paper notices to be bundled with other 
shareholder correspondence. These changes could result in cost savings 
for funds that may be passed on to investors.
2. Costs
    We believe that compliance costs associated with the final 
amendments, particularly those that expand the current scope of the 
names rule or create new requirements, 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 assume that certain funds' 
current investment policies may already be in line with many of the 
final rule's requirements or could be readily conformed without 
material change. For example, as discussed in section IV.C.3 above, a 
review of fund filings suggests that approximately 7% of funds have 
investment policies that cover at least 80% of investment assets but 
are not required to do so under the current names rule. Over 80% of 
these funds would be newly scoped into the rule. Since we also estimate 
that 16% of funds will be newly subject to the rule, this means that 
roughly one third of funds that will be newly subject to an 80% 
investment policy requirement already have an 80% investment policy, 
though the exact implementation of this policy may differ from that 
required by the rule. Even more funds not currently scoped into the 
names rule already have a minimum investment policy covering less than 
80% of assets. These funds will have lower implementation costs than 
they would have if they did not already have such an investment policy. 
For example, these funds are likely already to track the value of their 
assets on an initial and periodic basis for purposes of complying with 
such policy, as well as whether a particular asset is part of the 
percentage of their assets consistent with the investment policy.\514\
---------------------------------------------------------------------------

    \514\ Implementations of such existing 80% investment policies 
may vary, for example with respect to the kind and frequency of the 
determinations being made. Cost savings would be greater for funds 
whose existing implementation can more easily be adapted to meet the 
specific requirements of the final rule.
---------------------------------------------------------------------------

    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, or may decide to instead change their name. Even 
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 data to track 
whether selected investments are consistent with the fund's investment 
focus. In certain circumstances, this cost may be relatively low and 
not vary much across similar funds. For example, some growth funds may 
rely on U.S. financial data when selecting fund portfolio investments. 
Even if different funds use different metrics to choose their 
investments, or invest in different industries, the cost of obtaining 
and using their data will likely be similar across funds unless they 
are able to share this cost across funds in a fund complex. Further, 
the cost of aggregating and analyzing financial data is likely to be 
relatively low because Generally Accepted Accounting Principles promote 
consistency and comparability in reported financial information, and 
because in most cases these data are

[[Page 70485]]

already tagged in XBRL so they can be parsed automatically. Conversely, 
other growth funds may rely on other metrics or more subjective 
criteria, and so the cost of creating or acquiring a dataset to track 
whether selected investments are consistent with the fund's investment 
focus may be higher. In general, this cost is likely to be relatively 
larger for smaller funds or funds with more esoteric or bespoke 
strategies.
    Similarly, the cost of data that funds will likely use to comply 
with the rule may vary across funds based on the investment focus. For 
example, funds with an ESG focus may face a lack of consistent and 
comparable ESG information since different vendors of ESG ratings come 
to different conclusions about the same investment assets. This 
disparity arises from differing methodologies as well as differing 
inputs. Data vendors may charge a premium for their relatively more 
bespoke analysis compared to vendors of other more consistent data, 
such as financial statement data. Further, some funds may integrate 
multiple sources of information themselves to determine whether a 
particular asset is consistent with a fund's investment focus, further 
increasing the cost.
    Also, while larger funds or funds that are part of a large fund 
complex may incur higher costs in absolute terms, larger funds may find 
it less costly, per dollar managed, to meet the requirements of the 
final 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 final amendment's requirements 
for several funds.
    Names Suggesting an Investment Focus. The final amendments 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.\515\ As discussed above, we estimate that this 
amendment would subject an additional 2,200 funds to this 
requirement.\516\ 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).\517\
---------------------------------------------------------------------------

    \515\ See section II.A.1 and supra footnote 56.
    \516\ See supra footnote 495 and accompanying text.
    \517\ 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.
---------------------------------------------------------------------------

    Some commenters projected that the costs of compliance with the 
expanded scope will be substantially larger than was estimated in the 
Proposing Release.\518\ Regarding the modifications of systems to 
comply with the proposed amendments, one commenter suggested that 
``programming and testing efforts are far more complex and time 
consuming than contemplated by the Commission.'' \519\ Another stated 
that ``[t]his type of compliance monitoring for an investment strategy 
would be novel and potentially require substantial changes and updates 
to compliance systems.'' \520\ We believe funds with names that would 
be newly scoped into the names rule's 80% investment policy requirement 
under the final amendments already have systems in place for monitoring 
compliance with existing principal investment strategy disclosure 
requirements, as these requirements predate the amendments we are 
adopting and funds presumably have systems to ensure that their 
investments are in line with these disclosures. Similarly, some of 
these funds already have minimum percentage investment policies in 
place and would have systems in place to monitor their portfolios in 
compliance with these policies.\521\ As a result, we believe that most 
funds with names that would be newly scoped in already have internal 
systems that could be modified to assess compliance with the final 
rule. Further, many fund complexes will use the same automated systems 
across their funds, and so these costs could be shared across their 
funds. However, funds would need to develop new, or revise existing, 
recordkeeping processes as discussed below.
---------------------------------------------------------------------------

    \518\ See, e.g., J.P. Morgan Asset Management Comment Letter, T. 
Rowe Comment Letter, Stradley Comment Letter.
    \519\ ICI Comment Letter.
    \520\ SIFMA AMG Comment Letter.
    \521\ See supra footnotes 419 and 469 and accompanying text.
---------------------------------------------------------------------------

    Funds with names that are not currently scoped into the 80% 
investment policy requirement may face costs in the need to determine 
whether a specific asset would qualify as part of a fund's 80% basket. 
One commenter stated that conducting an 80% test on terms that rely on 
judgment on the part of a fund manager ``could become a highly manual 
process of confirming and recording the judgment of investment 
professionals with respect to each holding in a fund.'' \522\ We 
believe that to the extent that fund names covered by the amended rule 
include terms that represent the judgment of their fund managers, the 
rule could create additional compliance costs. Assessing compliance 
with the 80% test for funds with such terms could be more costly 
(relative to doing so for terms with more automatable criteria) as this 
process is less scalable and potentially introduces more operational 
risk than would similar automated compliance processes. For example, 
manual entry of data is more prone to error than is an automated 
system.
---------------------------------------------------------------------------

    \522\ J.P. Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    The difficulty in scaling this process was particularly highlighted 
by some commenters.\523\ These commenters stated that for certain terms 
used in fund names, particularly ``growth'' and ``value,'' there might 
be no reliable data from a third-party vendor that would match internal 
definitions.\524\ According to these commenters, the definition of 
these terms and therefore the classification of certain assets may even 
differ across fund managers at the same firm, so any classification 
system would need to allow tags at the fund level rather than 
globally.\525\ Such classification, in some of these cases, may be 
difficult to automate or outsource. As a result, some classifications 
may need to be done manually, with costs being incurred each time a 
fund performs the classification process.
---------------------------------------------------------------------------

    \523\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
J.P. Morgan Asset Management Comment Letter.
    \524\ See, e.g., ICI Comment Letter, SIFMA AMG Comment Letter; 
J.P. Morgan Asset Management Comment Letter.
    \525\ See, e.g., ICI Comment Letter, SIFMA AMG Comment Letter; 
T. Rowe Comment Letter.
---------------------------------------------------------------------------

    Commenters' concerns about the scalability of this process were 
based on the proposed rule, which in effect would have required funds 
to engage in continual compliance testing to reassess the 
characteristics of investments in a fund's 80% basket. The final 
amendments are considerably less burdensome relative to the proposal in 
that such a test would need to take place only quarterly, in 
association with Form N-PORT reporting, or for each new investment (not 
the entire portfolio) at

[[Page 70486]]

the time of the investment.\526\ A fund subject to the 80% investment 
policy requirement that trades its entire portfolio each day would 
still be required to make a daily assessment for each asset of whether 
the asset belongs in a fund's 80% basket. However, funds whose 
disclosure of principal investment strategies indicates that the fund 
invests in assets with particular characteristics are presumably 
already doing the type of analysis required for such classification at 
the time of investment.\527\ The primary new burden of the amended rule 
in this respect is that the analysis must be redone for each asset on a 
quarterly basis. At this frequency, the classification process should 
be manageable even if done manually, though we recognize that this will 
be more costly for funds with names that include terms involving 
managerial judgment than it will be for funds whose names evoke a 
strategy where compliance testing is more easily automated.
---------------------------------------------------------------------------

    \526\ See supra section II.A.2.
    \527\ See supra footnote 486.
---------------------------------------------------------------------------

    Many commenters stated that the expanded scope will create 
interpretive questions.\528\ For example, funds that were not 
previously required to have an 80% investment policy will need to 
evaluate whether their current fund name would subject them to this 
requirement. In addition, some commenters were concerned that including 
more ``subjective'' terms into the scope of the rule would engender 
``second-guessing'' by the Commission or staff on a fund's choice of 
definition of these key terms.\529\ The amended rule will require that 
these definitions comport with their plain English meaning or 
established industry use.\530\ So to the extent that a term is 
relatively more subjective, funds will have discretion to define it 
consistent with the fund's investment strategy. Regardless of the 
chosen definition, a fund manager must make investments by applying 
specific criteria set forth in the fund's prospectus \531\ related to 
the fund's investment focus or strategies such as ``growth'' or 
``value.'' \532\ The investment decision is guided by definitions and 
methodologies prescribed in advance and publicized by the fund, 
mitigating the concern expressed by the commenters. Nonetheless, to the 
extent that ``subjective'' terms in a fund's name cause the fund's 
managers to be concerned about ``second-guessing,'' funds may spend 
more resources to comply with the final rule.
---------------------------------------------------------------------------

    \528\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter; 
Stradley Comment Letter.
    \529\ See, e.g., ICI Comment Letter; CCMC Comment Letter; 
Dechert Comment Letter.
    \530\ See supra footnote 341 and accompanying text.
    \531\ See Forms N-1A, N-2, and N-8B-2, as amended.
    \532\ See final rule 35d-1(a)(2)(ii).
---------------------------------------------------------------------------

    Some commenters were concerned that wherever fund names that are 
newly subject to an 80% test employ terms that are based on projections 
or otherwise forward-looking metrics, the Commission might evaluate 
their compliance with these terms retrospectively based on the outcomes 
of the investments.\533\ For example, a fund that calls itself a 
``growth'' fund, on the basis of its projection that fund assets will 
grow in value, might be concerned that if those assets do not grow, its 
name could be construed as misleading. However, the amended rule is 
designed for funds to retain reasonable discretion in establishing 
their 80% investment policies and defining the terms in their names. 
This discretion includes the use of forward-looking metrics and models 
in their selection process, just as is allowed under the baseline in 
certain circumstances.
---------------------------------------------------------------------------

    \533\ See, e.g., SIFMA AMG Comment Letter; J.P. Morgan Asset 
Management Comment Letter.
---------------------------------------------------------------------------

    Newly scoped index funds may also face higher costs of compliance 
than those already subject to the rule. One commenter was concerned 
that ``managers of index funds could be required to develop new 
fundamental analysis capabilities to evaluate each index constituent 
against the index name,'' and this sentiment was shared by several 
commenters.\534\ Commenters also suggested that an index fund's 
tracking error could increase as a result, which could also frustrate 
investor expectations.\535\ As is true under the baseline, index funds 
should generally adopt and implement written policies and procedures 
reasonably designed to ensure that the names of their selected indexes 
are not materially misleading themselves.\536\ However, for terms whose 
meanings may vary across people or time, such as ``growth'' or 
``value,'' we acknowledge that funds may incur a higher cost for 
determining that the indexes they rely on are not themselves 
misleading.
---------------------------------------------------------------------------

    \534\ WisdomTree Comment Letter. But see also, e.g., Fidelity 
Comment Letter; Dechert Comment Letter; SIFMA AMG Comment Letter.
    \535\ See supra footnote 319 and accompanying text.
    \536\ See supra section II.A.5.
---------------------------------------------------------------------------

    Similarly, funds may not take a position that would undermine the 
investment focus suggested by the fund's name, even if such a position 
contributes less than 20% of the fund's total assets. Ensuring that a 
fund's investments are not inconsistent with its name in this way is 
likely to be costlier for funds that are newly scoped into the rule 
than it is for those already subject to an 80% investment policy 
requirement. In response to an example in the 2022 Proposal, some 
commenters highlighted what they characterized as the subjective nature 
of deciding whether an investment is ``antithetical'' to the 
description of the fund, particularly when no specific prohibitions are 
included in the fund's name.\537\ We agree that such a determination of 
whether a substantial portion of the fund's risks or returns is 
materially different from that which an investor reasonably would 
expect based on the fund's name may be more difficult to make in some 
cases and accordingly come with higher costs of compliance.
---------------------------------------------------------------------------

    \537\ See, e.g., ICI Comment Letter; J.P. Morgan Asset 
Management Comment Letter; Capital Group Comment Letter. This 
release does not incorporate the ``antithetical investment'' 
language that the 2022 Proposal included, as final rule 35d-1(c) is 
designed to codify the existing relationship between the names rule 
and section 35(d) and not to create new requirements or standards 
with respect to the selection of investments in a fund's 20% basket 
that are not now present.
---------------------------------------------------------------------------

    Finally, to the extent that funds choose to rename their funds in 
more generic ways to avoid having to comply with the amended names 
rule, investors may face increased search costs in determining their 
optimal fund allocation. However, this cost will exist only to the 
extent that those funds who choose to change their name previously had 
names that provided useful information to investors for their 
investment allocation decision.
    Temporary Departures. The final amendments would retain a fund's 
ability to depart temporarily from the 80% investment requirement. The 
final amendments require that a fund must invest in accordance with its 
80% investment policy under normal circumstances. Funds must reassess 
their portfolio assets' inclusion in the fund's 80% basket at least 
quarterly. In instances where a fund identifies that its portfolio is 
out of compliance with the 80% investment requirement, the fund must 
make future investments in a manner that would bring the fund into 
compliance as soon as reasonably practicable and in all circumstances 
within 90 consecutive days of the fund's identification that the 
requirements are no longer met. If the fund, in other-than-normal 
circumstances, invests in a manner not consistent with the 80% 
investment policy, the fund is not required to come back into 
compliance as soon as reasonably practicable, but

[[Page 70487]]

must come back into compliance within 90 consecutive days of the 
initial departure. Funds are permitted under the final rules to 
temporarily depart from the 80% investment requirement in connection 
with a reorganization (for which the final rule does not specify a 
required time frame for accompanying temporary departures) or a fund 
launch (departure not to exceed the period of 180 consecutive days) or 
when a notice of a change in a fund's policy in certain circumstances 
has been provided to fund shareholders.
    This change could create a cost for investors under circumstances 
where departing from the 80% investment requirement for an extended 
period of time would be beneficial to the fund and its shareholders, 
and such a departure would have been allowed absent the adopted 
amendments. 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 their cost 
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.
    These costs are generally mitigated by the length of the period of 
time for resolving departures from investment compliance. In many 
circumstances, 90 days is significantly longer than we understand would 
be required for a fund to remedy departures from its 80% investment 
policy.\538\ This cost is also mitigated by flexibility in the amended 
rule for funds to instigate a name change as an alternative to 
returning to compliance.
---------------------------------------------------------------------------

    \538\ See, e.g., supra footnote 207 and accompanying text.
---------------------------------------------------------------------------

    When a fund manager considers purposely departing from the fund's 
80% investment policy, the manager must weigh the risks of bearing 
these costs against the potential benefit. Accordingly, these costs 
should arise only when the likelihood of bearing such costs is small 
relative to the upside of the departure. More often, the cost of this 
aspect of the rule will be reflected in any unearned excess return that 
the fund does not earn because it chose not to depart from its 
investment focus or tax treatment when it otherwise would have, absent 
the amended rule.
    To the extent that funds do not already have systems in place for 
doing so, they would have to set up systems to identify departures from 
the 80% investment requirement during quarterly testing, and systems to 
monitor the time limits for returning to the 80% investment requirement 
after a temporary departure. This will entail additional costs.
    Many commenters were concerned that a UIT would be required to 
monitor and change its assets in a case where its assets passively 
drifted such that they would no longer be consistent with the fund's 
80% investment policy.\539\ The final rule clarifies that UITs are 
subject to the 80% investment policy requirement at the time of initial 
deposit, but not on an ongoing basis. As a result, the costs associated 
with ongoing monitoring of portfolio investments for consistency with 
the fund's 80% investment policy discussed for other funds above will 
not be present for UITs.
---------------------------------------------------------------------------

    \539\ See, e.g., SIFMA AMG Comment Letter; Invesco Comment 
Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    The final rule's approach to temporary departures differs from that 
in the Proposing Release, which would have enumerated four specific 
cases in which funds would be allowed to depart temporarily from 
compliance with the 80% test for a period of, generally, no longer than 
30 days. Many commenters interpreted this as requiring daily or 
otherwise constant monitoring of their assets in regard to the 80% 
test, even when they were not trading.\540\ The final amendments 
mitigate this concern by requiring a fund to review its portfolio 
investments on a quarterly basis to determine whether the fund's 
investments continue to be consistent with its 80% investment policy. 
Many commenters were also concerned with the enumerated exceptions to 
compliance with the 80% requirement and preferred the current standard 
in which compliance was required ``under normal circumstances.'' \541\ 
Some commenters wanted more specific exceptions to be added if the 
final rule were to include a prescribed list.\542\ Still more 
commenters were concerned that unforeseeable events might occur which 
would reasonably cause managers and investors to agree that a temporary 
change in investment focus was warranted.\543\ We agree that 
enumerating the circumstances in which a fund could deviate from their 
80% investment policy would have provided significantly less 
flexibility to fund managers. Under the final rule the loss of 
flexibility is significantly less than under the proposed rule, 
relative to the baseline. A fund's use of its flexibility in accordance 
with investors' preferences will also promote capital allocation 
efficiency. Conversely, compared to the proposal, the final rule may be 
less effective at protecting investors to the extent that fund managers 
do not effectively manage their funds to the benefit of the fund's 
investors (for example, because fund managers do not fully internalize 
investors' preferences over risk or diversification benefits). However, 
we intend that the newly established timeline for returning to 
compliance with an 80% investment policy will limit this potential 
harm.
---------------------------------------------------------------------------

    \540\ See, e.g., J.P. Morgan Asset Management Comment Letter; T. 
Rowe Comment Letter; ICI Comment Letter.
    \541\ See, e.g., Dimensional Comment Letter; Seward & Kissel 
Comment Letter; Nasdaq Comment Letter.
    \542\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
SIFMA AMG Comment Letter.
    \543\ See, e.g., SIFMA AMG Comment Letter; Dimensional Comment 
Letter; J.P. Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    Considerations Regarding Derivatives in Assessing Names Rule 
Compliance. The final amendments address the valuation of derivatives 
instruments for purposes of determining the fund's compliance with its 
80% investment policy requirement. Specifically, the final amendments 
require that, in calculating its assets for purposes of names rule 
compliance, a fund must generally use the notional amount \544\ of each 
derivatives instrument, with certain adjustments as discussed above, 
and may reduce the value of its assets by excluding cash, cash 
equivalents, and certain Treasury securities up to the notional amounts 
of the derivatives instrument(s) and the value of asset(s) sold short 
and by excluding closed-out derivative positions.\545\ An exception to 
this requirement is the use of currency derivatives associated with one 
or more specific foreign-currency-denominated equity or fixed-income 
investments held by the fund, that are entered into and maintained by 
the fund for hedging purposes, which must be excluded.\546\ The final 
rule also specifies 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.\547\
---------------------------------------------------------------------------

    \544\ In the case of a physical short, a fund would use the 
value of the asset sold short.
    \545\ See final rule 35d-1(g).
    \546\ See supra discussion following footnote 234.
    \547\ See final rule 35d-1(b)(2).
---------------------------------------------------------------------------

    Our understanding is that funds that use derivatives typically 
calculate notional amounts for purposes other than names rule 
compliance, and that such a calculation, if not already performed, 
would not be burdensome.\548\ As such, we do not

[[Page 70488]]

anticipate that there will be additional costs associated with 
calculating notional values. While some funds may not currently 
calculate one or more of the adjustments to notional value required by 
the rule, we do not expect that doing so will entail significant costs. 
The inputs required for these calculations are widely available, 
including on most platforms that allow for trading these derivatives, 
and they can be automated with widely used and accessible software. The 
level of sophistication required to implement these calculations is 
significantly lower than that needed to manage the risk of the 
derivatives instruments in question. We understand, however, that 
meeting the requirements of this aspect of the final 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. However, we anticipate that the marginal contributions to 
cost of calculating the adjusted notional value will be minimal given 
that these same systems will need to be updated to comply with the rule 
generally.
---------------------------------------------------------------------------

    \548\ 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, funds that use derivatives 
typically consider notional amounts, and not solely their market 
value, when entering into derivatives contracts or when considering 
the economic effects of a derivatives contract within an existing 
portfolio.
---------------------------------------------------------------------------

    The goal of the treatment of derivatives under the final rule is to 
align the value of the derivative being used for compliance with the 
80% requirement with the exposure that this derivative provides to 
investors. There are inherent trade-offs in achieving this goal, 
however, because derivatives instruments are so varied in their 
purposes and details of execution. On the one hand, a uniform standard 
has the danger of being inappropriate in certain cases that could alter 
the incentives for its use. On the other hand, allowing greater 
flexibility runs the risk of being too permissive in a way which could 
undermine the purpose of this aspect of the amended rule.
    Many commenters were particularly concerned with the costs 
associated with a uniform derivatives valuation approach that limits 
their flexibility to choose a valuation that would be most appropriate. 
Some of these commenters suggested alternatives, such as additional 
flexibility to decide whether to incorporate the required adjustments 
or whether the notional value or some other value would best represent 
a particular derivative's exposure, which they stated could alleviate 
these costs.\549\ One particular concern shared by many commenters was 
that derivatives used to hedge risk exposures unrelated to the name of 
the fund could cause the fund to fail an 80% test.\550\ As discussed 
above, the final amendments require currency derivatives used as a 
hedge to be excluded from the 80% test calculation, and this approach 
addresses certain of the concerns commenters raised. However, this 
exception is limited to only currency hedges, and there are other 
possible hedges (such as those on interest rates) whose notional values 
will remain in the denominator, and not the numerator, of an 80% test 
calculation. As a result, the final amendments may disincentivize some 
funds from using derivatives to hedge risks other than those related to 
currency risk in the part of a fund's portfolio that is not used to 
satisfy the 80% requirement.
---------------------------------------------------------------------------

    \549\ See, e.g., ICI Comment Letter; T. Rowe Comment Letter; 
Dechert Comment Letter.
    \550\ See, e.g., Dechert Comment Letter; Fidelity Comment 
Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    The final rule will also allow funds to include derivatives in 
their 80% basket for the purposes of complying with an 80% investment 
policy test so long as those derivatives provide exposure to one or 
more risk factors associated with the name. While in most cases, this 
will more accurately account for the derivative's effect on a 
portfolio's exposure to risks associated with the name, there may be 
instances in which this will overstate the amount of exposure a 
derivative creates. For example, in certain cases, a derivative may be 
modifying the risk of another asset in the portfolio rather than 
creating a new exposure. It may be possible for a fund to count both 
the derivative (at its notional value) and the underlying asset in the 
80% basket for the purposes of compliance with an 80% test, even though 
a more useful valuation might rightfully treat these as a single asset 
for the purposes of representing risk exposures. This double counting 
could, in these instances, make the 80% test more lenient than 
intended. To the extent that this reduces the investor protection 
intended in the rule, this would create a cost to investors. This cost 
is mitigated by the rule's codification of the effect of compliance 
with an 80% investment policy since a fund's name may still be 
misleading even if the fund technically complies with the 80% 
investment policy requirement.\551\
---------------------------------------------------------------------------

    \551\ See supra section II.A.5.
---------------------------------------------------------------------------

    Unlisted Registered Closed-End Funds and BDCs. Under the current 
rule, unless a fund's name suggests that it is a tax-exempt fund, an 
unlisted registered 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. Under the final rule amendments, unlisted registered 
closed-end funds and BDCs will not be permitted to change their 80% 
investment policies without shareholder approval unless, among other 
things, the fund provides a 60-day notice and a tender or repurchase 
offer that is not oversubscribed.\552\
---------------------------------------------------------------------------

    \552\ This will only impact existing funds if they currently 
rely on a 60-day notice period, since funds whose 80% investment 
policy is a fundamental policy already require a shareholder vote to 
change the policy.
---------------------------------------------------------------------------

    Funds that currently rely on a 60-day notice period thus have two 
options for complying with the final amendments. Some funds may choose 
to seek shareholder approval to change their 80% investment policy. 
These funds would incur costs including 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.\553\
---------------------------------------------------------------------------

    \553\ 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) (Dec. 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 receive 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 $128,800 as of May 2023. See Bureau of Labor 
Statistics CPI Inflation Calculator, available at https://www.bls.gov/data/inflation_calculator.htm. While this estimate is 
significantly lower than the average estimate from ICI, the 
distribution of costs in their sample is heavily skewed by a 
relatively small number of very expensive campaigns. The Commission 
estimate is more analogous to the median of that distribution. 
Further, the kinds of votes included in the ICI survey are much 
broader than those considered here and contain votes on more 
contentious issues over which funds may spend more resources on 
marketing and other costs.
---------------------------------------------------------------------------

    Other funds may instead opt to make a repurchase or tender offer if 
doing so

[[Page 70489]]

is cheaper or otherwise more advantageous to the fund's sponsor than 
holding a shareholder vote. The costs incurred would include legal and 
accounting fees associated with preparing offer documents and filing 
documents with the Commission such as Schedule TO, the cost of 
disseminating offer materials and information, and underwriting costs. 
There may also be costs associated with the fund needing to fulfill the 
offer and thus no longer having an adequate capital stock to take 
advantage of some investment opportunities. Some commenters noted that 
many of the funds subject to this requirement already make periodic 
tender or repurchase offers and so allowing this alternative would 
significantly reduce their costs.\554\ For such funds, if the proposed 
change in the investment policy would not create an oversubscription to 
their regular tender or repurchase offer, the cost of compliance may be 
minimal. Exercising this option will be more costly for funds that are 
not already regularly providing tender or repurchase offers.\555\
---------------------------------------------------------------------------

    \554\ See, e.g., Stradley Comment Letter; Dechert Comment 
Letter; ICI Comment Letter.
    \555\ We are unable to quantify the total of these costs because 
we do not have data on the magnitude of many of the sources of these 
costs, such as underwriting costs, which are privately negotiated. 
Further, these costs are likely to vary largely depending on the 
specific circumstances of the fund. However, the SEC has previously 
estimated the PRA burden of a Schedule TO at approximately $9,000 
per response. See Filing Fee Disclosure and Payment Methods 
Modernization, Investment Company Act Release No. 34396 (Oct. 13, 
2021) [86 FR 70166 (Dec. 9, 2021)].
---------------------------------------------------------------------------

    The cost of the final rule will therefore be the difference between 
the cost of either seeking shareholder approval or making a tender or 
repurchase offer and the cost of issuing notice under the baseline. 
Instead of incurring these costs some funds may instead choose simply 
not to change their policy when faced with these costs. The value of 
any foregone investment opportunities that would have benefited 
investors if the fund had changed its investment policy would be a cost 
of the final rule.
    The Proposing Release would have required that 80% investment 
policies for unlisted registered closed-end funds and BDCs be 
fundamental policies, with no alternative. While unlisted registered 
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.\556\ This amount could be too low to address 
the investor protection the rule is designed to address. In the 
Proposing Release, we were concerned that a large tender offer for all, 
or substantially all, of the outstanding shares could prove even more 
costly to these funds than a shareholder vote and could result in the 
fund's liquidation.
---------------------------------------------------------------------------

    \556\ See 17 CFR 270.23c-3(a)(3), (b)(5), and (c).
---------------------------------------------------------------------------

    Some commenters highlighted the costs of the proposed 
approach,\557\ and stated that an alternative in which investors were 
able to liquidate would be valuable.\558\ We believe that the costs of 
the final rule are lower than those of the proposed rule, since these 
funds may now, instead, offer a repurchase opportunity, and funds can 
choose the lower-cost alternative.
---------------------------------------------------------------------------

    \557\ See, e.g., Invesco Comment Letter; Stradley Comment 
Letter; SIFMA AMG Comment Letter.
    \558\ See, e.g., ICI Comment Letter; Simpson Thacher Comment 
Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    Effect of Compliance with an 80% Investment Policy. The amended 
rule states 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.\559\ 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 final 
amendments will codify this view to make it clear.\560\ Because the 
provision will 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 anticipate that the provision creates new costs.
---------------------------------------------------------------------------

    \559\ Final rule 35d-1(c).
    \560\ See Proposing Release, supra footnote 2, at n.101.
---------------------------------------------------------------------------

    Some commenters stated that they believed that this provision 
created new requirements that were not clear from previous statements 
by the Commission. These comments largely addressed a fund's 
responsibilities to monitor the indexes that they track \561\ and 
relatively small positions that commenters questioned whether, in 
response to an example in the 2022 Proposal, would be ``antithetical'' 
to those suggested by a fund's name.\562\ To the extent that funds 
comply with the final rules in a way that may be costlier for names 
with certain terms, this represents a cost of the rule's scope 
expansion, and not from a separate provision under the final 
amendments.\563\
---------------------------------------------------------------------------

    \561\ See, e.g., Fidelity Comment Letter; Dechert Comment 
Letter; SIFMA Comment Letter.
    \562\ See, e.g., ICI Comment Letter; J.P. Morgan Asset 
Management Comment Letter; Capital Group Comment Letter; see also 
supra footnote 537.
    \563\ See supra the text following footnote 525 through the text 
accompanying footnote 537 for a discussion of these costs.
---------------------------------------------------------------------------

    Prospectus Disclosure. The final amendments to funds' registration 
forms--specifically, Form N-1A, Form N-2, Form N-8B-2, and Form S-6--
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 terms describe, if any.\564\ We 
received one comment stating that the costs of prospectus disclosure 
were underestimated.\565\
---------------------------------------------------------------------------

    \564\ See instruction to Item 4(a)(1) of Form N-1A; instruction 
to Item 9(b)(1) of Form N-1A; instruction 2 to Item 8(2) of Form N-
2; instruction 2 to Item 11 of Form N-8B-2, and instruction 1(a) of 
the Instructions as to the Prospectus of Form S-6. Based on the 
results of the PRA analysis provided in Tables 2, 3, 4, and 5 infra 
it is estimated that the annual internal costs, plus initial costs 
annualized over a 3-year period, attributable to information 
collection requirements associated with this aspect of the final 
amendments will be $53,694,312. The annual external costs are 
estimated to be $12,453,730. However, as we understand that 
including the prospectus disclosure that the final amendments would 
require is currently a common practice, the PRA estimates likely 
overestimate the costs associated with the final amendments for 
those funds whose disclosure is currently in line with the 
disclosure the amendments would require. See infra section V.C.
    \565\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    The final amendments require funds to tag most of the new 
prospectus disclosure in Inline XBRL.\566\ This will impose on Form N-
1A and Form N-2 filers the cost of adding new data tags for the new 
disclosures on Form N-1A and Form N-2, but will not include any initial 
implementation costs associated with structuring data, because those 
forms are already subject to structuring requirements. Thus, 
notwithstanding one commenter's statement that the costs associated 
with Inline XBRL tagging as proposed would be significant, we do not 
believe the Inline

[[Page 70490]]

XBRL tagging requirement would impose significant costs on Form N-1A 
and Form N-2 filers.\567\ For UITs and their sponsors, as noted by 
another commenter, 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 because UITs are not currently subject to 
Inline XBRL requirements.\568\ As discussed in further detail below, 
notwithstanding this commenter's recommendation to except UITs from 
Inline XBRL tagging requirements, we are including all funds (including 
UITs) within the scope of tagging requirements under the final 
rule.\569\
---------------------------------------------------------------------------

    \566\ See supra footnote 508. Based on the results of the PRA 
analysis provided in Table 7 infra it is estimated that the ongoing 
external costs attributable to Inline XBRL tagging requirements will 
be $749,550 for Form N-1A, Form N-2, Form N-8B-2 and Form S-6 
filers, and the ongoing internal costs, plus initial costs 
annualized over a 3-year period, will be $1,562,678 for those 
filers. Form N-8B-2 and Form S-6 filers (i.e., UITs) are not subject 
to any current Inline XBRL requirements (or Inline XBRL requirements 
with compliance dates in the future) and will 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.
    \567\ See SIFMA Comment Letter.
    \568\ See supra text accompanying footnote 337; Invesco Comment 
Letter.
    \569\ See infra section IV.E.4.
---------------------------------------------------------------------------

    Plain English/Established Industry Use Requirement. For funds that 
are required to adopt an 80% investment policy, the final 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.\570\ To the extent that funds are currently using terms 
in their names that are not consistent with either, funds would bear 
costs to either change their name or their investment policy so that 
they can define the terms in such a way that would comply with this 
provision. These costs will be similar to those described above for 
funds changing their name or investment policies and practices for 
other reasons.
---------------------------------------------------------------------------

    \570\ See supra footnote 341 and accompanying text.
---------------------------------------------------------------------------

    New Form N-PORT Reporting Requirements. The final amendments 
include new Form N-PORT reporting items regarding the 80% investment 
policy that a fund will be required to adopt in compliance with the 
names rule.\571\ As proposed, the final rule requires N-PORT funds that 
are required to adopt an 80% investment policy to report on Form N-
PORT: (1) whether each investment in the fund's portfolio is in the 
fund's 80% basket; (2) the value of the fund's 80% basket, as a 
percentage of the value of the fund's assets. The final amendments also 
add a new reporting item, in which funds will report the definitions of 
terms used in the fund's name including specific criteria a fund uses 
to select the investments the term describes, if any.\572\
---------------------------------------------------------------------------

    \571\ Based on the results of the PRA analysis provided in Table 
6, it is estimated that the ongoing annual internal costs, plus 
initial costs annualized over a 3-year period, attributable to 
information collection requirements for reporting about an 80% 
investment policy are $8,059,912. The annual external costs are 
estimated to be $11,216,380.
    \572\ Based on the results of the PRA analysis provided in Table 
6, it is estimated that the ongoing annual internal costs, plus 
initial costs annualized over a 3-year period, attributable to 
information collection requirements for investments to be included 
in a fund's 80% basket are $56,419,384. The annual external costs 
are estimated to be $11,216,380.
---------------------------------------------------------------------------

    Under the baseline, funds covered by the rule likely already 
tracked whether a particular asset was a part of the fund's 80% basket, 
as well as the total value of the 80% basket as a share of the total 
assets of the fund, as an aspect of their compliance practices. 
However, we recognize that reporting these items on Form N-PORT could 
necessitate periodic reassessments that might not otherwise occur. It 
may also require modifications to compliance systems and the use of 
third-party service providers.
    Although the final amendments will not increase the frequency of 
public disclosure, they will increase the amount of information 
available about certain funds' portfolio investments. Form N-PORT data, 
however, is made public only 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.
    The proposed rule required reporting information for each month of 
the quarter, while the final rule instead requires reporting 
information only for the last day of the third month of the quarter. 
The proposed rule also would have required certain information to be 
reported on Form N-PORT that is not included in the final Form N-PORT 
amendments (the number of days that 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), although the final reporting requirements 
include a new reporting item that was not included in the proposal (the 
definitions of terms used in the fund's name and criteria for selecting 
the investments the name describes, if any). The final rule should, on 
balance, have lower costs compared to the proposal because of the 
reduced amount of information reported on net, and efficiency gains in 
aligning a fund's compliance review with its reporting 
obligations.\573\
---------------------------------------------------------------------------

    \573\ See supra section II.E.
---------------------------------------------------------------------------

    The compliance cost associated with the new Form N-PORT reporting 
requirements includes the cost of adding new data tags for the newly 
reported items.\574\ It does not include any initial implementation 
costs associated with structuring data, because the form is already 
subject to structuring requirements.
---------------------------------------------------------------------------

    \574\ See supra footnote 571.
---------------------------------------------------------------------------

    Recordkeeping. The final rule requires funds to maintain certain 
records if the fund is required to adopt an 80% investment policy.\575\ 
The final rule does 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 is 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 and would be readily available to 
Commission staff.\576\
---------------------------------------------------------------------------

    \575\ See final rule 35d-1(b)(3). The recordkeeping requirements 
will apply to UITs only at the time of initial deposit, and with 
respect to any notice sent to shareholders.
    \576\ Based on the results of the PRA analysis provided in Table 
1, it is estimated that the internal annual costs, plus initial 
costs annualized over a 3-year period, attributable to recordkeeping 
requirements would be $30,450 per fund, with an additional $565 of 
external annual costs.
---------------------------------------------------------------------------

    We anticipate that much of the recordkeeping required in this rule 
can be at least partially automated for most funds.\577\ For example, 
we anticipate that records relating to the value of the fund's 80% 
basket and whether a particular investment is included in that basket 
can be automated for most funds, though for some funds this process may 
necessitate more manual steps as outlined above. For those records that 
can be automated, we believe that the marginal contribution to the 
costs of automating these systems above and beyond those which would be 
required to otherwise comply with the rule are relatively small, since 
the systems that retain this information will be similar to those 
necessary to ensure compliance at the time of investment or on a 
quarterly reassessment. We recognize, however, that some records, such 
as those documenting the reasons for any departures from the 80% 
investment policy, are unlikely to be easily automated.
---------------------------------------------------------------------------

    \577\ See supra footnote 419 and accompanying text.
---------------------------------------------------------------------------

    The final rule differs from the proposed amended rule in ways that 
may reduce costs in comparison to the proposal. First, under the final 
amendments funds are required to reassess the characteristics of 
individual assets on only a quarterly rather than ongoing basis. Since 
it may be difficult for some funds to fully automate the creation of a 
record with the basis for an asset's inclusion in the 80% basket,

[[Page 70491]]

particularly if its 80% investment policy relies on managerial 
judgment, this change could substantially lower the cost. However, to 
the extent that funds hold particular assets for less than two 
consecutive days, this change will not provide much cost mitigation 
since funds are also required to keep such records at the time of 
investment.
    Further, this rule as initially proposed would have additionally 
required funds that are not required to adopt an 80% investment policy 
to also maintain records of their analysis in that determination. Since 
the final rule will omit this requirement, the cost of complying with 
the rule will be lower for these funds than under the proposal.
    Notice Requirement. The names rule requires 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.\578\ The final 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 alterations 
would materially increase the cost to prepare the notice.\579\
---------------------------------------------------------------------------

    \578\ Final rule 35d-1(a)(2)(ii).
    \579\ Like the current rule, based on the results of the PRA 
analysis provided in Table 1, it is estimated that the internal 
annual costs, plus initial costs annualized over a 3-year period, 
attributable to notice requirements would be $8,500 per fund, for 
those funds providing notices. We also estimate an additional $565 
in external annual costs attributable to notice requirements.
---------------------------------------------------------------------------

    Quantified Compliance Costs. We estimate that the initial costs to 
establish and implement practices designed to meet the requirements of 
the final amendments as described above will range from $50,000 to 
$500,000 per fund, depending on the particular facts and circumstances 
of the fund.\580\ We believe the costs would be closer to the lower end 
of the range for funds whose current practices are more similar to the 
requirements of the final rule.\581\
---------------------------------------------------------------------------

    \580\ We believe that the low end of this range is reflective of 
a fund that incurs costs only to analyze the application of the 
rule, or that is covered by the rule and already has practices in 
place that could be readily adapted to meet the final rule's 
requirements. In the latter case the fund would incur costs 
associated with analyzing its current practices relative to the 
final rule's requirements.
    \581\ We believe the costs would be closer to the lower end of 
the range for funds that belong to large fund families because 
certain aspects of the costs, such as most aspects of system 
automation or the costs of reviewing rule requirements, are fixed 
costs that could be spread across multiple funds.
---------------------------------------------------------------------------

    The direct estimated costs of compliance are broadly attributable 
to the following activities: (1) reviewing the final rule's 
requirements; (2) determining whether to change a fund's name or comply 
with the new requirements, as applicable; (3) developing new (or 
modifying existing) practices, reporting, and recordkeeping 
requirements to align with the requirements of the final rule; (4) 
integrating and implementing those practices, reporting, and 
recordkeeping requirements to the rest of the funds' activities; and 
(5) preparing new training materials and administering training 
sessions for staff in affected areas.
    The estimated range in this section is aimed at quantifying the 
full direct compliance cost associated with the final amendments' 
provisions. As a result, the estimates in this section encompass more 
costs than do the estimates discussed below in section V for purposes 
of the Paperwork Reduction Act of 1995 (``PRA''). Further, note that 
the estimated range of costs above is the same as that included in the 
economic analysis in the proposing release. Keeping the estimated range 
the same reflects our assessment that the funds with the highest 
compliance costs, such as those whose entire portfolio turns over on a 
nearly daily basis, will face costs similar to those that would have 
been incurred under the proposed rule. The low end of the range is 
reflective of a fund that only incurs cost associated with analyzing 
the requirements of the rule.
    However, the final amendments are different from the proposed 
amendments in many ways that mitigate costs for most but not all funds. 
Compared to the Proposing Release, we believe that the largest 
reduction in cost comes from changing the provisions that would have 
effectively required continual, manual monitoring of whether funds' 
portfolio investments are consistent with the fund's 80% investment 
policy. This is consistent with many commenters' concerns.\582\ Since 
this is not required under the final rule unless all assets are traded 
daily, and other changes have also been made to mitigate costs, we 
believe that the typical cost for a fund to comply with the final rule 
will, while still contained within the same range, be significantly 
lower than the cost of compliance under the approach that the Proposing 
Release described.
---------------------------------------------------------------------------

    \582\ See, e.g., J.P. Morgan Asset Management Comment Letter; T. 
Rowe Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    Some funds may change their name rather than comply with the 
amended rule. For these funds, we estimate that the total direct 
burden, including analyzing the rule and deciding to change their name, 
is a one-time cost range of $75,000 to $250,000. Funds that decide to 
change their name rather than comply with the new requirements will 
also incur indirect costs associated with changing fund names, which 
include a potential loss in market share. However, this will translate 
to a cost to investors only to the extent that there is a decrease in 
efficiency resulting from investors being less able to find appropriate 
funds as a result of the rule.
    Without providing specifics, some commenters requested the 
Commission analyze Commission rules and proposals holistically.\583\ 
The Commission's economic analysis in each adopting release considers 
the incremental benefits and costs for the specific rule--that is the 
benefits and costs stemming from that rule compared to the baseline. 
One commenter stated that the Commission should consider ``practical 
realities such as the implementation timelines as well as operational 
and compliance requirements.'' \584\ The Commission acknowledges that 
resource limitations can lead to higher compliance costs in some cases 
when two or more rules affecting the same parties have overlapping 
compliance periods. In determining compliance periods, the Commission 
considers the benefits of the rules as well as the costs of delayed 
compliance periods and potential overlapping compliance periods.
---------------------------------------------------------------------------

    \583\ See, e.g., ICI Comment Letter III (``The Commission has 
issued a wide range of interconnected rule proposals . . . [that] in 
the aggregate warrant further analysis by the Commission. . . . The 
Commission's failure to consider the Interconnected Rules 
holistically is a widespread concern among other market 
participants.''); USCOC Comment Letter (urging the Commission to 
``determine the cumulative impact of its regulatory agenda upon 
economic activity or capital formation''). Commenters also 
specifically suggested the Commission consider the interaction 
between the final rule and the ESG Disclosure Proposal and/or its 
proposal relating to outsourcing by investment advisers. See Dechert 
Comment Letter, ICI Comment Letter, and AIC Comment Letter; see also 
Outsourcing by Investment Advisers, Investment Advisers Act Release 
No. 6176 (Oct. 26, 2022) [87 FR 68816 (Nov. 16, 2022)]. These 
proposals have not been adopted and thus have not been considered as 
part of the baseline here. To the extent those proposals are adopted 
in the future, the baseline in those subsequent rulemakings will 
reflect the regulatory landscape that is current at that time.
    \584\ ICI Comment Letter III. See also USCOC Comment Letter 
(``Regulated entities would have to divert substantial resources to 
comply with a host of new rules in a condensed time frame.'').
---------------------------------------------------------------------------

    In this regard, some commenters \585\ mentioned the recent 
Shareholder

[[Page 70492]]

Reports Final Rule \586\ and the recent Money Market Funds Final 
Rule.\587\ Overlapping compliance periods for these rules may result in 
economic costs for some entities that are also in the scope of the 
final amendments.\588\ For the reasons discussed above, we have adopted 
longer compliance periods relative to the proposal.\589\ In analyzing 
the costs of this final rule relative to the proposal, we believe the 
potential for heightened costs is mitigated by those longer compliance 
periods. The costs from overlapping compliance periods for smaller 
entities are even further mitigated by the longer compliance period for 
those entities relative to the compliance period for larger entities. 
Moreover, commenters raised concerns about the costs of overlapping 
compliance periods in the context of the proposal and, as discussed 
above, we have taken steps to reduce costs of the final rule in several 
ways from the proposal.\590\
---------------------------------------------------------------------------

    \585\ See, e.g., ICI Comment Letter III.
    \586\ See Tailored Shareholder Reports for Mutual Funds and 
Exchange-Traded Funds; Fee Information in Investment Company 
Advertisements, Investment Company Act Release No. 34731 (Oct. 26, 
2022) [87 FR 72758 (Nov. 25, 2022)] (``Shareholder Reports Final 
Rule''). The compliance date for those rules will be in July 2024. 
Certain fund managers, such as managers to mutual funds and ETFs, 
that will manage funds subject to the final rule are also generally 
subject to different aspects of the Shareholder Reports Final Rule.
    \587\ See Money Market Fund Reforms; Form PF Reporting 
Requirements for Large Liquidity Fund Advisers; Technical Amendments 
to Form N-CSR and Form N-1A, Investment Company Act Release No. 
34959 (Jul. 12, 2023) [88 FR 51404 (Aug. 3, 2023)] (``Money Market 
Fund Final Rule''). The compliance dates for these rules vary 
between Oct. 2023 and Oct. 2024. Certain fund managers, namely 
managers to money market funds, who will be subject to the final 
rule will also be subject to the Money Market Funds Final Rule.
    \588\ The Commission also considered the fact that, to the 
extent recently adopted rules address matters related to those in 
the final rules, the benefits of the final rules may be impacted to 
the extent recently adopted rules already offer certain investor 
protections or to the extent that recently adopted rules and the 
final rules offer synergies. However, we do not believe that there 
are significant interacting effects with recently adopted rules with 
respect to benefits in this case, because recently adopted rules do 
not address the same set of issues as those addressed in the final 
rule.
    \589\ As discussed above, the tiered compliance period we are 
adopting is designed to strike the appropriate balance between 
allowing funds adequate time to adjust their compliance practices, 
and allowing investors and shareholders to benefit from the amended 
names rule framework. See supra section II.H; see also infra section 
IV.D.3.
    \590\ For example, as discussed throughout this section, 
relative to the proposed rule the final rule has fewer recordkeeping 
tasks, fewer items on Form N-PORT, and removes the need for daily 
assessments of portfolio compliance with an 80% investment policy 
for assets that are not actively traded. See supra section IV.D.2.
---------------------------------------------------------------------------

    As a result, we believe that for both larger and smaller entities, 
any higher costs due to overlapping compliance periods raised in the 
context of the proposal may generally be mitigated under the final 
rules. We therefore do not believe that the overlap between the final 
rules, the Shareholder Reports Final Rule, and the Money Market Funds 
Final Rule will significantly increase the compliance costs of the 
final rule for small or large entities.
3. Effects on Efficiency, Competition and Capital Formation
    To the extent the final amendments will help 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 final amendments and to the extent 
those more appropriately representative fund names will allow investors 
to more easily select funds that better match their preferences, 
however, we would expect the efficiency of investment to increase. 
Conversely, if, as a result of the final rules, some funds change their 
names and investment policies in ways that lead to less efficient 
matching between funds and some investors or increase search costs for 
some investors, capital allocation efficiency may decrease. For 
example, some funds may decide to use more generic names so as not to 
convey an investment focus with their name. If these funds previously 
had names that conveyed information that investors found more useful, 
then investors will either face higher costs in finding the funds best 
suited to their goals, or choose funds less tailored to those goals.
    Additionally, the final amendments may disincentivize some funds 
from investing in assets with characteristics that do not readily lend 
themselves to popular investment focuses and incentivize investment in 
assets that do. Depending on whether any such change aligns with the 
preferences of investors or runs counter to their preferences, capital 
allocation efficiency may increase or decrease.
    To the extent the final amendments increase efficiency of 
investment in the fund 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 they lack confidence that funds' names accurately convey funds' 
investment focuses, then to the extent the final amendments lower those 
costs and enhance investor protections, we would expect to observe more 
investors entering the funds market.\591\ 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.
---------------------------------------------------------------------------

    \591\ For example, by decreasing potential greenwashing 
concerns, the final amendments, in turn, may increase investor 
confidence in selecting funds with names implying an ESG strategy 
and increase capital formation among ESG issuers.
---------------------------------------------------------------------------

    More investors entering the funds market could also increase 
competition, to the extent that competition in a market is related to 
the size of the market. The final amendments may affect competition 
through an additional channel: certain funds may have established 
reputations for making investments consistent with the investment focus 
the fund's name suggests. 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 investment focus the fund's name suggests.\592\ There may be 
investors who do not invest in funds lacking established reputations 
for making investments consistent with the focuses their names suggest 
(or invest less than they would have) because those investors are less 
confident that such funds will make investments consistent with their 
names. We would expect the investor protections offered by the final 
amendments, which are designed to ensure that funds' names accurately 
convey funds' investment focuses, could enhance the ability of funds 
without established reputations to compete with those funds with 
established reputations. This could, in turn, lead to increased 
investment for funds without established reputations.\593\
---------------------------------------------------------------------------

    \592\ 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'').
    \593\ This argument assumes that fund reputation and investor 
protections provided by regulatory requirements are substitute 
mechanisms for providing assurances to investors.
---------------------------------------------------------------------------

    However, the compliance costs of the rule may also result in 
negative competitive effects by causing firms to close their funds and 
reducing the competitive alternatives investors have. Relative to the 
proposed rule, the final rule took steps to mitigate these costs in 
several ways. For example, relative to

[[Page 70493]]

the proposed rule, the final rule has fewer recordkeeping tasks, fewer 
items on Form N-PORT, and removes the need for daily assessments of 
portfolio compliance with an 80% investment policy for assets that are 
not actively traded.\594\
---------------------------------------------------------------------------

    \594\ See supra section IV.D.2.
---------------------------------------------------------------------------

    In addition, as stated above, some commenters requested the 
Commission consider interactions between the economic effects of the 
proposed rule and other recent Commission rules, as well as practical 
realities such as implementation timelines.\595\ As discussed above, 
the Commission acknowledges that overlapping compliance periods may in 
some cases increase costs.\596\ This may be particularly true for 
smaller entities with more limited compliance resources. This effect 
can negatively impact competition because these entities may be less 
able to absorb or pass on these additional costs, making it more 
difficult for them to remain in business or compete. However, in 
addition to mitigating the overall costs of the final rules relative to 
the proposal,\597\ we believe we have mitigated the potential for 
heightened costs by adopting longer compliance periods for all entities 
relative to the proposal, and even longer compliance periods for 
smaller entities. The compliance periods for the rules mentioned by 
commenters, the Shareholder Reports Final Rule and the Money Market 
Funds Final Rule,\598\ culminate in approximately July-October 2024 
while the compliance dates for the final rule are [FILL IN date 24 
months following amendments' effective date] for larger entities, and 
[FILL IN date 30 months following amendments' effective date] for 
smaller entities. We therefore do not expect the risk of negative 
competitive effects from increased compliance costs from simultaneous 
compliance periods to be significant.
---------------------------------------------------------------------------

    \595\ See supra section IV.D.
    \596\ See supra section IV.D.2.
    \597\ See supra footnote 594 and accompanying text.
    \598\ See supra section IV.D.2; see also, e.g., ICI Comment 
Letter III.
---------------------------------------------------------------------------

    Finally, to the extent that the final amendments disincentivize 
some funds from investing in assets with characteristics that do not 
readily lend themselves to popular investment focuses that fund names 
suggest and incentivizes investment in assets that do, the final 
amendments could affect capital formation. For example, it may be 
relatively more difficult for funds to conclude that certain issuers--
for example, firms that are newer, smaller, or whose strategies and 
performance objectives are not as well publicized or as clearly 
articulated--should appropriately be included in a fund's 80% basket, 
and therefore funds that are within the scope of the 80% investment 
policy requirement may invest relatively less in these issuers. These 
issuers could consequently face increased costs of capital. Conversely, 
assets whose appropriate inclusion in a fund's 80% basket is relatively 
easier for a fund to determine (for example, because they exhibit 
quantifiable criteria that assist in this determination) may receive 
more fund attention and consequently face reduced costs of capital.

E. Reasonable Alternatives Considered

1. Disclosure-Based Framework
    The final rule expands the scope of names that require an 80% 
investment policy. For certain categories of names, we considered 
whether a disclosure-based framework would be more appropriate. 
Specifically, we considered whether a fund whose name suggests a 
particular investment focus should be required to have additional 
disclosure in that fund's prospectus describing the investment strategy 
in lieu of the requirement to maintain an 80% investment policy.\599\ 
Such a requirement could have been accompanied either by no scope 
expansion at all for the 80% investment policy requirement or by a 
less-encompassing scope expansion. The additional disclosure could have 
included definitions of the terms in the name of the fund, criteria for 
investment selection, or other information that would clarify for 
investors how a fund's name relates to the investment strategy pursued 
by the fund.
---------------------------------------------------------------------------

    \599\ This approach was suggested by many commenters (see, e.g., 
ICI Comment Letter, Dechert Comment Letter; Cato Institute Comment 
Letter) and offered by Commissioner Peirce (see statement, available 
at https://www.sec.gov/news/statement/peirce-fund-names-statement-052522).
---------------------------------------------------------------------------

    We are cognizant of the differential cost and benefits of this 
alternative relative to the adopted expansion of the 80% investment 
policy requirement. In particular, funds whose names include terms that 
are defined at least partially using managerial judgment are likely to 
face higher costs and lower benefits from an 80% test relative to funds 
with names that include more objective terms.\600\
---------------------------------------------------------------------------

    \600\ For a fuller discussion, see supra section IV.D.2.
---------------------------------------------------------------------------

    However, we also considered the costs associated with excluding 
certain terms or types of terms from the requirement. Excluding certain 
types of funds names, or terms used in fund names, from the requirement 
would incentivize funds to follow strategies associated with these 
exclusions and thus limit the investment options available to 
investors. This, however, may be balanced by the effect of investors 
seeking funds covered by the amended rule. In addition, to the extent 
that investor behavior is affected by the name of the fund itself, 
additional prospectus disclosure on its own would not provide 
additional investor protection. There is significant evidence from 
academic literature that a fund's name does affect investor behavior 
above and beyond what can be explained by any observable aspect of the 
fund's actual investment strategy.\601\
---------------------------------------------------------------------------

    \601\ See supra section IV.C.
---------------------------------------------------------------------------

2. Alternatives to 90-Day Temporary Departure Limit
    The final amendments require a fund to invest consistent with its 
80% investment policy under normal circumstances. In the event that a 
fund identifies that its portfolio is no longer invested consistent 
with its 80% investment policy, a fund must return to compliance as 
soon as is reasonably practicable and in no more than 90 consecutive 
days. Separately, if the fund decides to invest in a manner not 
consistent with the 80% investment policy under other-than-normal 
circumstances, the fund is not required to come back into compliance as 
soon as reasonably practicable but must come back into compliance 
within 90 consecutive days. 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. We also considered whether to adopt a limit 
greater than 90 days. 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.
    Collectively, these alternatives may provide more flexibility for 
funds to address the conditions that necessitate temporary departures 
than the final amendments. Either they would not limit the duration for 
which a fund could engage in a temporary departure, provided that the 
board either approves or is notified of the departure, or they would 
increase the allowable length of time that a fund could depart from its

[[Page 70494]]

80% investment policy. These approaches could 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 final amendments at addressing the concerns highlighted above 
regarding portfolio ``drift'' or extended-length intentional 
departures. That is, fund managers and boards may not fully internalize 
investors' preferences for certain elements of a portfolio, such as 
risk and diversification benefits, that a fund name suggests, and so 
could be willing to extend departures for longer than would be optimal 
for investors. For example, a fund board could determine to engage in a 
departure for longer than 90 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 named 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 the alternative that includes board notification or 
approval would increase burdens on fund boards, particularly if we were 
to require the approval or notification be immediate. Further, in 
determining not to use a longer time frame for this requirement, we 
considered the fact that in practice funds may be out of compliance for 
more than 90 days, since funds will be required to reassess their 
portfolio assets' inclusion in the fund's 80% basket no less than 
quarterly and funds may unknowingly be out of compliance between 
assessments.
3. Permit But Not Require 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 using notional values for purposes of 
assessing names rule compliance. As discussed in section II.A.3 above, 
an approach where a fund uses 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 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 in most 
cases, we are requiring, rather than permitting, the use of notional 
values.
4. Exclude Unit Investment Trusts From Requirements for Tagging 
Prospectus Disclosure
    Under the final amendments, the new prospectus disclosure of term 
definitions and investment selection criteria submitted by UITs on Form 
N-8B-2 and Form S-6 will be tagged in Inline XBRL. Alternatively, we 
could have changed the scope of the tagging requirement for the new 
prospectus disclosures by excepting UITs from this requirement. Such an 
exception was suggested by one commenter, who noted that UITs are not 
currently required to tag any filings in Inline XBRL.\602\ Under this 
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 tagging requirement.\603\ 
However, narrowing the scope of tagging requirements to exclude UITs 
would diminish the extent of informational benefits that would accrue 
as a result of the disclosure requirements by making UITs' disclosures 
comparatively costlier to process and analyze.\604\ As such, we are not 
excluding UITs from Inline XBRL tagging requirements.
---------------------------------------------------------------------------

    \602\ See supra footnote 433.
    \603\ See infra section V.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 66 (June 2023), at 5-1; see 17 CFR 
232.301 (incorporating EDGAR Filer Manual into Regulation S-T). To 
the extent UITs 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 UITs will incur under the final 
amendments.
    \604\ In addition, one commenter noted that UITs can avail 
themselves of the same applications and processes used by other fund 
types that report information using Inline XBRL. See supra footnote 
433.
---------------------------------------------------------------------------

V. Paperwork Reduction Act Analysis

A. Introduction

    Certain provisions of the final rules and form amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\605\ We are submitting the 
final collections of information to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA.\606\ The titles for 
the collections of information are: (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 Unit 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). 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.
---------------------------------------------------------------------------

    \605\ 44 U.S.C. 3501 et seq.
    \606\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The Commission published notice soliciting comments on the 
collection of information requirements in the Proposing Release and 
submitted the proposed collections of information to OMB for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The Commission 
received some comments that specifically addressed the estimated PRA 
burdens and costs in the Proposing Release, as well as some comments 
that discussed the overall burdens of implementing aspects of the 
proposal associated with collections of information. We discuss these 
comments below along with discussing updated estimates of the 
collection of information burdens associated with the final amendments 
to rule 35d-1, Form N-1A, Form N-2, Form N-8B-2, Form S-6, Form N-PORT; 
and the interactive data requirements under the final

[[Page 70495]]

amendments. A description of the final amendments, including the need 
for the information and its use, as well as a description of the likely 
respondents, may be found in sections I and II above, and a discussion 
of the economic effects of the final amendments may be found in section 
IV above.

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. The final 
amendments will expand the scope of funds covered by the 80% investment 
policy requirement of rule 35d-1. In addition to those fund names 
currently subject to the rule, the final amendments specify that any 
fund with a name suggesting that the fund focuses its investments in 
investments that have, or whose issuers have, particular 
characteristics will have to adopt an 80% investment policy.
    We are also adopting amendments to the names rule's notice 
requirement. These amendments are designed to specify further the 
content and delivery of the notice, and address more directly the needs 
of investors who elect electronic delivery. The final amendments will 
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 final amendments also include certain new recordkeeping 
requirements. These amendments will 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 among other things 
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, and certain information regarding departures from the fund's 
80% investment policy. A fund also will be required to keep records of 
any notice sent to the fund's shareholders pursuant to the rule. In a 
modification to the proposal, the final amendments will not require 
funds that do not adopt an 80% policy to maintain a record of the 
fund's analysis that such policy is not required under the names 
rule.\607\
---------------------------------------------------------------------------

    \607\ See supra section II.F.
---------------------------------------------------------------------------

    Rule 35d-1, including the final amendments to the rule, contains 
collection of information requirements. These collection of information 
requirements include, as detailed in the chart below, the notice 
requirement and recordkeeping requirements for funds that are required 
to adopt an 80% investment policy. Compliance with these requirements 
is mandatory. Responses to these requirements will not be kept 
confidential.
    The Commission received only one comment that specifically 
addressed the PRA analysis for the proposed amendments to rule 35d-1, 
stating that the Commission had ``significantly underestimated'' the 
costs related to preparing and providing notices to shareholders.\608\ 
The Commission received other comments that did not specifically 
address the PRA analysis but suggested that the Commission had 
generally underestimated the compliance costs associated with the 
proposed notice and recordkeeping requirements.\609\ Some commenters 
stated that the costs of providing notices would likely increase in 
light of the rule's increase in scope.\610\ With respect to the 
proposed recordkeeping requirements, commenters stated that funds would 
face significant compliance costs related to the requirement to 
document each investment included in the 80% basket.\611\ Some 
commenters also stated that the proposed recordkeeping requirements may 
not be easily automated, including the requirement to include a basis 
for including each investment in the 80% basket, and the reasons for 
departure from the fund's 80% investment policy.\612\
---------------------------------------------------------------------------

    \608\ ICI Comment Letter.
    \609\ ICI Comment Letter; T. Rowe Comment Letter; SIFMA AMG 
Comment Letter; Seward & Kissel Comment Letter.
    \610\ ICI Comment Letter; SIFMA AMG Comment Letter; T. Rowe 
Comment Letter; Dechert Comment Letter.
    \611\ ICI Comment Letter; T. Rowe Comment Letter; SIFMA Comment 
Letter; Seward & Kissel Comment Letter.
    \612\ Invesco Comment Letter; Seward & Kissel Comment Letter.
---------------------------------------------------------------------------

    We have adjusted the proposal's estimated annual burden hours and 
total time costs to reflect these comments and to reflect changes from 
the proposal. Specifically, we are increasing the estimated annual 
burden associated with the recordkeeping requirement to reflect that 
certain records may not easily lend themselves to automation. The final 
estimate also reflects that funds will be required under the final 
amendments to reassess the characteristics of investments in the fund's 
80% basket on a quarterly basis, in contrast to the proposed rule, 
which would have required funds to engage in continual compliance 
testing to reassess the characteristics of investments in the fund's 
80% basket.\613\ Because we are not adopting the proposed recordkeeping 
requirement for funds that are not required to adopt 80% investment 
policies, the burdens associated with that requirement are omitted from 
the final estimates below. We have also adjusted the proposal's 
estimated annual burden hours and total time costs to reflect updated 
wage rates. Because funds already have in place systems required to 
provide notice to shareholders, we do not believe that per-fund costs 
of providing notice to shareholders will materially increase as result 
of the rule's increased scope under the final amendments. We also do 
not believe that per-fund costs of providing notice will increase as a 
direct result of exception under the final amendments related to 
unlisted registered closed-end funds and BDCs because we believe that 
the costs associated with providing notice under this exception are 
comparable to the costs that a fund not relying on this exception would 
incur by providing notices associated with the shareholder vote that 
would otherwise be required for a change to the fund's investment 
policy. The proposed estimate of funds that would provide notices under 
the names rule over-estimated the number of unlisted registered closed-
end funds and BDCs that would provide notices, as it did not subtract 
unlisted registered closed-end funds and BDCs from the overall estimate 
of registered closed-end funds and BDCs (even though the proposal did 
not anticipate that unlisted registered closed-end funds and BDCs would 
provide notices under the names rule, as they would have to conduct a 
shareholder vote in connection with a change in an 80% investment 
policy). We are therefore not changing our analysis in our estimates of 
the final rules' PRA burdens to increase the proposed estimate, even 
though the final amendments (unlike the proposal) would permit unlisted 
registered closed-end funds and BDCs to send notices to shareholders in 
connection with a change in an 80% investment policy instead of holding 
a shareholder vote.
---------------------------------------------------------------------------

    \613\ See supra section II.A.2.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the final notice and recordkeeping 
amendments to rule 35d-1.

[[Page 70496]]



                                                    Table 1--PRA Estimates for Rule 35d-1 Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Annual
                                       Initial          Annual hours \1\              Wage rate \2\             Internal time costs       external  cost
                                        hours                                                                                                 burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Currently Aproved Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notice Requirement...................        0  20 hours \3\...................  $425 (estimate of wage   $8,500........................  ..............
Number of Funds......................  .......  x 38 funds \4\.................   rate in most recently   x 38 funds....................
                                                                                  approved supporting
                                                                                  statement).
Current Burden Estimates.............  .......  760 hours......................  .......................  $323,000......................              $0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Proposed Estimated Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notice Requirement...................        0  20 hours \5\...................  $425 (blended rate for   $8,500........................         \7\ 496
Number of Funds......................  .......  x 34 funds \6\.................   attorneys).             x 34 funds....................
Total New Burden for Notice            .......  680 hours......................  .......................  $289,000......................          16,864
 Requirement (I).
Recordkeeping for Funds with an 80%      \9\ 9  50 hours.......................  $356 (1:1 blend for      $17,800.......................             496
 Policy \8\.                           .......  x 10,394 funds.................   compliance attorney     x 10,394 funds................
Number of Funds......................                                             and senior programmer).
Total New Burden for Recordkeeping     .......  519,700 hours..................  .......................  $185,013,200..................       5,155,424
 For Funds Required to Adopt 80%
 Policy (II).
Recordkeeping For Funds Not Required         0  1 hour.........................  $425 (blended rate for   $425..........................             496
 to Adopt 80% Policy.                           x 3,465 funds \10\.............   attorneys).             x 3,465 funds.................
Total New Burden for Recordkeeping     .......  3,465 hours....................  .......................  $1,472,625....................       1,718,640
 For Funds Not Required to Adopt 80%
 Policy (III).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Total Proposed Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden (I + II +      .......  523,845 hours..................  .......................  $186,774,825..................       6,890,910
 III).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Final Estimated Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notice Requirement...................        0  20 hours \5\...................  $425 (blended rate for   $8,500........................        \11\ 565
Number of Funds......................  .......  x 34 funds \6\.................   attorneys).             x 34 funds....................
Total New Burden for Notice            .......  680 hours......................  .......................  $289,000......................          19,210
 Requirement (I).
Recordkeeping for Funds with an 80%      \9\ 9  75 hours \12\..................  $406 (1:1 blend for      $30,450.......................             565
 Policy \8\.                           .......  x 10,291 funds.................   compliance attorney     x 10,291 funds................
Number of Funds......................                                             and senior programmer).
Total New Burden for Recordkeeping     .......  771,825 hours..................  .......................  $313,360,950..................       5,814,415
 (II).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Total Final Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden (I + II).....  .......  772,505 hours..................  .......................  $313,649,950..................       5,833,625
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ The estimated wage figures are based on published rates for the professionals described in this chart, modified to account for an 1800-hour work-
  year and inflation. The estimated figures for the proposed and final burdens were multiplied by 5.35 to account for bonuses, firm size, employee
  benefits, and overhead. See Securities Industry and Financial Markets Association's Report on Management & Professional Earnings in the Securities
  Industry 2013.
\3\ This estimate assumed that these notices are typically short, one-page documents that are sent to shareholders with other written materials. The
  Commission anticipated that each respondent would only incur these burden hours once.
\4\ The currently-approved burden takes into account the Commission's previous estimate, across approximately 13,182 open-end funds and 676 closed-end
  funds then registered with the Commission, that there are approximately 11,502 funds that have names covered by the rule or 83% of funds covered by
  the rule (13,858 funds x 83% = 11,502). The Commission estimated that 1% of these funds, or 115 funds, would, within the next three years, provide a
  notice to shareholders pursuant to rule 35d-1. Therefore, over the course of 3 years, the Commission estimated that, on average approximately 38 funds
  per year would provide a notice to shareholders under rule 35d-1.
\5\ The final amendments would make some changes to the current notice requirement, including requiring funds to provide additional specificity about
  the content and delivery of notice. Because funds already have in place systems required to provide notice to shareholders, the Commission continues
  to believe, as in the proposal, that these proposed alterations would not increase the burden hours needed to prepare the notice. Although the final
  rules, unlike the proposed rules, would permit unlisted registered closed-end funds and BDCs to make changes to their 80% investment policies without
  a shareholder vote under certain circumstances, including that a fund provide certain notice to shareholders, we have not increased our estimates as a
  result of this provision. The costs associated with providing notice under this exception are comparable to the costs that a fund would incur by
  providing notices associated with the shareholder vote that would otherwise be required for a CEF/BDC to change its 80% investment policy under the
  final rule.
\6\ The currently-approved PRA burden for rule 35d-1 was based on the Commission's estimate that 83% of funds were covered by rule 35d-1. The Commission
  at proposal estimated that 75% of funds would have names subject to the 80% investment policy. The prior PRA burden was based on an estimate using a
  different analytical approach than the Commission employed at proposal, based on its updated economic analysis. Based on that analysis, the Commission
  estimated that 62% of funds were subject to rule 35d-1 at the time of proposal and that the proposed rule amendments would increase this estimate to
  75% of funds. The Commission estimated, across approximately 14,532 open-end and closed-end funds registered with the Commission, that there were
  approximately 10,394 funds that have names that would be covered by the proposed rule amendments, or 75% of funds covered by the rule amendments. The
  Commission estimated that 1% of these 10,394 funds, or 103 funds, would within the next three years provide a notice to shareholders pursuant to the
  proposed rule amendments. Therefore, over the course of 3 years, the Commission estimated that, on average approximately 34 funds per year would
  provide a notice to shareholders under the proposed rule amendments. The Commission now estimates, pursuant to its current economic analysis, that 60%
  of funds are currently subject to the 80% investment policy requirement, and that 76% of funds would be subject to this requirement under the final
  amendments. The Commission estimates, across approximately 13,541 open-end and closed-end funds registered with the Commission, that there are
  approximately 10,291 funds that have names that would be covered by the final rule amendments, or 76% of funds covered by the rule amendments (9,533
  mutual funds (other than money market funds) + 2,735 non-UIT ETFs + 355 money market funds = 12,975 open end funds + 748 registered closed-end funds +
  125 BDCs + 45 UITs = 13,541 funds x 76% = 10,291 funds). The Commission estimates that 1% of these 10,291 funds, or 103 funds, would within the next
  three years provide a notice to shareholders pursuant to the final rule amendments. Therefore, over the course of 3 years, the Commission estimates
  that on average approximately 34 funds per year would provide a notice to shareholders under the final rule amendments.
\7\ This estimate was based on the estimated wage rate of $496, for 1 hour of outside legal services. The Commission's estimate of the relevant wage
  rates for external time costs, such as outside legal services, took into account staff experience, a variety of sources including general information
  websites, and adjustments for inflation.
\8\ For funds that adopt an 80% investment policy under the proposed rule, the recordkeeping requirements under proposed rule 35d-1(b)(3) would require
  records documenting the fund's compliance under paragraphs (a) and (b) of proposed rule 35d-1. Written records documenting the fund's compliance
  include: the fund's record of which assets are invested in the 80% basket and the basis for including each such asset in the fund's 80% basket; the
  percentage of the value of the fund's assets that are invested in the 80% basket; the reasons for any departures from the fund's 80% investment policy
  (including why the fund determined that circumstances are other-than-normal); the dates of any departures from the 80% investment policy; and any
  notice sent to the fund's shareholders pursuant to proposed rule 35d-1(e). The Commission based its proposed estimate on its understanding that these
  records would generally need to be made daily, but that the vast majority of records would be automated. The Commission stated that it understood,
  however, that some records, specifically, records documenting the reasons for any departures from the 80% investment policy, may not be automated and
  may require a fund to spend more time to make. The proposed PRA estimates took these considerations into account. The recordkeeping requirements under
  the final rule are substantially similar to the proposed requirements, but do not include the proposed requirement for funds that do not adopt an 80%
  investment policy to maintain a record of their analysis that such a policy is not required.

[[Page 70497]]

 
\9\ This estimate initial burden for the proposed recordkeeping requirement accounts for the time the Commission estimates that fund will need to
  establish recordkeeping procedures for the records that must be kept.
\10\ The Commission at proposal estimated that, across approximately 14,532 open-end and closed-end funds registered with the Commission, there were
  approximately 3,465 funds that have names that would be not covered by the proposed rule amendments, or 25% of funds covered by the rule amendments.
\11\ This estimate is based on the estimated wage rate of $565, for 1 hour of outside legal services. The Commission's estimate of the relevant wage
  rates for external time costs, such as outside legal services, takes into account staff experience, a variety of sources including general information
  websites, and adjustments for inflation.
\12\ The Commission's estimates of the internal annual time burdens associated with the recordkeeping requirement under the final rules have been
  increased by 50% from the proposal to account for records that may not be easily automatable. This estimate reflects that funds will be required under
  the final amendments to reassess the characteristics of investments in the fund's 80% basket on a quarterly--as opposed to continual--basis.
  Therefore, while we recognize that some records may not be able to be automated, as commenters discussed, we are not increasing the proposed estimates
  to the degree that commenters suggested would be appropriate in light of the final rule's comparatively less-burdensome approach to reassessing
  investments in the fund's 80% basket.

C. Prospectus Disclosure

    We are adopting amendments to funds' registration forms--
specifically, Form N-1A, Form N-2, Form N-8B-2, and Form S-6--that will 
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 a 
fund's investment strategy corresponds 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 this is not currently required in a fund's prospectus, we 
understand that including similar disclosure is currently common 
industry practice, and believe that that the impact that the final 
amendments will have on funds subject to the names rule will generally 
be minor. Therefore, the PRA estimates for the final prospectus 
disclosure amendments likely overestimate the costs for those funds 
whose disclosure is currently in line with the disclosure the 
amendments would require.
    The final 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.
    The Commission received one comment stating that the costs of 
prospectus disclosure were underestimated.\614\ We have adjusted the 
proposal's estimated annual burden hours and total time costs to 
reflect updated wage rates, and in light of developments in our 
analysis with respect to estimating the burdens associated with initial 
disclosure-related burdens.
---------------------------------------------------------------------------

    \614\ See supra footnote 565.
---------------------------------------------------------------------------

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

                                                            Table 2--Form N-1A PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    Initial                                                                                     Annual external  cost
                                      hours        Annual hours \1\           Wage rate \2\         Internal time costs                 burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Currently Aproved Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Preparing and Filing Reports on     .......  278........................  $284 (estimate of     $78,952....................  $21,849.
 Form N-1A Generally.                                                      wage rate in most
                                                                           recently approved
                                                                           supporting
                                                                           statement).
Number of Responses...............  .......  6,002 \3\..................  ....................  6,002......................  6,002.
Current Burden Requirement........  .......  1,672,077 hours............  ....................  $474,392,078...............  $132,940,008.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Propoproposed Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed New Names Rule Disclosure        7  10 hours...................  $356 (1:1 blend of    $3,560.....................  $992.\6\
Number of funds...................  .......  x 9,731 funds \4\..........   attorney and senior  x 9,731 funds..............  x 9,731 funds.
                                                                           programmer).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Total Proposed Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden...........  .......  97,310 hours...............  ....................  $34,643,250................  $9,653,152.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Final Estimated Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
New Names Rule Disclosure.........   \5\ 15  12 hours...................  $406 (1:1 blend of    $4,872.....................  $1,130.\6\
Number of funds...................           x 9,593 funds \7\..........   attorney and senior  x 9,593 funds..............  x 9,593 funds.
                                                                           programmer).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Total Final Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden...........  .......  115,116 hours..............  ....................  $46,737,096................  $10,840,090.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ The estimated wage figures are based on published rates for the professionals described in this chart, modified to account for an 1800-hour work-
  year and inflation. The estimates for the proposed and final burdens were multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
  overhead. See Securities Industry and Financial Markets Association's Report on Management & Professional Earnings in the Securities Industry 2013.
\3\ The currently-approved burden was based on the Commission's estimate that included all open-end funds, including ETFs, then registered on Form N-1A.
\4\ The currently-approved PRA burden for rule 35d-1 was based on the Commission's estimate that 83% of funds were covered by rule 35d-1. This estimate
  assumed that 75% of funds would be covered by our proposed rule amendments. The prior PRA burden was based on an estimate using a different analytical
  approach than we are now employing. The Commission estimated at proposal that 62% of funds were currently subject to rule 35d-1, and that the proposed
  rule amendments would increase this estimate to 75% of funds. The Commission estimated, across approximately 12,975 open-end funds including ETFs
  registered with the Commission, that there are approximately 9,731 open-end funds that have names that would have been covered by the proposed rule
  amendments, or 75% of open-end funds covered by the rule amendments (10,223 mutual funds (other than money market funds) + 2,320 non-UIT ETFs + 432
  money market funds = 12,975 open end funds x 75% = 9,731 open-end funds).

[[Page 70498]]

 
\5\ The estimated initial burden has been increased based on developments in our analysis with respect to estimating the burdens associated with initial
  disclosure-related burdens. This burden has been increased to reflect internal review processes that we understand are conventional when updating
  prospectus disclosures to reflect a new disclosure requirement, as well as the time that we understand, based on staff experience with the disclosure
  review process, drafting disclosure in response to new disclosure requirements typically takes.
\6\ The estimated burdens at proposal were based on the estimated wage rate of $496/hour, and at adoption are based on the estimated wage rate of $565/
  hour, for 2 hours, for outside legal services. The Commission's estimates of the relevant wage rate for external time costs, such as outside legal
  services, take into account staff experience, a variety of sources including general information websites, and adjustments for inflation.
\7\ Based on our current analysis, we estimate that 60% of funds are currently subject to rule 35d-1, and that the final amendments will increase this
  estimate to 76% of funds. The Commission estimates, across approximately 12,623 open-end funds including ETFs registered with the Commission, that
  there are approximately 9,467 open-end funds that have names that will be covered by the final amendments (9,533 mutual funds (other than money market
  funds) + 2,735 non-UIT ETFs + 355 money market funds = 12,623 x 76% = 9,593 open-end funds).

2. Form N-2

                                                             Table 3--Form N-2 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    Initial                                                                                       Annual external cost
                                      hours        Annual hours \1\            Wage rate \2\           Internal time costs               burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Currently Aproved Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Preparing and Filing Reports on     .......  2,426.......................  $400 (estimate of      $970,533....................  $160,523.
 Form N-2 Generally.                                                        wage rate in most
                                                                            recently approved
                                                                            supporting
                                                                            statement).
Number of Responses...............  .......  298.........................  .....................  298.........................  298.
Current Burden Requirement........  .......  722,948 hours...............  .....................  $289,218,834................  $47,835,854.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Proposed Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed New Names Rule Disclosure        7  10 hours....................  $356 (1:1 blend of     $3,560......................  $992.\5\
Number of Funds...................  .......  x 626 funds \3\.............   attorney and senior   x 626 funds.................  x 626.
                                                                            programmer).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Total Proposed Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden...........  .......  6,260 hours.................  .....................  $2,228,560..................  $620,992.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Final Estimated Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
New Names Rule Disclosure.........   \4\ 15  12 hours....................  $406 (1:1 blend of     $4,872......................  $1,130.\5\
Number of Funds...................  .......  x 663 funds \6\.............   attorney and senior   x 663 funds.................  x 663.
                                                                            programmer).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Total Final Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden...........  .......  7,956 hours.................  .....................  $3,230,136..................  $749,190.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ The estimated wage figures are based on published rates for the professionals described in this chart, modified to account for an 1800-hour work-
  year and inflation. The estimates for the proposed and final burdens were multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
  overhead. See Securities Industry and Financial Markets Association's Report on Management & Professional Earnings in the Securities Industry 2013.
\3\ The currently-approved PRA burden for rule 35d-1 was based on the Commission's estimate that 83% of funds were covered by rule 35d-1. We now
  estimate that 75% of funds would be covered by our proposed rule amendments. The prior PRA burden was based on an estimate using a different
  analytical approach than we are now employing. The Commission estimated that 62% of funds were currently subject to rule 35d-1, and that the proposed
  rule amendments would increase this estimate to 75% of funds. The Commission estimated, across approximately 835 closed-end funds registered with the
  Commission, that there were approximately 626 closed-end funds that had names that would be covered by the proposed rule amendments, or 75% of closed-
  end funds covered by the rule amendments (736 registered closed-end funds +99 BDCs = 835 Form N-2 registrants x 75% = 626 Form N-2 registrants).
\4\ The estimated initial burden has been increased based on developments in our analysis with respect to estimating the burdens associated with initial
  disclosure-related burdens. This burden has been increased to reflect internal review processes that we understand are conventional when updating
  prospectus disclosures to reflect a new disclosure requirement, as well as the time that we understand, based on staff experience with the disclosure
  review process, drafting disclosure in response to new disclosure requirements typically takes.
\5\ The estimated burdens at proposal were based on the estimated wage rate of $496/hour, and at adoption are based on the estimated wage rate of $565/
  hour, for 2 hours, for outside legal services. The Commission's estimates of the relevant wage rate for external time costs, such as outside legal
  services, take into account staff experience, a variety of sources including general information websites, and adjustments for inflation.
\6\ Based on our current analysis, we estimate that 60% of funds are currently subject to rule 35d-1, and that the final amendments will increase this
  estimate to 76% of funds. The Commission estimates, across approximately 873 closed-end funds registered with the Commission, that approximately 663
  closed-end funds have names that will be covered by the final rule, or 76% of closed-end funds (748 registered closed-end funds + 125 BDCs = 873 Form
  N-2 registrants x 76% = 663 Form N-2 registrants).

3. Form N-8B-2

                                                           Table 4--Form N-8B-2 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Cost of internal     Annual cost burden per
                                                                Annual hours \1\        Wage rate \2\      burden per portfolio          portfolio
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Currently Aproved Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Preparing and Filing Reports on    UITs...................  10 hours...............  $351 (estimate of    $3,510................  $10,000.
 Form N-8B-2 Generally.                                                               wage rate in most
                                                                                      recently approved
                                                                                      supporting
                                                                                      statement).
                                   UIT ETFs...............  18 hours...............  $351 (estimate of    $6,318................  $0.
                                                                                      wage rate in most
                                                                                      recently approved
                                                                                      supporting
                                                                                      statement).
Number of Responses..............  .......................  1 \3\..................  ...................  1.....................  1.
Current Burden Requirement.......  .......................  28 hours...............  ...................  $9,828................  $10,000.
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 70499]]

 
                                                                    Proposed Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed New Names Rule            7......................  10 hours...............  $356 (1:1 blend of   $3,560................  $992.\6\
 Disclosure.                       .......................  x 1 UIT \4\............   compliance          x 1 UIT...............  x 1 UIT.
Number of Responses..............                                                     attorney and
                                                                                      senior programmer).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Total Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden..........  .......................  10 hours...............  ...................  $3,560................  $992.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Final Estimated Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
New Names Rule Disclosure........  15 \5\.................  12 hours...............  $406 (1:1 blend of   $4,872................  $1,130.\6\
Number of Responses..............  .......................  x 1 UIT \4\............   compliance          x 1 UIT...............  x 1 UIT.
                                                                                      attorney and
                                                                                      senior programmer).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Total Final Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden..........  .......................  12 hours...............  ...................  $4,872................  $1,130.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ The estimated wage figures are based on published rates for the professionals described in this chart, modified to account for an 1800-hour work-
  year and inflation. The estimates for the proposed and final burdens were multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
  overhead. See Securities Industry and Financial Markets Association's Report on Management & Professional Earnings in the Securities Industry 2013.
\3\ Based on Commission records, in 2016, 2017, 2018, and 2019, during that four-year period, the Commission received 1 filing, submitted in 2019, on
  Form N-8B-2. The cumulative 4-year average is, therefore, 0.25 filings per year.
\4\ The Commission's proposed estimate was 1 annual filing and we continue to assume 1 filing annually.
\5\ The estimated initial burden has been increased based on developments in our analysis with respect to estimating the burdens associated with initial
  disclosure-related burdens. This burden has been increased to reflect internal review processes that we understand are conventional when updating
  prospectus disclosures to reflect a new disclosure requirement, as well as the time that we understand, based on staff experience with the disclosure
  review process, drafting disclosure in response to new disclosure requirements typically takes.
\6\ The estimated burdens at proposal were based on the estimated wage rate of $496/hour, and at adoption are based on the estimated wage rate of $565/
  hour, for 2 hours, for outside legal services. The Commission's estimates of the relevant wage rate for external time costs, such as outside legal
  services, take into account staff experience, a variety of sources including general information websites, and adjustments for inflation.

4. Form S-6

                                                             Table 5--Form S-6 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    Initial
                                      hours        Annual hours \1\           Wage rate \2\            Internal costs           Annual external costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Currently Aproved Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Draft and Update Disclosures on          24  18 hours...................  $356 (1:1 blend of    $6,408.....................  $27,265.
 Form S-6 \3\.                                                             compliance attorney
                                                                           and senior
                                                                           programmer).
Number of Responses...............  .......  2,498......................  ....................  2,498......................  2,498.
Current Burden Requirement........  .......  107,359....................  ....................  $16,007,184................  $68,107,970.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Proposed Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Proposed New Names Rule Disclosure        7  10 hours...................  $356 (1:1 blend of    $3,560.....................  $992.\6\
                                                                           compliance attorney
                                                                           and senior
                                                                           programmer).
Number of Responses...............  .......  785 filings................  ....................  x 785 filings \4\..........  x 785 filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Total Proposed Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden...........  .......  7,850 hours................  ....................  $2,794,600.................  $778,720.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Final Estimated Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
New Names Rule Disclosure.........   \5\ 15  12 hours...................  $406 (1:1 blend of    $4,872.....................  $1,130.\6\
                                                                           compliance attorney
                                                                           and senior
                                                                           programmer).
Number of Responses...............  .......  x 764 filings \7\..........  ....................  x 764 filings..............  764 filings.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Total Final Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden...........  .......  9,168 hours................  ....................  $3,722,208.................  $863,320.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ The estimated wage figures are based on published rates for the professionals described in this chart, modified to account for an 1800-hour work-
  year and inflation. The estimates for the proposed and final burdens were multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
  overhead. See Securities Industry and Financial Markets Association's Report on Management & Professional Earnings in the Securities Industry 2013.
\3\ Form S-6 incorporates the disclosure requirements of Form N-8B-2 for UITs on an ongoing basis. Because Form S-6 incorporates the requirements of
  Form N-8B-2, the amendments would indirectly affect these entities. UITs that have made their initial deposit of securities prior to the effective
  date of any final rule would be required to update their disclosure on Form S-6 to comply with the amended requirements of Form N-8B-2. As discussed
  above, UITs formed after the adoption of any final rules would be required to comply with the proposed disclosure requirements upon formation when
  those UITs file Form N-8B-2 with the Commission.

[[Page 70500]]

 
\4\ The currently-approved PRA burden for rule 35d-1 was based on the Commission's estimate that 83% of funds were covered by rule 35d-1. The Commission
  estimated that 75% of funds would be covered by our proposed rule amendments, based on this proposal's economic analysis above. The prior PRA burden
  was based on an estimate using a different analytical approach than we are now employing. The Commission estimated that 62% of funds are currently
  subject to rule 35d-1 and that our proposed rule amendments would increase this estimate to 75% of funds. The Commission estimated 49 non-separate
  account and non-ETF UITs registered with the Commission. However, the Commission based its estimate on the belief that using the number of filings
  instead of registrants would form a more accurate estimate of annual disclosure burdens. The Commission estimated 1,047 filings based on the average
  number of filings made on Form S-6 from 2018 to 2020. The Commission therefore estimated that there would be approximately 785 filings for funds that
  have names that would be covered by the proposed rule amendments, or 75% of the filings for UITs covered by the rule amendments (1,047 filings x 75% =
  785 filings).
\5\ The estimated initial burden has been increased based on developments in our analysis with respect to estimating the burdens associated with initial
  disclosure-related burdens. This burden has been increased to reflect internal review processes that we understand are conventional when updating
  prospectus disclosures to reflect a new disclosure requirement, as well as the time that we understand, based on staff experience with the disclosure
  review process, drafting disclosure in response to new disclosure requirements typically takes.
\6\ The estimated burdens at proposal were based on the estimated wage rate of $496/hour, and at adoption are based on the estimated wage rate of $565/
  hour, for 2 hours, for outside legal services. The Commission's estimates of the relevant wage rate for external time costs, such as outside legal
  services, take into account staff experience, a variety of sources including general information websites, and adjustments for inflation.
\7\ Based on our current analysis, we estimate that 60% of funds are currently subject to rule 35d-1, and that the final amendments will increase this
  estimate to 76% of funds. The Commission estimates 45 non-separate account and non-ETF UITs registered with the Commission. However, consistent with
  the Commission's methodology at proposal, we believe that using the number of filings instead of the number of registrants will form a more accurate
  estimate of annual disclosure burdens. The Commission estimates 1,005 filings based on the average number of filings made on Form S-6 from 2020 to
  2022. The Commission therefore estimates that there will be approximately 764 filings for funds that have names that will be covered by the final
  amendments, or 76% of the filings for UITs covered by the rule amendments (1,005 filings x 76% = 764 filings).

D. Form N-PORT Reporting Requirements

    We are adopting amendments to Form N-PORT to include new reporting 
items for N-PORT funds regarding the 80% investment policy that such a 
fund adopts in compliance with the names rule. As proposed, the final 
amendments require N-PORT funds that are required to adopt an 80% 
investment policy to report on Form N-PORT: (1) whether each investment 
in the fund's portfolio is in the fund's 80% basket; and (2) the value 
of the fund's 80% basket, as a percentage of the value of the fund's 
assets.
    The final amendments contain some modifications from the 
proposal.\615\ First, the final Form N-PORT amendments modify the 
proposed reporting approach by requiring reported information for the 
third month of each calendar quarter, instead of for every month. This 
modified reporting frame corresponds with the period for review that 
will otherwise be mandated by the final amendments. Secondly, the final 
amendments add a new reporting item, in which funds will be required to 
report the definitions of terms used in a fund's name. Lastly, we are 
not adopting the proposed requirement that funds report the number of 
days that 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.
---------------------------------------------------------------------------

    \615\ See supra section II.E.
---------------------------------------------------------------------------

    Form N-PORT, including the final 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.
    The Commission did not receive public comment regarding the PRA 
estimates for the amendments to Form N-PORT in the proposing release, 
but it did receive comments on the overall costs and burdens associated 
with this aspect of the proposal. Some commenters stated that the costs 
and operational burdens of the proposed requirement for N-PORT funds 
subject to the 80% investment policy requirement to indicate whether 
each of its portfolio investments is included in the fund's 80% basket 
would be significant.\616\ Commenters specifically expressed concern 
about the costs and burden of reporting this information for each 
investment on a monthly basis.\617\ Some commenters also stated that 
the proposed new reporting item would require the build-out of new 
systems, for daily testing and validation of names rule compliance 
information, and for mapping this information over for reporting on 
Form N-PORT.\618\ Commenters also stated that funds may need to hire 
third-party vendors for supplemental and specially-tailored data on 
their portfolio investments, in order to comply with the proposed new 
reporting requirements.\619\ With respect to the proposed requirement 
that a fund report 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, commenters stated that monitoring individual 
securities on a daily basis for name rule compliance would be 
operationally onerous.\620\
---------------------------------------------------------------------------

    \616\ See, e.g., MFS Comment Letter; J.P. Morgan Asset 
Management Comment Letter; T. Rowe Comment Letter.
    \617\ See MFS Comment Letter.
    \618\ See, e.g., T. Rowe Comment Letter; Invesco Comment Letter; 
Seward & Kissel Comment Letter.
    \619\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter.
    \620\ See, e.g., J.P. Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    We have adjusted the proposal's estimated annual burden hours and 
total time costs to reflect these comments as well as the changes from 
the proposed requirements. We recognize that complying with the new 
reporting requirements will entail compliance activities, and 
potentially systems and operational modifications as well as the use of 
third-party service providers, and that reporting will be required for 
each of a fund's portfolio holdings. As a result, we have adjusted the 
estimated initial and annual hours associated with the requirement for 
funds to report whether each of its investments is part of its 80% 
basket. On the other hand, we expect that the modified reporting time 
frame will reduce the burdens associated with the final amendments' 
collection of information requirements. The burdens associated with the 
proposal will also be reduced because we are not adopting the proposed 
requirement to report the number of days that the value of the 80% 
basket fell below 80% of the value of the fund's total assets. We do 
not anticipate the new reporting item under the final amendments 
requiring funds to include definitions of terms used in a fund's name 
will entail significant costs because this reporting requirement 
leverages the same disclosure that funds will also, under the final 
amendments, be required to include in their prospectuses. Moreover, any 
costs associated with this requirement should be recurring costs only 
to the extent a fund determines to change its name or its definition of 
the terms used in its name.
    The table below summarizes the estimates for internal burdens 
associated with the new requirements under the final amendments to Form 
N-PORT.

[[Page 70501]]



                                                           Table 6--Form N-PORT PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                    Initial
                                      hours        Annual hours \1\           Wage rate \2\         Internal time costs      Annual external cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Currently Aproved Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Preparing and Filing Reports on     .......  44,500.....................  $344.19 (estimate of  $15,316,455................  $4,684,296.
 Form N-PORT Generally.                                                    wage rate in most
                                                                           recently approved
                                                                           supporting
                                                                           statement).
Number of Responses...............  .......  2,696......................  ....................  2,696......................  2,696.
Current Burden Requirement........  .......  1,839,903 hours............  ....................  $654,658, 288..............  $113,858,133.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Proposed Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
New Reporting About 80% Investment        4  9 hours....................  $356 (blend of        $3,204.....................  $992.\4\
 Policy \3\.                                                               compliance attorney
                                                                           and senior
                                                                           programmer).
Number of Funds...................  .......  x 9,996 funds \3\..........  ....................  x 9,996 funds..............  x 9,996 funds.
Total New Burden for New Reporting  .......  89,964 hours...............  ....................  $32,027,184................  $9,916,032.
 About 80% Investment Policy (I).
Investments to be Included in a           4  10 hours...................  $356 (rate for        $3,560.....................  $992.\6\
 Fund's 80% Basket \4\.             .......  x 9,996 funds \4\..........   compliance attorney  x 9,996 funds..............  x 9,996 funds.
Number of Funds...................                                         and senior
                                                                           programmer).
Total New Burden for Investments    .......  99,960 hours...............  ....................  $35,585,760................  $9,916,032.
 to be Included in a Fund's 80%
 Basket (II).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Total Proposed Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden (I + II)..  .......  189,924 hours..............  ....................  $67,612,944................  $19,832,064.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Final Estimated Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
New Reporting About 80% Investment        4  2 hours....................  $406 (blend of        $812.......................  $1,130.\4\
 Policy \3\.                                                               compliance attorney
                                                                           and senior
                                                                           programmer).
Number of Funds...................  .......  x 9,926 funds \3\..........  ....................  x 9,926 funds..............  x 9,926 funds.
Total New Burden for New Reporting  .......  19,852 hours...............  ....................  $8,059,912.................  $11,216,380.
 About 80% Investment Policy (I).
Investments to be Included in a          15  14 hours...................  $406 (rate for        $5,684.....................  $1,130.\6\
 Fund's 80% Basket\4\.                                                     compliance attorney
                                                                           and senior
                                                                           programmer).
Number of Funds...................  .......  x 9,926 funds \6\..........  x 9,926 funds.......  x 9,926 funds..............
Total New Burden for Investments    .......  138,964 hours..............  ....................  $56,419,384................  $11,216,380.
 to be Included in a Fund's 80%
 Basket (II).
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Total Final Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total New Annual Burden (I + II)..  .......  158,816 hours..............  ....................  $64,479,296................  $22,432,760.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ The estimated wage figures are based on published rates for the professionals described in this chart, modified to account for an 1800-hour work-
  year and inflation. The estimates for the proposed and final burdens were multiplied by 5.35 to account for bonuses, firm size, employee benefits, and
  overhead. See Securities Industry and Financial Markets Association's Report on Management & Professional Earnings in the Securities Industry 2013.
\3\ This burden corresponds to the requirement for a fund to report the value of its 80% basket as a percentage of the value of its assets. The proposed
  estimate also reflects the burden associated with the requirement for funds to report the number of days that the value of the 80% basket fell below
  80% of the value of the fund's total assets. Because we are not adopting this requirement under the final rule, the final annual hours burden estimate
  has been reduced by 33% compared to the proposed estimate. The final annual hours estimate has also been reduced by a factor of 3 to reflect the
  modified reporting timeframe under the final amendments (i.e., quarterly as opposed to monthly). Accordingly, the adjustment from proposed annual
  hours burden estimate to the final estimate reflects the following calculation: 9 hours x (\2/3\) = 6 hours/3 = 2 hours.
\4\ This burden corresponds to the requirement for funds that are required to adopt 80% policies 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; and for the final estimate (but not the proposed
  estimate), the requirement for funds to report definitions of the terms used in their names. Our final estimate of the initial hours burden has been
  increased by a factor of 2 compared to the proposed estimate to reflect costs associated with systems and operational modifications that may be
  required for compliance with these requirements. Our final estimate of the annual hours burden also reflects these increased costs compared to the
  proposed estimate; however it has been reduced in order to reflect the modified reporting timeframe under the final amendments (i.e., quarterly as
  opposed to monthly), resulting in an overall estimate for the annual hours burden that is lower that the proposed estimate. Specifically, the
  adjustment from the proposed annual hours burden estimate to the final estimate reflects the following calculation: 10 hours x 2 = 20 hours/3 = 6.67
  (rounded to 7 hours).
\3\ The currently-approved PRA burden for rule 35d-1 was based on the Commission's estimate that 83% of funds were covered by rule 35d-1. The Commission
  estimated that 75% of funds would be covered by our proposed rule amendments. The prior PRA burden was based on an estimate using a different
  analytical approach than we are now employing. The Commission estimated that 62% of funds are currently subject to rule 35d-1 and that the proposed
  rule amendments would increase this estimate to 75% of funds. The Commission estimated, across approximately 14,001 open-end and closed-end funds
  registered with the Commission, not including money market funds, that there would have been approximately 10,394 funds that have names that would be
  covered by the proposed rule amendments, or 75% of funds covered by the rule amendments (10,223 mutual funds (other than money market funds) + 2,320
  non-UIT ETFs = 12,543 open end funds + 736 registered closed-end funds + 49 UITs = 13,328 funds x 75% = 9,996 funds).
\4\ See id.
\5\ The estimated burdens at proposal were based on the estimated wage rate of $496/hour, and at adoption are based on the estimated wage rate of $565/
  hour, for 2 hours, for outside legal services. The Commission's estimates of the relevant wage rate for external time costs, such as outside legal
  services, take into account staff experience, a variety of sources including general information websites, and adjustments for inflation.
\6\ Based on our current analysis, we estimate that that 60% of funds are currently subject to rule 35d-1, and that the final amendments will increase
  this estimate to 76% of funds. The Commission estimates, across approximately 13,061 open-end and closed-end funds registered with the Commission, not
  including money market funds, that there will be approximately 10,318 funds that have names that will be covered by the proposed rule amendments, or
  76% of the funds covered by the rule amendments (9,533 mutual funds (other than money market funds) + 2,735 non-UIT ETFs + = 12,268 open end funds +
  registered closed-end funds + 45 UITs = 13,061 funds x 76% = 10,318 funds).

E. Investment Company Interactive Data

    We are adopting amendments to 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.\621\ The final amendments

[[Page 70502]]

include new structured data requirements that will require funds to tag 
the information in their registration statements about their fund name 
using Inline XBRL.\622\ 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.
---------------------------------------------------------------------------

    \621\ 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 adopting to rules 
485 and 497 under the Securities Act, as well as rules 11 and 405 to 
Regulation S-T, are conforming amendments that have no associated 
PRA burden. While the new names-related information that open-end 
funds will be required to disclose under our final amendments to 
Form N-1A also will be required to be tagged using Inline XBRL, the 
final amendments to Form N-1A will create no additional PRA burden. 
The final rule amends 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.
    \622\ See supra section II.B; see also instruction to Item 
4(a)(1) of Form N-1A; instruction to Item 9(b)(1) of Form N-1A; 
instruction to Item 8(2) of Form N-2; 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 2022, we estimate that 663 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 will experience additional 
burdens related to one-time costs associated with becoming familiarized 
with Inline XBRL reporting. These costs will 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 796 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 323,724 hours, and a total aggregate annual 
external cost burden of $16,041,450. Compliance with the interactive 
data requirements is mandatory, and the responses will not be kept 
confidential.
    The Commission did not receive public comment regarding the PRA 
estimates for the investment company interactive data requirements. We 
have adjusted the proposal's estimated annual burden hours and total 
time costs, however, to reflect updated wage rates.
    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.

                                               Table 7--Investment Company Interactive Data PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                  Internal initial     Internal annual burden                                                     Annual external cost
                                    burden hours             hours \1\             Wage rate \2\       Internal time costs               burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Proposed Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Names rule information for                        1  1 hour \4\...............  $356 (blended rate  $356.....................  $50.\5\
 current XBRL filers \3\.                                                        for compliance
                                                                                 attorney and
                                                                                 senior
                                                                                 programmer).
Number of funds................  ..................  x 626 funds \6\..........  ..................  x 626 funds..............  x 626 funds.
Names rule information for new                    9  4 hours \8\..............  $356 (blended rate  $1,424...................  $900.\9\
 XBRL filers \7\.                                                                for compliance
                                                                                 attorney and
                                                                                 senior
                                                                                 programmer).
Number of filings..............  ..................  x 785 filings \10\.......  ..................  x 785 filings............  x 785 filings.
Total new aggregate annual       ..................  3,766 hours \11\.........  ..................  $1,340,696 \12\..........  $737,800.\13\
 burden.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Total Proposed Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current aggregate annual burden  ..................  + 252,602 hours..........  ..................  .........................  + $15,350,750.
 estimates.
Revised aggregate annual burden  ..................  256,368 hours............  ..................  .........................  $16,088,550.
 estimates.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Final Estimated Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
Names rule information for                        1  1 hour \4\...............  $406 (blended rate  $406.....................  $50.\5\
 current XBRL filers \3\.                                                        for compliance
                                                                                 attorney and
                                                                                 senior
                                                                                 programmer).
Number of funds................  ..................  x 663 funds \6\..........  ..................  x 663 funds..............  x 663 funds.
Names rule information for new                    9  4 hours \8\..............  $406 (blended rate  $1,625...................  $900.\9\
 XBRL filers \7\.                                                                for compliance
                                                                                 attorney and
                                                                                 senior
                                                                                 programmer).
Number of filings..............  ..................  x 796 filings \14\.......  ..................  x 796 filings............  x 796 filings.
Total new aggregate annual       ..................  3,847 hours \11\.........  ..................  $1,562,678 \12\..........  $749,550.\13\
 burden.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Total Final Estimated Burdens Including Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current aggregate annual burden  ..................  + 323,724 hours..........  ..................  .........................  + $16,041,450.
 estimates.
Revised aggregate annual burden  ..................  324,571 hours............  ..................  .........................  $16,791,000
 estimates.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a 3-year period.
\2\ See supra table 1 regarding estimated wage rates.

[[Page 70503]]

 
\3\ This estimate represents the average burden for a filer on Form N-2 that is currently subject to interactive data requirements.
\4\ This estimate included initial burden estimates annualized over a three-year period, plus 0.67 hour of ongoing annual burden hours. The estimate of
  1 hour was based on the following calculation: ((1 initial hour/3) + 0.67 hour of additional ongoing burden hours) = 1 hour.
\5\ The Commission estimated an incremental external cost for filers on Form N-2, as they already submit certain information using Inline XBRL.
\6\ Based on filing data as of December 30, 2020, the Commission estimated 626 funds, including BDCs, filing on Form N-2. Based on filing data as of
  December 2022, we have adjusted that estimate to 663 funds.
\7\ This estimate represents the average burden for a filer on Form N-8B-2 and Form S-6 that is not currently subject to interactive data requirements.
\8\ Includes initial burden estimates annualized over a three-year period, plus 1 hour of ongoing annual burden hours. The estimate of 10 hours is based
  on the following calculation: ((27 initial hours/3) + 1 hour of additional ongoing burden hours) = 10 hours.
\9\ This estimate assumes an external cost for filers on Form N-8B-2 and Form S-6 of $900 to reflect one-time compliance and initial set-up costs.
  Because these filers have not been previously been subject to Inline XBRL requirements, this estimate reflects that these funds would experience
  additional burdens related to one time-costs associated with becoming familiar with Inline XBRL reporting. These costs would include, for example, the
  acquisition of new software or the services of consultants.
\10\ The Commission estimated 49 non-separate account and non-ETF UITs registered with the Commission. However, the Commission based the proposed
  estimate on the belief that the number of filings instead of registrants would form a more accurate estimate of annual burdens. The Commission
  estimated 1,047 filings based on the average number of filings made on Form S-6 from 2018 to 2020, and therefore estimated that there are
  approximately 785 filings for funds that have names that would have been covered by the proposed rule amendments, or 75% of the filings for UITs
  covered by the rule amendments (1,047 filings x 75% = 785 filings).
\11\ With respect to the proposed estimate, 3,766 hours = (626 funds x 1 hour = 626 hours) + (785 filings x 4 hours = 3,140 hours). With respect to the
  final estimate, 3,847 hours = (663 funds x 1 hours = 663 hours) + (796 filings x 4 hours = 3,184 hours).
\12\ With respect to the proposed estimate, $1,340,696 internal time cost = (626 funds x $356 = $222,856) + (785 filings x $1,424 = $1,117,840). With
  respect to the final estimate, $1,562,678 internal time cost = (663 funds x $406 = $269,178) + (796 filings x $1,625 = $1,293,500).
\13\ With respect to the proposed estimate, $737,800 annual external cost = (626 funds x $50 = $31,300) + (785 filings x $900 = $706,500). With respect
  to the final estimate, $749,550 annual external cost = (663 funds x $50 = $33,150) + (796 filings x $900 = $716,400).
\14\ Based on our current analysis, we estimate that 76% of funds will be subject to rule 35d-1 under the final amendments, and therefore estimate that
  796 filings for funds that have names that will be covered by the final amendments (1,047 filings x 76% = 796 filings).

VI. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory 
Flexibility Analysis (``FRFA'') in accordance with section 604 of the 
Regulatory Flexibility Act (``RFA'').\623\ It relates to final 
amendments to rule 35d-1 and Forms N-1A, N-2, N-8B-2, S-6, and N-PORT, 
as well as final conforming amendments to rules 11 and 405 of 
Regulation S-T and rules 485 and 497 under the Securities Act 
(collectively, ``final amendments'').
---------------------------------------------------------------------------

    \623\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Need for and Objectives of the Rule and Form Amendments

    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 adopting final amendments designed to increase investor 
protection by improving, and broadening the scope of, 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 adopting 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 names-related regulatory 
requirements. The reasons for, and objectives of, the final amendments 
are discussed in more detail in sections I and II above.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, the Commission requested comment on every 
aspect of the Initial Regulatory Flexibility Analysis (``IRFA''), 
including the number of small entities that would be affected by the 
proposed rule and form amendments, the existence or nature of the 
potential impact of the proposals on small entities discussed in the 
analysis, and how to quantify the impact of the proposed amendments. 
The Commission also requested comment on the proposed compliance 
burdens and the effect these burdens would have on small entities.
    Although the Commission did not receive comments specifically 
addressing the IRFA, one commenter stated that many small or innovative 
funds would be ``disproportionately'' burdened by the legal and 
compliance costs of the expanded scope of fund names that would be 
subject to the proposed amendments.\624\ In addition, the Commission 
received comments stating that the proposed requirement that funds use 
a derivatives instrument's notional amount to determine the fund's 
compliance with its 80% investment policy would create costly technical 
and operational challenges for small fund groups.\625\
---------------------------------------------------------------------------

    \624\ See Freeman Capital Management Comment Letter. But see 
PIABA Comment Letter (stating that most instances of misleading fund 
names involve small and medium funds).
    \625\ See Dechert Comment Letter; ICI Comment Letter; Center for 
American Progress Comment Letter.
---------------------------------------------------------------------------

    Smaller funds may incur costs associated with the final amendments 
as funds comply with all aspects of the final amendments, including the 
specific aspects that commenters discussing small entities 
highlighted.\626\ As discussed above, compliance costs associated with 
the final 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. With respect to potential costs incurred to comply 
with other aspects of the amendments that commenters discussing small 
entities identified, we expect that funds would incur costs to review 
the final amendments' requirements and modify, as necessary, their 
investing practices, policies and procedures, and recordkeeping 
practices to comply with these requirements, or may decide to instead 
change their names.
---------------------------------------------------------------------------

    \626\ See supra sections IV.D.2 and V for a discussion of costs 
associated with the final amendments.
---------------------------------------------------------------------------

C. Small Entities Subject to 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 (``small fund'').\627\ 
Commission staff estimates that, as of December 2022, approximately 34 
registered open-end mutual funds (including one money market fund), 9 
registered ETFs, 27 registered closed-end funds, 3 UITs, and

[[Page 70504]]

10 BDCs (collectively, 83 funds) are small entities.\628\
---------------------------------------------------------------------------

    \627\ See rule 0-10(a) under the Act [17 CFR 270.0-10(a)].
    \628\ 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 2022.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The final amendments include reporting, recordkeeping, and other 
compliance requirements. First, the final amendments 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 will 
need to adopt an 80% investment policy.\629\ The final amendments also 
include other changes to the current names rule, such as permitting a 
fund to engage in temporary departures from an 80% investment 
requirement for a limited period of time under other than normal 
circumstances, which will also necessitate an update to funds' existing 
practices regarding names rule compliance. Funds will be required to 
review their portfolio investments to determine whether they continue 
to be consistent with the fund's 80% investment policy at least 
quarterly. The final amendments also 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 final amendments 
further require a fund that is required to adopt an 80% investment 
policy to maintain certain records documenting its compliance with the 
rule, including, 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).
---------------------------------------------------------------------------

    \629\ While the final rule amendments will 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 13.
---------------------------------------------------------------------------

    The final amendments 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 will 
be included using Inline XBRL. Under the final amendments, funds (other 
than money market funds and BDCs) that are required to adopt an 80% 
investment policy also newly must report certain information on Form N-
PORT regarding names rule matters. This will necessitate that certain 
funds either must change their names or adjust their investment 
strategies, and thus potentially their portfolio investments, to ensure 
compliance. Lastly, the final amendments include exceptions for certain 
UITs. 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 final amendments will require.
1. 80% Investment Policy Requirements--Scope Expansion and Other 
Amendments
    All funds, including small funds, that have names that include 
terms suggesting that the fund focuses its investments in investments 
that have, or whose issuers have, particular characteristics will be 
required to adopt an 80% investment policy under the final 
amendments.\630\ Further, in order to comply with this element of the 
final 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 
will need to change their practices to comply with the names rule to 
address other aspects of the final amendments: (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 
registered 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.\631\
---------------------------------------------------------------------------

    \630\ See supra section VI.C for a discussion of the number of 
small entities subject to the amendments.
    \631\ As discussed above, under the final amendments such funds 
will be permitted to make changes to their 80% policies without this 
vote if the fund conducts a tender or repurchase offer in advance of 
the change, the fund provides at least 60 days' prior notice of any 
change in the policy in advance of that offer, and that offer is not 
oversubscribed, and in the event of a tender offer, the fund 
purchases shares at their net asset value.
---------------------------------------------------------------------------

    These requirements are designed to help ensure that a fund's 
investment activity is consistent with 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.
    While we 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 generally expect a smaller fund to find it more 
costly, per dollar managed, to comply with the final requirements 
because it will not be able to benefit from a larger fund complex's 
economies of scale. Smaller funds may be more likely than larger funds 
with significant in-house resources to hire outside assistance in 
connection with understanding and assisting in compliance with the 
final amendments--for example, retaining outside counsel to analyze the 
implications of the final amendments' scope expansion on existing fund 
names. And a larger fund complex may be able to develop a process with 
in-house or 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.\632\ 
Notwithstanding the economies of scale experienced by larger versus 
smaller funds, we generally do not expect the costs of compliance 
associated with the new requirements to be meaningfully different for 
smaller versus larger funds. The costs of compliance will 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, will be as a consequence 
of that fund having a name that suggests an investment focus under the 
final amendments, not based upon the size of the fund.
---------------------------------------------------------------------------

    \632\ The final amendments' approach that permits unlisted 
registered closed-end funds and BDCs to make changes to their 80% 
investment policies without a shareholder vote under certain 
circumstances could, however, result in fewer costs to smaller 
unlisted registered closed-end funds and BDCs, to the extent that 
this additional permissible approach to changing their 80% 
investment policies is less costly than obtaining a shareholder 
vote. See supra sections II.A.4; IV.D.2.
---------------------------------------------------------------------------

2. Effect of Compliance With an 80% Investment Policy
    We are adopting 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

[[Page 70505]]

policy and otherwise complies with the rule's requirement to adopt and 
implement the policy. The final provision makes 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 invests in a way such that 
the source of a substantial portion of the fund's risks or returns is 
materially different from that which an investor reasonably would 
expect based on the fund's name. This new provision is consistent with 
prior Commission statements that the 80% investment requirement under 
the names rule is not intended to create a safe harbor from liability 
under section 35(d) for materially deceptive or misleading fund names.
    This provision applies to all funds subject to the names rule's 80% 
investment policy requirement, including those that are small entities. 
However, because this provision restates section 35(d), we believe that 
it will not result in any additional costs beyond those already 
attendant on compliance with the Act itself.
3. Recordkeeping Requirements
    The recordkeeping requirements are designed to help ensure 
compliance with the rule's requirements and aid in oversight. A fund 
that will be required to adopt an 80% investment policy under the final 
amendments will 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 will be required to maintain include: (1) the fund's 
record of which assets 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 asset in the 80% basket; (2) the value of the 
fund's 80% basket, as a percentage of the value of the fund's assets; 
(3) the reasons for any departures from the 80% investment policy; (4) 
the dates that the fund identifies any departures from the 80% 
investment policy; and (5) any notice sent to the fund's shareholders 
pursuant to the rule. The records under this requirement 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.
    These requirements impose burdens on all funds, including those 
that are small entities. We expect that smaller funds--and more 
specifically, smaller funds that are not part of a fund complex--may 
not have recordkeeping systems that will meet all the elements that 
will be required under the final amendments. Also, while we 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 
expect a smaller fund to find it more costly, per dollar managed, to 
comply with the requirements because it will not be able to benefit 
from a larger fund complex's economies of scale.
4. Disclosure and Reporting Requirements
    The 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 final amendments 
require funds to tag this disclosure in Inline XBRL.
    The final amendments also require funds (other than money market 
funds and BDCs) that will 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 taxexempt fund's name); (2) with respect 
to each portfolio investment, whether the investment is included in the 
fund's calculation of assets in the fund's 80% basket; and (3) the 
definitions of the terms used in the fund's name, including the 
specific criteria the fund uses to select the investments that the term 
describes, if any. 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 to 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. While we 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 expect a smaller fund 
to find it more costly, per dollar managed, to comply with these 
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 do 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 vary only based on fund characteristics tied to their name. 
For example, a fund whose investments move relatively more frequently 
in and out of the fund's 80% basket may incur a higher burden to comply 
with the requirement to report whether each portfolio investment is 
included in the fund's 80% basket, than a fund whose investments' 
inclusion in the 80% basket is relatively more stable. Furthermore, 
based on our experience implementing tagging requirements that use the 
XBRL, we recognize that some funds that will be affected by the 
requirement, particularly filers with no Inline XBRL tagging 
experience, likely will 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 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 requirements. If reporting 
the disclosures in structured data language 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. Treatment of UITs
    The final rule amendments provide that the 80% investment policy 
and recordkeeping requirements will apply to UITs only at the time of 
initial deposit. This modification is designed to accommodate the 
practical realities that UITs would encounter if required to comply 
with the new provisions in the final amendments that require periodic 
review and potential rebalancing of a fund's portfolio. As a result, 
UITs that have names that are implicated by the final amendments and 
whose initial deposit occurs after the compliance date

[[Page 70506]]

of the final amendments will need to adopt an appropriate 80% 
investment policy, including making such a policy fundamental or 
providing notice to investors in the event of a change of the policy, 
if appropriate. However, such UITs will not be required to engage in 
the monitoring and other requirements associated with the final 
amendments' temporary departure requirements nor will they be required 
to keep records under the final amendments beyond the initial deposit. 
All UITs will be subject to the rule's other requirements under the 
final amendments, as applicable, as well as those of the Federal 
securities laws generally, including section 35(d) of the Investment 
Company Act. This treatment will be available to UITs of all sizes, 
including smaller UITs.

E. Agency Action To Minimize Effect on Small Entities

    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 and reporting 
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 final amendments will 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, will be 
required to comply with most of the aspects of the final amendments. 
Further, consistent with the current rule, the 80% investment 
requirement in the final amendments allows a fund to maintain up to 20% 
of its assets in other investments. A fund seeking maximum flexibility 
with respect to its investments will continue to be free to use a name 
that does not require the fund to adopt an 80% investment policy.
    We estimate that 82% of funds have investment policies specifying a 
minimum percentage of investments consistent with a certain investment 
focus and, of these, approximately 67% have an investment policy 
requiring at least 80% of fund investments be consistent with a certain 
investment focus.\633\ This estimate indicates that some funds, 
including some small funds, will not bear the costs of adopting a new 
80% investment policy, though such funds will likely need to update 
existing policies to account for elements of the final amendments. 
However, for small funds that will be more significantly affected by 
the final amendments, providing an exemption for them could subject 
investors in small funds to a higher degree of risk than investors to 
large funds that will be required to comply with the 80% investment 
policy and related elements of the final amendments.
---------------------------------------------------------------------------

    \633\ See supra footnotes 468 and 469.
---------------------------------------------------------------------------

    We also do not believe, as a general matter, that it is appropriate 
to subject small funds to different reporting, recordkeeping, and other 
compliance requirements or frequency. Similar to the concerns discussed 
above, if the final rules were to include different requirements for 
small funds, this 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, this 
would result in the Commission and other market participants having 
less transparency and insight with respect to those smaller funds' 80% 
investment policies and related investments. However, as discussed in 
detail above, we do agree that additional time for smaller entities, 
which would include small funds, to come into compliance with the final 
rules would be appropriate to the extent that these entities may face 
additional or different challenges in coming into compliance with the 
amendments than larger entities. As result, small funds will have an 
additional six months to come into compliance with the final rules 
relative to larger entities.
    We do not believe that clarifying, consolidating, or simplifying 
the compliance requirements under the final amendments for small funds, 
beyond that already required 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 final amendments apply most of the rule's requirements and 
corresponding compliance burdens--only to certain fund names that are 
required to adopt an 80% investment policy.
    The costs associated with the final amendments will vary depending 
on the fund's particular circumstances, and thus the amendments may 
result in different burdens on funds' resources. In particular, we 
expect that a fund that has a name that will be required to adopt an 
80% investment policy under the final amendments will have higher costs 
than those that do not. Thus, to the extent a fund that is a small 
entity has a name that will not require the fund to adopt an 80% 
investment policy under the final amendments, we believe it will incur 
relatively low compliance costs. Further, some funds with names that 
will 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 will 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 final 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 final amendments are designed to further our investor 
protection objectives.
    Finally, with respect to the use of performance rather than design 
standards, the final 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 final 
amendments with respect to designing 80% investment policies is 
appropriate because of the fact-specific nature of the investment focus 
of funds.

Statutory Authority

    The Commission is adopting 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 adopting 
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

[[Page 70507]]

of 1940 [15 U.S.C. 80a-8, 80a-18, 80a-34, and 80a-37], sections 5, 6, 
7, 8, 10, and 19 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 adopting 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 adopting 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 Rule and Form Amendments

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

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

0
1. The authority citation for part 230 continues to read, in part, 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 
registration 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 registration 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 registration form.
* * * * *

0
3. Amend Sec.  230.497 by revising paragraphs (b), (c), (d), and (e) to 
read as follows:


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

* * * * *
    (b) For unit investment trusts filing on Sec.  274.12 of this 
chapter (Form N-8B-2) or Sec.  239.16 of this chapter (Form S-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 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. A registrant must submit an Interactive Data File (as 
defined in Sec.  232.11 of this chapter) if required by the form on 
which it files its registration statement.
    (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. A 
registrant must submit an Interactive Data File (as defined in Sec.  
232.11 of this chapter) if required by the form on which it files its 
registration statement.
    (d) After the effective date of a registration statement no 
prospectus which purports to comply with section 10 of the Act and 
which varies from any form of prospectus filed pursuant to paragraph 
(b) or (c) of this section shall be used until 10 copies thereof have 
been filed with, or mailed for filing to, the Commission. A registrant 
must submit an Interactive Data File (as defined in Sec.  232.11 of 
this chapter) if required by the Form on which it files its 
registration statement.
    (e) For investment companies filing on Form N-1A, Form N-3, Form N-
4, or 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 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. A registrant must submit an Interactive Data File (as 
defined in Sec.  232.11 of this chapter) if required by the Form on 
which it 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, 80b-4, 80b-6a, 80b-10, 80b-11, 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

[[Page 70508]]

(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:
0
a. Revising the introductory text;
0
b. Revising paragraphs (a)(2), (a)(3)(i) introductory text, (a)(3)(ii), 
and (a)(4);
0
c. Revising paragraphs (b)(1) introductory text, (b)(2) introductory 
text, and (b)(2)(iv) and (v);
0
d. Adding paragraph (b)(2)(vi); and
0
e. Revising the last sentence in Note 1 to Sec.  232.405.
    The revision and addition 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), General Instruction F of Sec.  249.311 (Form 11-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), 
Sec.  240.13a-21 of this chapter (Rule 13a-21 under the Exchange Act), 
paragraph 101 of the Instructions as to Exhibits of Sec.  249.220f of 
this chapter (Form 20-F), paragraph B.(15) of the General Instructions 
to Sec.  249.240f of this chapter (Form 40-F), paragraph C.(6) of the 
General Instructions to Sec.  249.306 of this chapter (Form 6-K), Sec.  
240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under the Exchange 
Act), Note D.5 of Sec.  240.14a-101 of this chapter (Rule 14a-101 under 
the Exchange Act), Item 1 of Sec.  240.14c-101 of this chapter (Rule 
14c-101 under the Exchange Act), General Instruction I of Sec.  249.333 
of this chapter (Form F-SR), General Instruction C.3.(g) of Sec. Sec.  
239.15A and 274.11A of this chapter (Form N-1A), General Instruction I 
of Sec. Sec.  239.14 and 274.11a-1 of this chapter (Form N-2), General 
Instruction C.3.(h) of Sec. Sec.  239.17a and 274.11b of this chapter 
(Form N-3), General Instruction C.3.(h) of Sec. Sec.  239.17b and 
274.11c of this chapter (Form N-4), General Instruction C.3.(h) of 
Sec. Sec.  239.17c and 274.11d of this chapter (Form N-6), General 
Instruction 2.(l) of Sec.  274.12 of this chapter (Form N-8B-2), 
General Instruction 5 of Sec.  239.16 of this chapter (Form S-6), and 
General Instruction C.4 of Sec. Sec.  249.331 and 274.128 of this 
chapter (Form N-CSR) 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 (as defined in 
Sec.  232.11 of this chapter).
    (a) * * *
    (2) Be submitted only by an electronic filer either required or 
permitted to submit an Interactive Data File as specified by Item 
601(b)(101) of Regulation S-K, General Instruction F of Sec.  249.311 
(Form 11-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), Sec.  240.13a-21 of this chapter (Rule 13a-21 under the 
Exchange Act), paragraph 101 of the Instructions as to Exhibits of 
Sec.  249.220f of this chapter (Form 20-F), paragraph B.(15) of the 
General Instructions to Sec.  249.240f of this chapter (Form 40-F), 
paragraph C.(6) of the General Instructions to Sec.  249.306 of this 
chapter (Form 6-K), Rule 17Ad-27(d) under the Exchange Act, Note D.5 of 
Rule 14a-101 under the Exchange Act), Item 1 of Rule 14c-101 under the 
Exchange Act, General Instruction I to Sec.  249.333 of this chapter 
(Form F-SR), General Instruction C.3.(g) of Sec. Sec.  239.15A and 
274.11A of this chapter (Form N-1A), General Instruction I of 
Sec. Sec.  239.14 and 274.11a-1 of this chapter (Form N-2), General 
Instruction C.3.(h) of Sec. Sec.  239.17a and 274.11b of this chapter 
(Form N-3), General Instruction C.3.(h) of Sec. Sec.  239.17b and 
274.11c of this chapter (Form N-4), General Instruction C.3.(h) of 
Sec. Sec.  239.17c and 274.11d of this chapter (Form N-6), General 
Instruction 2.(l) of Sec.  274.12 of this chapter (Form N-8B-2), 
General Instruction 5 of Sec.  239.16 of this chapter (Form S-6), or 
General Instruction C.4 of Sec. Sec.  249.331 and 274.128 of this 
chapter (Form N-CSR), as applicable;
    (3) * * *
    (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)), a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), or a clearing agency 
that provides a central matching service, 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)), a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), or a clearing agency 
that provides a central matching service, 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, Sec.  229.601(b)(101) of this chapter (Item 601(b)(101) of 
Regulation S-K), General Instruction F of Sec.  249.311 of this chapter 
(Form 11-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), Sec.  240.13a-21 of this chapter (Rule 13a-21 under the 
Exchange Act), paragraph 101 of the Instructions as to Exhibits of 
Sec.  249.220f of this chapter (Form 20-F), paragraph B.(15) of the 
General Instructions to Sec.  249.240f of this chapter (Form 40-F), 
paragraph C.(6) of the General Instructions to Sec.  249.306 of this 
chapter (Form 6-K), Rule 17Ad-27(d) under the Exchange Act, Note D.5 of 
Rule 14a-101 under the Exchange Act, Item 1 of Rule 14c-101 under the 
Exchange Act, General Instruction I to Sec.  249.333 of this chapter 
(Form F-SR), General Instruction C.3.(g) of Sec. Sec.  239.15A and 
274.11A of this chapter (Form N-1A), General Instruction I of 
Sec. Sec.  239.14 and 274.11a-1 of this chapter (Form N-2), General 
Instruction C.3.(h) of Sec. Sec.  239.17a and 274.11b of this chapter 
(Form N-3), General Instruction C.3.(h) of Sec. Sec.  239.17b

[[Page 70509]]

and 274.11c of this chapter (Form N-4), General Instruction C.3.(h) of 
Sec. Sec.  239.17c and 274.11d of this chapter (Form N-6); Instruction 
2.(l) of Sec.  274.12 of this chapter (Form N-8B-2); General 
Instruction 5 of Sec.  239.16 of this chapter (Form S-6); or General 
Instruction C.4 of Sec. Sec.  249.331 and 274.128 of this chapter (Form 
N-CSR).
    (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)), a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), or a clearing agency 
that provides a central matching service, 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.), a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), or a clearing agency 
that provides a central matching service, 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:
* * * * *
    (iv) Items 2, 4, 5, 10, 11, and 18 of Sec. Sec.  239.17c and 
274.11d of this chapter (Form N-6);
    (v) Any disclosure provided in response to Item 18 of Sec. Sec.  
249.331 and 274.128 of this chapter (Form N-CSR), or
    (vi) Item 11 of Sec.  274.12 of this chapter (Form N-8B-2) pursuant 
to Instruction 2, including to the extent required by Sec.  239.16 of 
this chapter (Form S-6); as applicable.
* * * * *

    Note 1 to Sec.  232.405: 
    * * * 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, 80a-37, and sec. 71003 and sec. 84001, Pub. L. 114-
94, 129 Stat. 1321, unless otherwise noted.
* * * * *

0
8. Amend Form S-6 (referenced in Sec. Sec.  239.16) by adding General 
Instruction 5.

    Note: Form S-6 is attached as Appendix A to this document. Form 
S-6 will not appear in the Code of Federal Regulations.

* * * * *

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 
environmental, social, or governance factors), unless:
    (i) The fund has adopted a policy to invest, under normal 
circumstances, 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; 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, under normal circumstances, at least 80% of the 
value of its assets in investments the income from which is exempt, as 
applicable,

[[Page 70510]]

from Federal income tax or from both Federal and State income tax; or
    (B) To invest, under normal circumstances, 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) The 
requirements of paragraph (a)(2)(i) and (a)(3)(i) of this section apply 
at the time a fund invests its assets, provided that:
    (i) The fund must review its portfolio investments' inclusion in 
the fund's 80% basket, as defined in paragraph (g) of this section, at 
least quarterly. If, subsequent to an investment, the fund identifies 
that the requirements of paragraph (a)(2)(i) or (a)(3)(i) of this 
section, as applicable, are no longer met, the fund must make future 
investments in a manner that will bring the fund into compliance with 
those paragraphs as soon as reasonably practicable, and in all 
circumstances within 90 consecutive days of the fund's identification 
that those requirements are no longer met;
    (ii) If the fund departs from the requirements of paragraph 
(a)(2)(i) or (a)(3)(i) of this section, as applicable, in other-than-
normal circumstances, the fund must come back into compliance with the 
requirements of those paragraphs within 90 consecutive days, measured 
from the time of the initial departure; and
    (iii) 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, as 
applicable, 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 the investment focus that the fund's name suggests.
    (3) A fund must maintain written records documenting its compliance 
under paragraphs (a) and (b) of this section, as applicable. A fund 
must maintain written records, at the time a fund invests its assets, 
documenting: whether the investment the fund makes is included in the 
fund's 80% basket and, if so, the basis for including such investment 
in the fund's 80% basket; and the value of the fund's 80% basket, as a 
percentage of the value of the fund's assets. A fund must maintain 
written records documenting its review of its portfolio investments' 
inclusion in the fund's 80% basket, as described in paragraph (b)(1)(i) 
of this section, including whether each investment is included in the 
fund's 80% basket and the basis for including such investment in the 
80% basket. If during the review of portfolio investments' inclusion in 
the fund's 80% basket or otherwise, the fund identifies that the 
requirements of paragraph (a)(2)(i) or (a)(3)(i) of this section, as 
applicable, are no longer met, the fund must maintain written records 
documenting: the date this was identified; and the reason for any 
departure from the policies described in paragraphs (a)(2)(i) and 
(a)(3)(i) of this section. If the fund departs from the requirements of 
paragraph (a)(2)(i) or (a)(3)(i) of this section, as applicable, in 
other-than-normal circumstances as described in paragraph (b)(1)(ii) of 
this section, or as described in paragraph (b)(1)(iii) of this section, 
the fund must keep records documenting: the date of any departure from 
the policies described in paragraphs (a)(2)(i) and (a)(3)(i) of this 
section; and the reason for any such departure (including why the fund 
determined that circumstances are other-than-normal). A fund must 
maintain records of any notice sent to the fund's shareholders pursuant 
to paragraph (d) of this section. Written records documenting the 
fund's compliance under paragraphs (a) and (b) of this section 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.
    (c) Effect of compliance with policy adopted under paragraph 
(a)(2)(i) or (a)(3)(i). 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 (a)(3) of this section, as applicable.
    (d) 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) of this section, 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.
    (e) Unit investment trusts. The requirements of paragraphs 
(a)(2)(i), (a)(3)(i), and (b)(3) of this section shall apply to any 
unit investment trust (as defined in section 4(2) of the Act (15 U.S.C. 
80a-4(2)) only at the time of initial deposit of portfolio securities.
    (f) Unlisted registered closed-end funds and business development 
companies. Notwithstanding the requirements of paragraph (a)(2)(ii) 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, any policy adopted pursuant to 
paragraph (a)(2) of this section can be changed only if authorized by 
the vote of the majority of the outstanding voting securities of such 
fund unless:
    (1) The fund conducts a tender or repurchase offer to allow 
shareholders to redeem shares, in accordance with all applicable 
Commission rules, in advance of any change in such policy;
    (2) The fund provides the fund's shareholders with at least 60 
days' prior notice of any change in such policy in advance of the 
tender or repurchase offer described in paragraph (f)(1) of this 
section;

[[Page 70511]]

    (3) The tender or repurchase offer described in paragraph (f)(1) of 
this section is not oversubscribed; and
    (4) In the event of a tender offer, the fund purchases shares at 
their net asset value.
    (g) Definitions. For purposes of this section:
    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 must value each physical short position 
using the value of the asset sold short. The fund may reduce the value 
of its assets by excluding any cash and cash equivalents, and U.S. 
Treasury securities with remaining maturities of one year or less, up 
to the notional amount of the derivatives instrument(s) and the value 
of asset(s) sold short, and also exclude any closed-out derivatives 
positions if those positions result in no credit or market exposure to 
the fund. A fund must exclude from this calculation derivatives 
instruments used to hedge currency risks associated with one or more 
specific foreign-currency-denominated equity or fixed-income 
investments held by the fund, provided that such currency derivatives 
are entered into and maintained by the fund for hedging purposes and 
that the notional amounts of such derivatives do not exceed the value 
of the hedged investments (or the par value thereof, in the case of 
fixed-income investments) by more than 10 percent.
    Derivatives instrument means any swap, security-based swap, futures 
contract, forward contract, option, any combination of the foregoing, 
or any similar instrument.
    Eighty percent (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).
    Fund means a registered investment company or a business 
development company, including any separate series thereof.
    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.
    Launch means a period, not to exceed 180 consecutive days, starting 
from the date the fund commences operations.
    Oversubscribed means shareholders have tendered or requested 
repurchase of a greater number of shares than the fund has offered to 
purchase in accordance with applicable Commission rules.

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

0
11. The 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 paragraph (a)(1) of Item 4 and adding new instruction 8 to 
paragraph (b)(1) of Item 9.

    Note: Form N-1A is attached as Appendix B to this document. Form 
N-1A will not appear in the Code of Federal Regulations.


0
13. Amend Form N-2 (referenced in Sec. Sec.  239.14 and 274.11a-1) by 
revising Item 8.

    Note: Form N-2 is attached as Appendix C to this document. Form 
N-2 will not appear in the Code of Federal Regulations.


0
14. Amend Form N-8B-2 (referenced in Sec.  274.12) by adding new 
General Instruction 2.(l) and by revising the Instruction to Item 11.

    Note: Form N-8B-2 is attached as Appendix D to this document. 
Form N-8B-2 will not appear in the Code of Federal Regulations.


0
15. Amend Form N-PORT (referenced in Sec.  274.150) by revising General 
Instruction A, Part B, and Part C.

    Note: Form N-PORT is attached as Appendix E to this document. 
Form N-PORT will not appear in the Code of Federal Regulations.


    By the Commission.

    Dated: September 20, 2023.
Vanessa A. Countryman,
Secretary.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendix A--Form S-6

Form S-6

* * * * *

General Instructions

* * * * *

Instruction 5. Interactive Data

    (a) An Interactive Data File (as defined in Sec.  232.11 of this 
chapter) is required to be submitted to the Commission in the manner 
provided by Sec.  232.405 of this chapter (Rule 405 of Regulation S-
T) for any registration statement or post-effective amendment 
thereto filed on Form S-6 that includes or amends information 
provided in response to Instruction 2 to Item 11 of Form N-8B-2 (as 
provided on this Form 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 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 Sec.  230.485 of this chapter (Rule 485 under the 
Securities Act), 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) An Interactive Data File is required to be submitted to the 
Commission in the manner provided by Rule 405 of Regulation S-T for 
any form of prospectus filed pursuant to paragraphs (b) or (d) of 
Rule 497 under the Securities Act that includes information provided 
in response to Instruction 2 to Item 11 of Form N-8B-2 (as provided 
on this Form pursuant to Instruction 1(a) of the Instructions as to 
the Prospectus of this Form) that varies from the registration 
statement. The Interactive Data File must be submitted with the 
filing made pursuant to Rule 497.
    (c) All interactive data must be submitted in accordance with 
the specifications in the EDGAR Filer Manual.
* * * * *

Appendix B--Form N-1A

Form N-1A

* * * * *

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 summarize the definitions 
of the terms used

[[Page 70512]]

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.
* * * * *

Item 9. Investment Objectives, Principal Investment Strategies, Related 
Risks, and Disclosure of Portfolio Holdings

* * * * *
    (b) * * * Instructions
* * * * *
    8. 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 9(b)(1) must include the 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.

Appendix C--Form N-2

Form N-2

* * * * *

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.
* * * * *

Appendix D--Form N-8B-2

Form N-8B-2

* * * * *

General Instructions for Form N-8B-2

* * * * *

2. Preparation and Filing of Registration Statement

(l) 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 of that Item. 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

* * * * *
    Instructions:
    1. The registrant need disclose information only 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.
* * * * *

Appendix E--Form N-PORT

Form N-PORT

* * * * *

General Instructions

A. Rule as To Use of Form N-PORT

    Form N-PORT is the reporting form that is to be used for monthly 
reports of Funds other than money market funds and SBICs under 
section 30(b) of the Act, as required by rule 30b1-9 under the Act 
(17 CFR 270.30b1-9). Funds must report information quarterly about 
their portfolios and each of their portfolio holdings as of the last 
business day, or last calendar day, of each month, other than the 
information reported in Items B.9 and C.2.e, which Funds must report 
quarterly about their portfolios and each of their portfolio 
holdings as of the last business day, or calendar day, of the third 
month of the quarter. A registered investment company that has filed 
a registration statement with the Commission registering its 
securities for the first time under the Securities Act of 1933 is 
relieved of this reporting obligation with respect to any reporting 
period or portion thereof prior to the date on which that 
registration statement becomes effective or is withdrawn.
    Reports on Form N-PORT must disclose portfolio information as 
calculated by the fund for the reporting period's ending net asset 
value (commonly, and as permitted by rule 2a-4, the first business 
day following the trade date). A Fund must maintain in its records 
the information that is required to be included on Form N-PORT no 
later than 30 days after the end of each month, other than the 
information reported in Items B.9 and C.2.e which is required to be 
maintained no later than 30 days after the end of each quarter. Such 
information shall be treated as a record under section 31(a)(1) of 
the Act and rule 31a-1(b) thereunder subject to the requirements of 
rule 31a-2(a)(2). Reports on Form N-PORT for each month in each 
fiscal quarter of a fund must be filed with the Commission no later 
than 60 days after the end of such fiscal quarter. If the due date 
falls on a weekend or holiday, the filing deadline will be the next 
business day.
    A Fund may file an amendment to a previously filed report at any 
time, including an amendment to correct a mistake or error in a 
previously filed report. A Fund that files an amendment to a 
previously filed report must provide information in response to all 
items of Form N-PORT, regardless of why the amendment is filed.
* * * * *

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)(i) or (3)(i)], 
provide the following:
    a. The definitions of the terms used in the Fund's name, 
including the specific criteria the Fund uses to select the 
investments the term describes, if any; and
    b. 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.
    Instruction to Item B.9:
    Consistent with rule 35d-1(g)(2), if the Fund uses 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) and/or values a physical short position using 
the value of the asset sold short, for purposes of determining the 
fund's compliance with an investment policy adopted under rule 35d-
1(a)(2)(i) or (a)(3)(i)(A), the percentage that the Fund reports in 
response to Item B.9.b must reflect the use of notional amounts with 
certain adjustments (and/or the value of the asset sold short) as 
set forth above. This percentage also must reflect any reduction of 
the value of the Fund's assets resulting from, as applicable, the 
fund's exclusion of cash and cash equivalents and U.S. Treasury 
securities with remaining maturities of one year or less, closed-out 
derivatives positions,

[[Page 70513]]

and currency derivatives instruments, each as provided in rule 35d-
1(g)(2).
* * * * *

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) or 
(3)(i)], is the investment included in the Fund's 80% basket, as 
defined in rule 35d-1(g), as applicable? [Y/N]
* * * * *
[FR Doc. 2023-20793 Filed 10-10-23; 8:45 am]
BILLING CODE 8011-01-P