New Names Rule FAQs Released Following Rule Amendments

The staff of the SEC Division of Investment Management (Staff) released updated answers to frequently asked questions (FAQs or 2025 FAQs) about recent Amendments to the Names Rule on January 8, 2025. The FAQs address certain questions that have been raised since the SEC adopted the Amendments, with which most funds must comply beginning December 11, 2025.

Background

On September 20, 2023, the SEC adopted significant changes to Rule 35d-1 under the Investment Company Act of 1940 (Names Rule), as well as certain forms and disclosure requirements (Amendments), with a compliance date of December 11, 2025, for large fund complexes and June 11, 2026, for small fund complexes.¹ Among the relevant changes, the Amendments significantly expand the universe of fund names in scope of the Names Rule.² For example, fund names with terms such as "growth," "value," and terms indicating that the fund's "investment decisions incorporate one or more [ESG] factors" are now within the scope of the Names Rule.³ However, interpretive questions remain as to whether fund names with certain terms will be deemed to be within the scope of the amended Names Rule. As a result, the Staff sought to clarify some of these questions in the FAQs, including with respect to the terms "income" and "high yield municipal," among others. Importantly, the FAQs represent the views of the Staff and are not rules, regulations or statements of the SEC. They may be updated to include additional FAQs in the future.⁴

Specific Terms Commonly Used in Fund Names

"Income"

The FAQs state that when the term "income" in a fund's name "does not refer to 'fixed income' securities," it "generally suggests that the fund emphasizes the achievement of current income as a portfolio-wide result." In these circumstances, the term "income" in a fund's name "would not, alone, require the fund to adopt" an 80% Investment Policy.⁵ This clarification is particularly useful for funds with "income" in their names that intend to provide income to shareholders but do not wish to be required to adopt an associated 80% Investment Policy. However, the FAQs do not provide any guidance or examples regarding where the term "income" would "refer" to fixed income securities or under what circumstances a fund would be using the term in this sense. Thus, a degree of uncertainty remains regarding the Staff's specification "when the term 'income' does not refer to 'fixed income' securities."

While it does not resolve all questions on the topic, this guidance helps to clarify the application of the amended Names Rule to fund names that include the term "income." Uncertainty on this point had arisen under the Amendments largely because of the following passage in the Adopting Release:

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. 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.⁶

The Staff's specification - "when the term 'income' does not refer to 'fixed income' securities" - seems to indicate a Staff view that the word "income" could indeed "reasonably be understood" to reference either a desired portfolio-level outcome or the characteristics of a fund's individual investments, and that the conclusion will depend on usage and context. Further, by clarifying certain circumstances under which the term "income" in a fund's name "would not, alone, require the fund to adopt" an 80% Investment Policy, the FAQ indicates that the Staff is of the view that, notwithstanding this language from the Adopting Release, the same term - "income" - could "requir[e] an 80% investment policy in some cases and not in others" without "be[ing] confusing to investors." It is unclear whether or, if so, how, the Staff would view other words with similar multiple uses in light of this FAQ.

"High Yield Municipal"

In connection with the adoption of the original Names Rule in 2001, the Staff provided guidance that although the term "high-yield" generally connotes below investment-grade corporate bonds, a "high yield municipal" fund was not required to adopt an 80% Investment Policy related to the term "high yield."⁷ That guidance in the 2001 FAQs cited historical market practice by tax-free high-yield bond funds due to the market for below investment-grade municipal bonds being smaller and relatively less liquid than below investment-grade corporate bonds. The Staff retained this guidance in the 2025 FAQs, again making reference to the historical investment practices of high-yield municipal bond funds.⁸ The Staff reiterated that a "high yield municipal" or "high yield tax-exempt" fund must adopt a fundamental investment policy consistent with Names Rule requirements with respect to the term "municipal" or "tax-exempt."⁹ This response confirmed that the Staff will not take issue if such a fund invests less than 80% of the value of its assets in bonds that meet the fund's high-yield rating criteria. The Staff cautioned, however, that such funds are still subject to the general Section 35(d) prohibition on materially deceptive or misleading names. This guidance is a welcome development for managers of high yield municipal funds, given the uncertainty as to whether the position articulated in the 2001 FAQs would remain in place under the amended Names Rule and the challenges many such funds would face if required to invest at least 80% of their assets in below investment-grade securities.

"Tax-Sensitive" (or Similar Terms) and "Money Market"

The Staff provided that usage of the term "tax-sensitive" and similar terms such as "tax-efficient," "tax-advantaged," "tax-managed," and "tax aware," will not require a fund to adopt an 80% Investment Policy because they indicate a fund's objectives without communicating the particular characteristics of the investments comprising a fund's portfolio.¹⁰ This expands the Staff's previous guidance from the 2001 FAQs, which only referred to "tax-sensitive."¹¹

The Staff also restated previous guidance from the 2001 FAQs that a fund using the term "money market" in its name would need to adopt an 80% Investment Policy tied to the type of money market instruments suggested by its name.¹² For example, "XYZ U.S. Treasury Money Market Fund" would need to adopt an 80% Investment Policy with respect to U.S. Treasury securities. On the other hand, a money market fund that has a name suggesting that the fund invests in money market instruments generally (e.g., the "XYZ Money Market Fund") would not need an 80% Investment Policy tied to eligible securities because Rule 2a-7 under the 1940 Act requires such a fund to invest solely in eligible securities.

Changes to a Fundamental 80% Investment Policy

Since the Amendments were adopted, it has been unclear whether shareholder approval would be required for changes to a fund's fundamental 80% Investment Policy needed to comply with the amended Names Rule. For funds with an existing fundamental 80% Investment Policy, the Staff clarified in the FAQs that as long as the new policy does not deviate from the current policy, shareholder approval is not required.¹³ For example, if an equity fund with "growth" in its name and an existing fundamental 80% Investment Policy broadly referencing equity investments revised this policy to reference equity investments with growth characteristics, it generally would not be deviating from its current policy and, thus, the change would not require shareholder approval.

Tax-Exempt Funds

The Staff restated previous guidance from the 2001 FAQs in the 2025 FAQs regarding the application of the amended Names Rule to tax-exempt funds.¹⁴ As with the current Names Rule, under the Amendments, a single-state tax-exempt fund (e.g., the "Maryland Tax-Exempt Fund") must have a fundamental policy to invest, under normal circumstances, either: (i) at least 80% of the fund's assets in investments the income from which is exempt from both federal and the named state's income tax, or (ii) its assets so that 80% of the income that it distributes will be exempt from both federal and the named state's income tax. Additionally, a single-state tax-exempt fund may count investments in securities of issuers located outside of the named state toward compliance with such policy so long as (i) the security pays interest that is exempt from both federal income tax and the tax of the named state and (ii) the fund discloses in its prospectus that it may invest in tax-exempt securities of issuers located outside of the named state.¹⁵

Consistent with the 2001 FAQs,¹⁶ the Staff takes the view that the terms "municipal" and "municipal bond" in a fund's name suggest that the fund's distributions are exempt from income tax, and that a fund with one of these terms in its name must therefore have a fundamental investment policy consistent with Names Rule requirements.¹⁷ Such a fund, in contrast to a fund with "tax-exempt" in its name, may continue to count securities that generate income subject to the alternative minimum tax toward compliance with such policy.

Conclusion

Although the FAQs provide some welcome clarity, interpretative questions remain. For example, the FAQs do not address other terms for which the applicability of the amended Names Rule remains unclear, such as "core." The FAQs also do not address difficulties that certain funds may have in complying with an 80% Investment Policy, such as "commodity strategy" funds that hold fixed income investments in connection with their commodity exposures. The FAQs also do not address any derivatives-related issues. With compliance dates approaching, fund managers eagerly await any additional guidance or relief as implementation of the Amendments progresses.

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