On January 8, 2025, the staff (Staff) of the Securities and Exchange Commission’s (SEC) Division of Investment Management (IM) released the 2025 Names Rule FAQs (2025 FAQs) related to the amendment of Rule 35d-1 (Names Rule) under the Investment Company Act of 1940, as amended (1940 Act), adopted in 2023.
In short, the Names Rule, as amended, requires funds with names suggesting (i) a focus in certain industries or types of investments, (ii) a focus in certain countries or geographic regions, (iii) that the fund’s distributions are tax exempt, or (iv) a focus in investments that have, or issuers that have, “particular characteristics” to adopt a policy to invest, under normal circumstances, at least 80% of the fund’s net assets (plus borrowings for investment purposes) in industries, investment types, or geographic regions suggested by the fund’s name (80% Policy). To learn more about the 2023 amendments to the Names Rule, please visit our earlier legal alert, SEC expands the Names Rule.
The 2025 FAQs come ahead of December 11, 2025, the Names Rule compliance date.1 The 2025 FAQs modify, supersede, or withdraw portions of FAQs released in 2001 (2001 FAQs) related to the original adoption of the Names Rule in response to the Staff’s reviews of the no-action letters and other statements addressing compliance with the Names Rule. In addition to the 2025 FAQs, IM also released Staff Guidance providing an overview of the questions and answers withdrawn from the 2001 FAQs (Staff Guidance). Together, the 2025 FAQs and the Staff Guidance are intended to provide clarity on various implementation issues and interpretative questions left unclear by the 2023 adopting release for the amended Names Rule.
The 2023 Names Rule amendments significantly expanded the universe of fund names that come within the scope of the Names Rule, with the addition of such terms as “growth,” “value,” and terms indicating that the fund invests in investments or securities of issuers that have “particular characteristics.” While the adopting release provided extensive discussion of what terms may be within or outside of the scope of the Names Rule, interpretive questions remained regarding certain terms such as “income” and “high yield” among others. The 2025 FAQs provide clarification regarding the following terms:
- “High Yield” together with “Municipal” or “Tax Exempt” – Historically it has been the Staff’s position that funds with names including “high yield” and “municipal” or “tax-exempt” have not been required to invest 80% of their assets in high yield (or below investment grade) bonds because the market for such bonds is smaller and relatively less liquid compared to the market for taxable high yield bonds.2 In the 2025 FAQs, the Staff confirmed its historical position for these types of funds, and further confirmed that a fund using the term “municipal” or “tax-exempt” in conjunction with “high yield” would be required to adopt an 80% Policy for the terms “municipal” or “tax-exempt” but that the Staff would not object if such funds were to invest less than 80% of their assets in high yield (or below investment grade) bonds. The Staff cautioned, however, that all funds are still subject to Section 35(d), which prohibits funds from having names that are materially deceptive or misleading.
- “Tax-Sensitive” - In the 2025 FAQs, the Staff confirmed, consistent with the 2001 FAQs,3 that the term “tax-sensitive” in a fund’s name would not trigger the requirement to adopt an 80% Policy. The 2025 FAQs, however, expanded on the 2001 FAQs, noting that using similar terms such as “tax-efficient,” “tax-advantaged,” “tax-managed,” and “tax aware” would also not require a fund to adopt an 80% Policy. While, in the 2001 FAQs, the Staff stated that the term “tax sensitive” connotes a type of “investment strategy” rather than investment type (a distinction that was eliminated in the 2023 Names Rule amendments),4 the Staff’s position in the 2025 FAQs is based on the Staff’s belief that these terms indicate a fund’s investment objectives without communicating particular characteristics of a fund’s investments.
- “Income” – Pursuant to the 2025 FAQs, “when the term ‘income’ does not refer to ‘fixed income’ securities, the term ‘income’ in a fund’s name generally suggests that the fund emphasizes the achievement of current income as a portfolio-wide result.”5 As stressed in the 2023 adopting release,6 and confirmed in the 2025 FAQs, a term suggesting a portfolio wide result does not, on its own, require a fund to adopt an 80% Policy. While this provides some clarification regarding the use of the term “income” in a fund’s name, the Staff did not provide any concrete examples of fund names where the term income would or would not “refer” to fixed income securities. Additionally, it is important to note that, as stated in the 2023 adopting release, when a term in a fund’s name could be reasonably understood to reference a fund’s individual investments, or a portfolio-wide result, that fund must adopt an 80% Policy.7 As such, uncertainty remains regarding the use of the term “income.”
- “Money Market” - The Staff restated previous guidance from the 2001 FAQs that a fund using the term “money market” in its name would need to adopt an 80% Policy to the extent it refers to any specific types of money market instruments. For example, a fund with the terms “Treasury” and “money market” in its name would be required to adopt an 80% Policy to invest in US Treasury securities. However, a money market fund that has a name suggesting that the fund invests in money market instruments generally (e.g., XYZ Money Market Fund) would not need to adopt a specific 80% Policy because Rule 2a-7 under the 1940 Act already requires money market funds to invest solely in eligible securities.
With compliance dates approaching, there remains considerable uncertainty regarding the application of the 2023 amendments to specific terms – particularly when analyzing whether a particular term suggests that a fund invests in investments or issuers with “particular characteristics.”
The 2025 FAQs also provided clarification of certain issues pertaining to tax exempt funds. The 2023 Names Rule, like the original 2001 Names Rule, requires a fund with a name suggesting that the fund’s distributions are exempt from federal income tax or from both federal and state income tax (tax-exempt fund) to comply with subsection (a)(3) of the Names Rule and adopt a fundamental policy8 “to invest, under normal circumstances, either: (i) at least 80% of the value of its assets in investments the income from which is exempt from both federal income tax and the income tax of the named state, or (ii) its assets so that at least 80% of the income that it distributes will be exempt from both federal income tax and the income tax of the named state.”9 The 2025 FAQs confirmed, consistent with the 2001 FAQs, that a single-state tax exempt fund (such as, Maryland Tax-Exempt Fund) may include a security of an issuer located outside of the named state in the fund’s 80% basket under the following circumstances: (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 the fund may invest in tax-exempt securities of issuers located outside of the named state.
Additionally, in the 2025 FAQs the Staff restated a 2001 FAQ regarding the use of the terms “municipal” and “municipal bond.” The Staff reiterated its prior position that the terms “municipal” and “municipal bond” in a fund’s name suggest that the fund’s distributions are exempt from income tax, and such funds would be expected to comply with Rule 35d-1(a)(3). The Staff also confirmed that funds that use the term “municipal” rather than “tax-exempt” may count securities that generate income subject to the alternative minimum tax toward the 80% investment requirement, while funds that use the term “tax-exempt” may not.
Lastly, since the adoption of the 2023 Names Rule amendments, it has been unclear whether shareholder approval would be required for changes to an existing fundamental 80% Policy that a fund would need to make in order to comply with the amended Names Rule. In the 2025 FAQs the Staff stated that funds with an existing fundamental 80% Policy would not be required to obtain shareholder approval to change the policy, so long as the new policy does not deviate from the current policy or some other existing fundamental policy. For example, if a fund has a fundamental 80% Policy that broadly references equity investments, and the policy was revised to reference equity investments with growth characteristics, in the Staff’s view, this revision would not constitute a deviation from the existing policy, and thus would not require a shareholder vote to implement. However, the Staff cautions that a fund should consider whether any requirements outside the 1940 Act, such as state law or the fund’s charter or by-laws, would require the fund to seek shareholder approval in order to adopt or revise a fundamental 80% Policy.
All funds must carefully consider these guidelines when naming their new products and evaluating the names of their existing products in advance of the Names Rule compliance date. While the 2025 FAQs represent the views of the Staff and are not rules, regulations or statements of the SEC, they provide a valuable insight into the SEC’s perception of certain implementation issues and interpretative questions.
Less than a month after the 2025 FAQs were published, President Donald Trump issued an executive order requiring federal agencies, including the SEC, to consider a 60-day deferral for any rules that have been published in the Federal Register, but have not become effective, “for the purpose of reviewing any questions of fact, law, and policy that the rules may raise.”10 While the SEC has not yet made any statements with regard to the deferral of the Names Rule compliance date, uncertainty remains whether the 2023 Names Rule amendments will take effect as scheduled.
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1 Compliance date of December 11, 2025, listed above refers to the compliance date for large fund complexes (those with assets of $1 billion or more), the compliance date for small fund complexes (those with assets of less than $1 billion) is June 11, 2026.
2 Frequently Asked Questions about Rule 35d-1, Question 7 (December 4, 2001) (hereinafter 2001 FAQs).
3 2001 FAQs, Question 8.
4 Final Rule, Investment Company Names, Release No. 33-11238, pg. 30 (September 20, 2023) (hereinafter Adopting Release).
5 2025 Names Rule FAQs, Question 6 (January 8, 2025) (hereinafter 2025 FAQs).
6 Adopting Release, pg. 42.
7 Adopting Release, pg. 43-44.
8 A fundamental policy is one that cannot be changed without a vote of shareholders.
9 2025 FAQs, Question 2.
10 Presidential Action, Regulatory Freeze Pending Review, January 20, 2025.
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