Funds not caged by SEC designated in proposed rule change: Roaming room will remain | Carlton Fields

The SEC recently adopted amendments to its investment company “name” rules that apply to most SEC-registered funds that include underlying assets invested in a separate account by a registered insurance company.

Although this amendment and the SEC’s interpretive guidance in its adopting release are very broad, some of its key effects include:

• If the fund name contains any words, the fund must generally follow a policy of investing at least 80% of the fund’s net assets in the industry, investment type, or geographic area suggested by the fund name. Reconsider the analysis of whether or not. For example, unlike the rules previously in place, the proposed amendments generally include references to “value” and “growth” or “ESG” factors among many other names that require 80% policies. Added names to mention.
• If a Fund is required to adopt an 80% policy, (a) the Fund’s prospectus (and the periodic reports the Fund files with the SEC on Form N-PORT) shall define the terms used in that prospectus; Adds a new requirement that disclosures must be included. (b) Those definitions must be reasonable and consistent with the “plain English” meaning of the term or established industry usage. Most of this new prospectus information must be tagged using inline XBRL.
• Require such funds to (a) monitor compliance with the 80% policy at least quarterly (as well as at the time of investment under normal circumstances); (b) restore compliance within 90 days after the noncompliance is identified (resulting from a change in the value or characteristics of the Fund’s existing portfolio investments or the Fund’s decision to deviate from the 80% policy due to unusual circumstances); (c) on a quarterly basis, report to the SEC on Form N-PORT the percentage of the Fund’s net assets then classified as eligible for the 80% basket and, with respect to each portfolio investment; Report whether the investment is classified as such.
• As the SEC Adoption Release specifies and explains in detail, it requires that a “meaningful nexus” exist between the fund’s name and each portfolio investment that the fund allocates to the 80% basket.
• Adds new requirements regarding how derivative positions held by a fund must be treated for purposes of the 80% test.
• Provides extensive additional record-keeping requirements for funds that must comply with the 80% policy. However, other funds will be freed from the previous requirement to keep certain records documenting their decision not to require an 80% policy.

These and other consequences of the amendments raise a number of questions and decisions that are potentially important to the Fund, at least some of which may require or merit significant analysis. for example:

• For funds that do not currently comply with the 80% policy, (a) Will the amendments require the fund to adopt such a policy? (b) If necessary, will the fund make investments to avoid such a requirement? Need to change the program or name?
• For funds currently following an 80% policy, (a) this amendment would allow the fund to terminate its policy without changing its investment program or name, or (b) even if , the fund must exit the 80% policy. Does this require a change in investment program or name?
• For a fund that has decided to comply with the 80% policy pursuant to the revised regulations, may the fund make any changes to its investment program or its management to reduce the burdens and costs associated with such compliance? , should I do that again? In most cases, some cost savings can be achieved.

Fortunately, the amendments pave the way for funds to take steps to avoid or reduce the costs and burdens that are often subject to the 80% policy requirement. This is particularly important because the changes described above will significantly increase these costs and burdens.