What’s In A Name?

Understanding SEC requirements for naming a mutual fund.

Shakespeare had it all wrong. There’s quite a bit in a name. Just ask the SEC. That which we call the Rose Global Fund by any other name – the Rose Pacific Fund, say — is an entirely different mutual fund altogether. The names Montague and Capulet may have signified nothing to two star-crossed lovers in Verona, but to your average 401K investor in Oshkosh, there is something in a mutual fund name. Rightly or wrongly, the name is often the first source of information about a fund’s investments and risks – and sometimes the last.

The Regulation

Enter Congress in 1940, stage left, followed by the SEC. Understanding the important role that a mutual fund’s name may play in an investor’s decisions, Congress enacted Section 35(d) of the Investment Company Act, which prohibits deceptive or misleading words in a fund name. Fifty-six years later Congress amended the Act to expand the SEC’s authority beyond after-the-fact prohibition to before-the-fact regulation of fund names, and in 2001 the SEC adopted Rule 35d-1, also known as the Names Rule, which spelled out requirements linking specific types of fund names and investment strategies.

It is the Names Rule that can make for a bit of Act I drama when launching a mutual fund. Most Advisers have a specific investment plan in mind for their new fund. They see hidden opportunity in this bond duration or that continent and they know how to exploit it. The Adviser often has a favorite fund name in mind as well. But the happy pairing of investment plan and name is not to be. Enter the Names Rule, stage right, to drive the two asunder.

Its Application

Under the Names Rule, if a fund name suggests that a fund focuses its investments on a particular investment type or industry, then the fund must also adopt the policy, stated in its prospectus, to invest at least 80% of assets in that particular type or industry. Similarly, if the name suggests investment in a particular country or region, then the fund must adopt the policy to invest 80% of assets in investments tied to that country or region. The prospectus must also define the criteria for inclusion in the type, industry, or region (i.e., whether Equity encompasses equity futures, or which countries are part of the Pacific Region, or which industries are covered by Environmentally Responsible). If a fund name suggests that distributions are tax-exempt, then the fund’s policy must also state that either 80% of assets are invested in tax-exempts, or 80% of distributions are tax-exempt. And of course a fund name may never suggest that a fund’s performance is guaranteed or approved by the US government.

The Names Rule applies to names suggesting investment types, regions, and industries, but not to names suggesting particular investment strategies. The term Income defines a strategy and not an investment type, and does not trigger an 80% requirement. The term Fixed Income, though, is an investment type, and does. Similarly, Tax Sensitive is a strategy, whereas Tax Exempt is an investment type.

It gets trickier. High-Yield is an investment type (i.e. below investment grade) for taxable bond funds, but for some tax-exempt funds, where higher yield does not always imply lower rating, the name High-Yield implies a strategy, not a type. The High-Yield Corporate Bond Fund would be required to invest 80% of assets in high-yield corporate bonds, whereas the High-Yield Muni Fund would be subject to an 80% requirement only for type – Munis – but not for strategy -- High-Yield. For another example, under SEC guidance Foreign means ex-US, a specific location, whereas Global suggests a number of different countries throughout the world. If a fund name includes Foreign, it’s subject to the 80% rule, but if the name includes Global, the SEC would look for a policy to invest a significant amount of assets in a number of different countries – but not for an explicit 80% requirement.

That which we call the Rose Pacific Fund would be subject to an 80% requirement. By another name – the Rose Global Fund – it would not.

There is some flexibility built into the Names Rule. The 80% requirement would apply only "under normal circumstances." It would also apply only at the time a fund invests its assets. But if, due to subsequent price movements, the named investment dropped below the 80% threshold, any new money flowing into the fund must be directed towards redressing the balance. An Adviser seeking more flexibility could, at the outset, choose to make the 80% requirement ‘non-fundamental’, meaning that it can be changed without a shareholder vote – but only if the fund is not tax-exempt. Any such decision would trigger shareholder notification requirements and, possibly, a change to the fund’s name.

How Atlantic Can Help

When launching a mutual fund, finding the right name is an art, from choosing the name to writing the prospectus to ensuring ongoing compliance. An experienced guide is essential. For thirty years Atlantic Fund Services has helped Advisers realize their vision and bring their new fund to market. We know the rules and understand the process to launch your fund smoothly – without the star-crossed drama. 

To learn more about key considerations when launching a mutual fund, please contact Jessica Chase at 207 347 2016 or submit an inquiry via Contact Us.  


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