Statement by Commissioner Uyeda on Updates to the Names Rule

Thank you, Chair Gensler, and my thanks to the staff for their presentations. Today, the Commission is adopting amendments to rule 35d-1 under the Investment Company Act, known as the “fund names rule,” and related Form amendments, including to Form N-PORT. While the adopting release makes a number of changes from the proposal, they ultimately do not go far enough.

With these amendments, the Commission overemphasizes the importance of a fund’s name, as if to suggest that investors and their financial professionals need not look at the prospectus disclosures. These amendments also will entail significant compliance costs for funds to implement – costs not captured in our particular method of estimating time burdens and costs under the Paperwork Reduction Act – which ultimately will be borne by investors. Alternatively, funds might simply select generic or exceedingly complex names that do little to help investors.

The fund names rule was adopted in 2001. It generally provides that if a fund’s name suggests a focus in a particular type of investment, or in investments in a particular industry, country, or geographic region, the fund must adopt a policy to invest at least 80% of its assets in the type of investment suggested by that name. The fund names rule has been marked by difficult interpretative issues that have caused registrants and Commission staff to spend an inordinate amount of effort and resources to resolve fund name questions.

Unfortunately, today’s amendments do not ameliorate these issues but exacerbate them. The greatly expanded fund names rule now will encompass names suggesting investments that have, or whose issuers have, particular characteristics such as growth or value, or terms indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance factors. As the release provides scant guidance on what is meant by “particular characteristics,” practically any term could be subject to the names rule. If we wanted all funds subject to the names rule, we should have simply said so. The amended rule provides some flexibility to funds to define terms consistent with their plain English meaning or established industry use. However, when the fund names rule was initially adopted in 2001, the Commission also noted that a fund “may use any reasonable definition of the terms used in its name…”[1] Hopefully this time we mean it, for if we construe terms too rigidly, fund innovation and investor choice will suffer.

In this regard, I am particularly concerned with the potential lack of transparency as to how the Commission’s staff will administer the rule. Smaller funds may not have the resources to sift through a mountain of EDGAR correspondence to decipher the staff’s views, and all funds – including larger funds – will incur significant costs in complying with the expanded rule.

Therefore, I encourage Commission staff to publicly release guidance, tools, or training materials that might shed light on how the staff will maintain internal consistency in the rule’s application. Past Commission practices may be instructive: for example, the Division of Investment Management issued annual generic comment letters,[2] the Division of Corporation Finance published a manual of telephone interpretations (the predecessor to the Division’s compliance and disclosure interpretations),[3] and the Division of Enforcement published a staff reference manual,[4] all of which provided the public with valuable insight. Publishing staff views and guidance about fund names can lead to more consistency and help set expectations.

With the expansion of the fund names rule to approximately 76% of funds – an estimate I think it likely on the conversative side – funds likely will face significant initial and ongoing costs complying with the amendments, including those relating to prospectus disclosure, notifying shareholders, and complying with newly amended Form N-PORT and recordkeeping requirements. Specifically, under the amended Form N-PORT requirements, funds must report: 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 fund assets. In addition, a fund will be required to report the definitions of the terms used in its name – a new requirement that was not proposed for public comment.

Requiring funds to repeat prospectus disclosure in Form N-PORT is inconsistent with the Commission’s layered disclosure approach.[5] It is also a curious policy choice: the Commission appears to believe that fund shareholders generally make their investment decisions by looking to the fund’s name, and yet is also requiring funds to repeat these detailed descriptions on Form N-PORT. In the nearly 20 years that I have been a securities regulator and in countless meetings with Main Street investors, I can tell you that none of them have ever mentioned Form N-PORT, or its predecessor Form N-Q, as the source of useful information in making an investment decision. Indeed, relying on potentially stale and outdated holdings information may be to the detriment of those in making that decision. Perhaps the only conclusion that one can draw is that this disclosure is not for shareholders’ benefit, but the benefit of the Commission’s examination and enforcement staff. This problematic choice likely will require funds to implement new and costly compliance systems for our convenience, and not for the benefit of shareholders.

These costs are particularly worrisome for smaller funds, as defined in the release.[6] While the tiered compliance period for smaller funds is a good development, I have concerns about the ambitious regulatory agenda for funds, which entails numerous compliance dates.[7] Again, the Commission is sending a message that being a mutual fund or ETF sponsor is reserved to the few and the large, and that regulatory barriers to entry will restrict opportunities for new entrants.

For the foregoing reasons, I cannot support today’s amendments. I appreciate the efforts of the Divisions of Investment Management, Trading and Markets, Economic Risk and Analysis, the Office of General Counsel, and the other offices around the Commission that contributed to today’s efforts. I also want to recognize the tireless work of the Division of Investment Management’s Disclosure Review and Accounting Office, who will be charged with implementing today’s amendments on top of their responsibility for ensuring the successful implementation of streamlined fund shareholder reports.[8] Finally – and while I cannot support the amendments overall – the additional compliance time for funds is a good change given the upcoming compliance date for streamlined shareholder reports.

Endnotes