under the Exchange Act and rule 23c-3 under the Investment Company
Act. See final rule 35d-1(g).
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5. Effect of Compliance With an 80% Investment Policy
    We are adopting, substantially as proposed, a new provision in the
names rule providing that a fund's name may be materially deceptive or
misleading under section 35(d) of the Investment Company Act even if
the fund adopts and implements an 80% investment policy and otherwise
complies with the rule's requirement to adopt and implement the
policy.\304\ The Commission has previously stated that the names rule's
80% investment policy requirement is not intended to create a safe
harbor from liability under section 35(d) for materially deceptive or
misleading fund names, and we are codifying this view to make clear
that a fund name may be materially deceptive or misleading even where
the fund complies with its 80% investment policy.\305\
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    \304\ Final rule 35d-1(c). In addition, the anti-fraud
provisions of the Federal securities laws regarding disclosures to
investors continue to apply to funds notwithstanding their
compliance with the names rule.
    \305\ See Proposing Release, supra footnote 2, at n.101.
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    Many commenters supported this aspect of the proposal.\306\ Some
commenters asserted that the codification is particularly important for
fund names that articulate an ESG focus.\307\ One commenter urged the
Commission to require funds that use ESG terms in their name to state
clearly and prominently what percent of the fund is invested in
securities that do not

comply with the investment criteria for the 80% basket.\308\ Other
commenters suggested that fund names that imply a prohibition or
absence of investments or issuers with certain characteristics should
have an investment policy that prohibits these investments.\309\
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    \306\ See, e.g., Better Markets Comment Letter; CFA Institute
Comment Letter; Sierra Club Comment Letter; Fidelity Comment Letter;
U.S. SIF Comment Letter.
    \307\ See, e.g., PRI Comment Letter; Comment Letter of As You
Sow (Aug. 15, 2022) (``As You Sow Comment Letter''); Comment Letter
of Blue Haven Initiative (Aug. 16, 2022) (``Blue Haven Comment
Letter''); Comment Letter of Building a Sustainable Investment
Community Comment Letter (Aug. 15, 2022) (``Building a Sustainable
Investment Community Comment Letter'').
    \308\ Comment Letter of Corey Shapiro (Aug. 16, 2022) (``Shapiro
Comment Letter'').
    \309\ See, e.g., CFA Institute Comment Letter; As You Sow
Comment Letter; Blue Haven Comment Letter; Bonwood Comment Letter;
Comment Letter of Change Finance (Aug. 15, 2022) (``Change Finance
Comment Letter'').
---------------------------------------------------------------------------

    Several commenters, however, suggested that the Commission should
provide more clarity or define precisely what types of investments
would be considered inconsistent with the fund's name to the degree
that the name would be materially deceptive or misleading despite the
fund's compliance with an 80% investment policy.\310\ In response to an
example in the 2022 Proposal that a fund that complies with the names
rule but makes a substantial investment that is ``antithetical'' to the
fund's investment focus would have a materially deceptive or misleading
name, commenters expressed that the proposed provision poses
significant risks of second-guessing because evaluating whether an
investment is antithetical to a fund's name is highly subjective.\311\
Commenters also suggested that the uncertainty related to the provision
would decrease portfolio management discretion and flexibility in
managing the fund's portfolio, as this uncertainty would give rise to
concern about violating the rule.\312\ A few commenters asserted that
absent a claim in a fund's name that the fund will not invest in a
particular type of investment, a fund should have flexibility as long
as it discloses how it will invest its 20% basket.\313\
---------------------------------------------------------------------------

    \310\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Dechert Comment Letter; Capital Group Comment Letter; PRI Comment
Letter.
    \311\ See, e.g., J.P. Morgan Asset Management Comment Letter;
Federated Hermes Comment Letter; Stradley Comment Letter; see also
Fidelity Comment Letter (expressing particular concern with the
statements provided in the 2022 Proposal, asserting that ``the
current regulatory landscape, which requires certain specific
disclosures under Form N-1A and provides for further registration
statement liability through other securities laws, appropriately
addresses any potential liability for material omissions or
misstatements in the registration statement'').
    \312\ See, e.g., MFS Comment Letter; Stradley Comment Letter;
Capital Group Comment Letter; Fidelity Comment Letter (stating that
``the 20% portion of the fund's portfolio that is not subject to the
Names Rule is a diversification tool in managing fund assets'').
    \313\ See SIFMA AMG Comment Letter; MFS Comment Letter.
---------------------------------------------------------------------------

    After considering the comments on the proposed provision, we
continue to believe that a fund's name could be materially deceptive or
misleading for purposes of section 35(d) even if that fund has complied
with the names rule's 80% investment policy requirement. For example, a
fund's name could be materially deceptive or misleading for purposes of
section 35(d) if the fund invests in a way such that the source of a
substantial portion of the fund's risks or returns is materially
different from that which an investor reasonably would expect based on
the fund's name, regardless of the fund's compliance with the
requirements of the names rule (e.g., a ``green energy and fossil fuel-
free'' fund making a substantial investment in an issuer with fossil
fuel reserves, or a ``conservative income bond'' fund using the 20%
basket to invest in highly volatile equity securities that introduce
significant volatility into a fund that investors would expect to have
lower levels of volatility associated with lower-yielding bonds).\314\
To the extent a fund uses its 20% basket to invest in assets that are
materially inconsistent with the investment focus or risk profile
reflected by the fund's name, the fund's name would be materially
deceptive or misleading under section 35(d). While we appreciate
commenters' expressed concerns, the provision is designed to codify the
existing relationship between the names rule and section 35(d) and not
to create new requirements or standards with respect to the selection
of investments in a fund's 20% basket that are not now present. For
these reasons, this provision will not require certain disclosures
related to the percent of a fund's assets invested in securities that
do not comply with the investment criteria for the 80% basket, nor will
this provision include an explicit prohibition on investments that are
inconsistent with the activity that a fund's name communicates, as
suggested by a few commenters.
---------------------------------------------------------------------------

    \314\ See Proposing Release, supra footnote 2. As another
example, a fund that is perpetually out of compliance with the 80%
investment requirement on account of temporary departures may have a
name that is materially deceptive or misleading under section 35(d)
even if each temporary departure is permissible under the rule. Id.
Further, as discussed above, a fund of funds or other acquiring fund
can reasonably rely upon the entire value of its investment in an
appropriate acquired fund as a general matter. See supra paragraph
following paragraph accompanying footnotes 139-140. However, if an
acquiring fund was aware that an underlying fund has changed its
investments such that it is not following the acquiring fund's
investment focus, that acquiring fund's name may be materially
misleading or deceptive if it continues to include the value of the
investment in the acquired fund in its 80% basket.
---------------------------------------------------------------------------

    Relatedly, the 2022 Proposal discussed situations where a fund may
be invested 80% or more in a market index referenced in the fund's
name, but that underlying index may have components that are
contradictory to the index's name.\315\ In such circumstances, even
though the fund meets the names rule requirements by its investments in
the index, the name could still be materially misleading or deceptive
in that the index's name would suggest an investment focus that the
fund does not follow. A few commenters agreed that this example could
lead to materially deceptive or misleading fund names, asserting that
terms used in the name of index funds can communicate an investment
focus to investors, therefore such funds should not be allowed to
circumvent the technical holding requirements of the names rule.\316\
Other commenters, however, expressed that index funds should not be
required to determine compliance with an 80% investment policy
regarding investments that the name of an index indicates, but rather
the fund should comply with the rule by investing 80% of its assets in
the components of the underlying index.\317\ Some of these commenters
expressed that fund managers may have visibility into index
methodologies, but they do not determine the particular investments
that an index includes, making it challenging to deviate from an index
if their principal objective is to track its returns.\318\ In addition,
some commenters suggested that applying the rule to index funds in the
manner the Commission's example described could increase tracking error
between index funds and indices, while increasing costs and the
likelihood of potential confusion for investors if funds have to
deviate from the methodologies of the underlying index.\319\
---------------------------------------------------------------------------

    \315\ See Proposing Release, supra footnote 2, at n.102 and
accompanying discussion.
    \316\ PIABA Comment Letter; Dogwhistle Comment Letter.
    \317\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Dechert Comment Letter; Fidelity Comment Letter; Invesco Comment
Letter.
    \318\ See SIFMA AMG Comment Letter; BlackRock Comment Letter;
Dechert Comment Letter (stating that ``[w]hile fund sponsors conduct
initial and ongoing periodic due diligence on index providers, index
funds rely upon the index providers, on a daily basis, to construct
the index. Funds make clear disclosures concerning their use of
indices, and we believe investors have established a clear
understanding of how index funds operate in the decades since their
introduction'').
    \319\ See Comment Letter of State Street Global Advisors (Aug.
16, 2022) (``State Street Comment Letter''); ICI Comment Letter;
WisdomTree Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that a fund that is invested 80% or more in
an index included in the fund's name can be materially deceptive and
misleading if a meaningful nexus does not exist

between the components of the underlying index and the investment focus
suggested by the index's name.\320\ We acknowledge that many investors
that invest in index funds are seeking exposure to a particular index
and that funds will have names that reflect the index that they track.
However, terms used in fund names, including index funds, can
communicate an investment focus that creates a reasonable expectation
among investors that the fund will hold investments that support that
focus. While we recognize the practical constraints and potential for
investor confusion raised by commenters, we believe permitting index
funds not to consider the relationship between the terms in their name
and the investment focus such terms convey undermines the investment
protection concerns that underlie the names rule and section 35(d). If
a fund's name indicates an investment focus, such as investments in a
specified industry, investors reasonably will expect that there is a
meaningful nexus between fund's investments and the fund's investment
focus--regardless of whether the fund executes its strategy by
selecting companies in the specified industry or tracking an index that
identifies such companies. As a result, consistent with rule 38a-1,
index funds should generally adopt and implement written policies and
procedures reasonably designed to ensure that indexes selected by a
fund do not have materially misleading or deceptive names
themselves.\321\ While index funds should generally implement written
policies and procedures ensuring that they comply with the requirements
of section 35(d), in response to commenters, we are confirming that the
terms in a market index referenced in an index fund's name would not be
subject to an 80% investment policy test that would be in addition to
the fund's policy to invest at least 80% of its assets in the index's
components required under the rule.
---------------------------------------------------------------------------

    \320\ See Proposing Release, supra footnote 2, at n.102 and
accompanying discussion.
    \321\ See supra footnote 119.
---------------------------------------------------------------------------

B. Prospectus Disclosure Defining Terms Used in Fund Name

    We are adopting amendments to funds' registration forms--
specifically, Form N-1A, Form N-2, Form N-8B-2, and Form S-6--that each
fund that is required to adopt and implement an 80% investment policy
must include disclosure in its prospectus that defines the terms used
in its name, including the specific criteria the fund uses to select
the investments that the term describes, if any.\322\ We are also
adopting a requirement that funds must tag most of the new information
that will be included under the final amendments, using a structured
data language (specifically Inline eXtensible Business Reporting
Language or ``Inline XBRL'').\323\ The final amendments are designed to
help investors better understand how the fund's investment strategies
correspond with the investment focus that the fund's name suggests, as
well as to provide additional information about how the fund's
management seeks to achieve the fund's objective. We are adopting these
amendments substantially as proposed.
---------------------------------------------------------------------------

    \322\ See instructions to Item 4(a)(1) and Item 9(b)(1) of Form
N-1A; instruction to Item 8(2) of Form N-2; and instruction to Item
11 of Form N-8B-2.
    \323\ See General Instruction C.3.(g) of Form N-1A; General
Instruction I of Form N-2; General Instruction 2.(l) of Form N-8B-2;
and General Instruction 5 of Form S-6. For purposes of the final
disclosure requirements, ``terms'' mean any word or phrase used in a
fund's name, other than any trade name of the fund or its adviser,
related to the fund's investment focus or strategies. However, words
like ``fund'' or ``portfolio'' in a fund's name do not describe an
investment focus or strategy and do not need to be defined.
---------------------------------------------------------------------------

    Commenters generally supported the proposed prospectus disclosure
requirements.\324\ We did not receive any comments opposing this
proposed requirement. In particular, the Commission received comments
supporting the proposal's approach that allows funds the flexibility to
use reasonable definitions when defining the terms in their names, as
there may be more than one reasonable definition for a particular
term.\325\ Commenters also supported requiring funds to disclose the
specific, non-proprietary criteria used to select the investment terms
used in the fund's name.\326\ Without this proposed disclosure, these
commenters stated, funds are not required to convey the key information
about the fund's holdings, risks, characteristics, or strategies
associated with the fund's 80% investment policy.
---------------------------------------------------------------------------

    \324\ See, e.g., ICI Comment Letter; CFA Institute Comment
Letter; SIFMA AMG Comment Letter; Public Citizen Comment Letter;
Comment Letter of IRI (Aug. 16, 2022) (``IRI Comment Letter'');
Fidelity Comment Letter; LTSE Comment Letter.
    \325\ See, e.g., ICI Comment letter; CFA Institute Comment
Letter; SIFMA AMG Comment Letter.
    \326\ See, e.g., CFA Institute Comment Letter; SIFMA AMG Comment
Letter.
---------------------------------------------------------------------------

    The final prospectus disclosure requirements will provide investors
with important information to determine whether a particular investment
meets an investor's needs and goals. These requirements are additive to
current names rule and other disclosure requirements.\327\ Despite the
protections afforded by the Commission's anti-fraud rules, the final
prospectus disclosure requirements will help ensure that investors are
given important information about how a fund manager understands how
the terms used in the fund's name connect to the fund's 80% investment
policy.\328\ These funds must disclose in their prospectuses the
specific criteria used by the fund to select these investments.
Understanding how terms used in a fund's name are understood by the
fund's investment manager is key information that an investor needs to
make an investment decision, as this will help the investor understand
whether the investment focus the name suggests is consistent with the
investor's investment goals and risk tolerance. There are many types of
fund names for which understanding additional detail about how these
terms are defined would provide greater clarity to an investor about
the investment focus that the name suggests.\329\
---------------------------------------------------------------------------

    \327\ However, the names rule does currently include this
requirement for funds with names suggesting investment in particular
countries or geographic regions. The final amendments replace this
provision with a general requirement to define terms used in the
fund's name whenever the fund's name suggest an investment focus
requiring an 80% investment policy.
    \328\ See, e.g., Public Citizen Comment Letter.
    \329\ See supra section I.B (discussing growth in the breadth of
fund investment strategies over the past two decades).
---------------------------------------------------------------------------

    We understand, based on staff experience with fund disclosure, that
it is currently common practice for funds to include prospectus
disclosure that describes the fund's 80% investment policy and that
defines the terms in the fund's name.\330\ The amendments we are
adopting codify certain best practices of some funds that currently
provide disclosure defining terms used in a fund's name. The disclosure
requirement, however, does not otherwise alter or address disclosure
that funds currently provide, for example in response to prospectus

disclosure requirements regarding the fund's investment policies.
---------------------------------------------------------------------------

    \330\ When the Commission adopted the names rule in 2001, the
Commission stated that a fund that is subject to the rule's 80%
investment policy requirement should disclose this policy as one of
its principal investment strategies in its prospectus. See 2001
Names Rule Adopting Release, supra footnote 8, at nn.15 and 43; see
also section 8(b) of the Act (requiring a registered investment
company's registration statement to contain certain information,
including a recital of its investment policies); Fidelity Comment
Letter (stating that it is currently common practice for mutual
funds to include prospectus disclosure that describes the fund's 80%
policies and defines any terms that their names include in plain
English, including funds whose names do not currently require such
disclosures).
---------------------------------------------------------------------------

    In addition, we are modifying the proposed disclosure requirement
for open-end funds registered on Form N-1A to provide that definitions
of terms in the fund's name must be summarized in the summary section
of the prospectus and disclosed in the statutory prospectus.\331\ We
proposed to require funds to provide this disclosure solely in the
summary section of the prospectus. The modifications in the final
amendments reflect that the principal investment strategies disclosure
in the summary section of the prospectus is intended to summarize
disclosure that appears later in the statutory prospectus.
Specifically, the Form N-1A requirement for principal investment
strategies disclosure that appears in the summary prospectus (Item 4(a)
of Form N-1A) provides that, based on the information given in response
to the Form N-1A requirement for principal investment strategies
disclosure that appears in the statutory prospectus (Item 9(b) of Form
N-1A), a fund must summarize how it intends to achieve its investment
objectives by identifying the fund's principal investment strategies.
---------------------------------------------------------------------------

    \331\ See Instruction to Item 4(a)(1) of Form N-1A; Instruction
8 to Item 9(b)(1) of Form N-1A.
---------------------------------------------------------------------------

    Funds have flexibility to use reasonable definitions of the terms
that their names use. A fund's use of reasonable definitions of the
terms used in the fund's name under the final rule, however, may not be
inconsistent with their plain English meaning or established industry
use.\332\ As discussed above, what constitutes ``reasonable'' in
context could vary depending on the fund name, but requires that
definition have a meaningful nexus between the term used in the fund's
name and the fund's investment focus.\333\ For instance, when the
investment focus relates to an industry, we recognize that there are
different approaches a fund could take to determine if a given security
is tied to the economic fortunes and risks associated with the named
industry. As there could be multiple reasonable definitions of the same
term that multiple funds use in their names, each fund required to
adopt an 80% investment policy must disclose how it interprets these
terms to help investors better distinguish among funds.\334\
---------------------------------------------------------------------------

    \332\ See final rule 35d-1(a)(2)(iii) and 35d-1(a)(3)(ii); see
also Proposing Release, supra footnote 2, at text following n.112.
    \333\ See supra section II.A.1.c). Commission staff could
request information from the fund regarding the fund's basis for
determining that the fund name is sufficiently consistent with the
definitions provided, just as staff currently may request
information from a fund to support its disclosure reflecting the
fund's compliance with various provisions of the Act and rules
thereunder.
    \334\ This disclosure, like other disclosure in funds'
prospectuses, should avoid ``excessive detail, technical or legal
terminology, and complex language.'' See General Instruction C.1.(c)
to Form N-1A.
---------------------------------------------------------------------------

    As proposed, we are requiring that all funds subject to the new
prospectus disclosure requirements tag information we are requiring
funds to disclose on their registration forms in a structured, machine-
readable data language, specifically Inline XBRL.\335\ We received a
comment supporting the proposed Inline XBRL tagging requirement,
stating that the XBRL standard is well-suited to narrative disclosures
and will enhance the ability of those interested in using the data to
extract disclosures quickly and to compare disclosures across entities
more easily.\336\ One commenter discussed that, as the Commission
recognized in the Proposing Release, the proposed Inline XBRL tagging
requirement would be new for UITs, as UITs are not currently subject to
structured data tagging requirements.\337\ This commenter requested
that the Commission except UITs from the Inline XBRL tagging
requirement, as most UIT unitholders are not familiar with Inline XBRL
and introducing this requirement to UITs would be costly.
---------------------------------------------------------------------------

    \335\ Many funds are already required to tag certain
registration statement disclosure items using Inline XBRL. See
Proposing Release, supra footnote 2, at n.115.
    \336\ See Comment Letter of XBRL US (Aug. 16, 2022) (``XBRL
Comment Letter''); but see SIFMA AMG Comment Letter (stating that
the costs associated with Inline XBRL tagging as proposed would be
significant).
    \337\ See, e.g., Invesco Comment Letter.
---------------------------------------------------------------------------

    We are adopting the Inline XBRL tagging requirements substantially
as proposed.\338\ These requirements include block text tagging of
narrative information about a fund's 80% investment policy and the
terms used in its name, including the specific criteria the fund uses
to select the investments that the term describes, if any.\339\ Many
funds are already required to tag certain registration statement
disclosure items using Inline XBRL. While UITs do not currently have
experience with tagging in Inline XBRL, after considering comments
received, we are adopting the proposed requirements because we
anticipate that tagging names rule disclosure for all funds that are
subject to this disclosure requirement will benefit investors, other
market participants, and the Commission by making the tagged
disclosures more readily available and easily accessible for
aggregation, comparison, filtering, and other analysis.\340\ This
requirement will enable automated extraction and analysis of granular
data about how funds are defining the terms used in their names,
allowing investors and other market participants to more efficiently
perform large-scale analysis and comparison across funds and time
periods. An Inline XBRL requirement facilitates other analytical
benefits, such as more easily extracting and searching disclosures
about funds' names and their 80% investment policies (rather than
having to manually run searches for these disclosures through entire
documents), and automatically comparing these disclosures against prior
periods.
---------------------------------------------------------------------------

    \338\ While the proposal did not distinguish between names-
related information that open-end funds would disclose in their
summary prospectuses versus their statutory prospectuses, the final
amendments do make this distinction. See supra paragraph
accompanying footnote 331 and accompanying text. Only the summary
prospectus disclosure would be tagged in Inline XBRL format;
however, the disclosure that open-end funds provide in their
statutory prospectuses also would be reported on Form N-PORT, where
it would be tagged in XML format. See infra section II.E.2.
    \339\ This tagging requirement would be implemented by including
cross-references to rule 405 of Regulation S-T in each applicable
fund registration form (and, as applicable, updating references to
those fund registration forms in rule 11 and rule 405, as well as
references in those fund registration forms that currently require
certain information to be tagged in Inline XBRL--that is, Form N-1A
and Form N-2), by revising rule 405(b) of Regulation S-T to include
the proposed names rule disclosures, and by adopting conforming
amendments to rule 485 and rule 497 under the Securities Act. The
final amendments incorporate technical changes to the proposed
amendments, but the tagging requirements that the final amendments
effectuate are designed to be the same as under the proposed
amendments. Pursuant to rule 301 of Regulation S-T, the EDGAR Filer
Manual is incorporated by reference into the Commission's rules. In
conjunction with the EDGAR Filer Manual, Regulation S-T governs the
electronic submission of documents filed with the Commission. Rule
405 of Regulation S-T specifically governs the scope and manner of
disclosure tagging requirements for operating companies and
investment companies, including the requirement in rule 405(a)(3) to
use Inline XBRL as the specific structured data language to use for
tagging the disclosures.
    \340\ See infra section IV.D.2 at footnotes 566-568 and
accompanying text (for a discussion of the costs for UITs to comply
with the new Inline XBRL requirement).
---------------------------------------------------------------------------

C. Plain English/Established Industry Use Requirement

    For funds that are required to adopt an 80% investment policy, we
are requiring that any terms used in the fund's name that suggest
either an investment focus or that such fund is a tax-exempt fund must
be consistent with those terms' plain English meaning or established
industry use.\341\ This requirement is designed to provide investors
with a better understanding of the fund and its investment objectives

by effectively requiring a fund's name to be consistent with a
reasonable investor's likely understanding of the investment focus or
tax status that the fund's name suggests.
---------------------------------------------------------------------------

    \341\ Final rule 35d-1(a)(2)(iii) and (3)(ii).
---------------------------------------------------------------------------

    We received many comments supporting the proposed requirement.\342\
Commenters expressed support for a requirement that would address
reasonable, plain-English definitions for terms used in a fund's name
as a means of providing additional clarity to fund shareholders.\343\
---------------------------------------------------------------------------

    \342\ See, e.g., J.P. Morgan Asset Management Comment Letter;
Comment Letter of Delbert L. Coonce, Jr. (Aug. 15, 2022) (``Coonce
Comment Letter''); Comment Letter of John Rosenmiller (Aug. 15,
2022) (``Rosenmiller Comment Letter''); Building a Sustainable
Investment Community Comment Letter; Comment Letter of Peter
Vandermark (Aug. 15, 2022) (``Vandermark Comment Letter''); Comment
Letter of Rodney Smith (Aug. 15, 2022) (``Smith Comment Letter'');
Comment Letter of Jim Metzinger (Aug. 15, 2022) (``Metzinger Comment
Letter''); Change Finance Comment Letter; Comment Letter of Steve
Wardwood (Aug. 15, 2022) (``Wardwood Comment Letter''); Public
Citizen Comment Letter; Comment Letter of Veris Wealth Partners
(Aug. 15, 2022) (``Veris Comment Letter''); Feinberg Comment Letter.
    \343\ See, e.g., Fidelity Comment Letter (``We believe the
requirement that the definition be reasonable and in plain English,
along with the existing anti-fraud provisions under the securities
law, will provide sufficient clarity to shareholders, without
stifling innovation and opportunities for investment advisers to
differentiate their investment strategies.''); CFA Institute Comment
Letter.
---------------------------------------------------------------------------

    We received several comments requesting clarification on this
requirement. One commenter asked how the Commission will determine
whether a term is consistent with its ``plain English'' or
``established industry use'' meaning.\344\ Another commenter requested
clarification about circumstances where the plain English or
established industry meaning of a word could be inaccurate or
misleading.\345\ For clarity on this point, commenters suggested that
the final rule be modified to allow funds to use only any
``reasonable'' definition of the terms of its name.\346\
---------------------------------------------------------------------------

    \344\ See, e.g., Calamos Comment Letter.
    \345\ See, e.g., Public Citizen Comment Letter.
    \346\ See, e.g., Seward & Kissel Comment Letter and WisdomTree
Comment Letter.
---------------------------------------------------------------------------

    One commenter stated that some plain English meanings may lack
clarity in an investment context and that funds should be required to
include a description of how terms relate to the fund's 80% investment
focus.\347\ Another commenter similarly stated that certain terms like
``sustainable'' or ``socially responsible'' are evolving, and investors
need to understand how funds define those terms.\348\ As one commenter
stated, certain terms have meanings that changed over time, and certain
terms, particularly in the ESG context, may develop new meanings as
markets and the investment management industry continue to evolve.\349\
---------------------------------------------------------------------------

    \347\ See CFA Institute Comment Letter.
    \348\ See Public Citizen Comment Letter.
    \349\ See J.P. Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    Some commenters conveyed concern about the proposed plain English
and established industry use requirement. One commenter stated that the
plain English standard already applies to prospectus disclosure, and it
should therefore not be separately required in the names rule.\350\ One
commenter suggested that there may still be deviations in how funds
define terms even with this requirement. As a result, investors will
still need to read the prospectus for clarity about the terms used in
the fund's name, mitigating any positive impact of the
requirement.\351\ Commenters expressed specific concerns about the
proposed ``established industry use'' standard. Commenters stated that
this standard is nebulous, as industries and terminology can change
over time, thereby altering the understood meaning of the term under
established industry use.\352\ Additionally, the Commission received a
comment expressing concern that the relationship between the ``plain
English'' standard and the ``established industry use'' standard is
potentially contradictory and opaque.\353\ One commenter cautioned that
the established industry use standard could contribute to greenwashing
for terms that have been widely used in inconsistent ways because the
standard could permit funds to use terms consistent with industry
practice when the usage of the term for the particular fund is
misleading.\354\ For example, this commenter stated that the term
``impact'' is used in many fund names with a range of meanings within
the fund industry, and therefore funds should disclose the definitions
of the terms used in the name as well as the criteria used to select
the investments the terms describe.
---------------------------------------------------------------------------

    \350\ See Seward & Kissel Comment Letter.
    \351\ See, e.g., Calamos Comment Letter.
    \352\ See, e.g., Fidelity Comment Letter; Seward & Kissel
Comment Letter.
    \353\ See Seward & Kissel Comment Letter.
    \354\ See Consumer Federation of America Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we are adopting this requirement as
proposed. We recognize that certain terms may be defined in multiple
reasonable ways. Accordingly, the final amendments are intended to
support these differences while providing that the use of terms that
are inconsistent with their terms' plain English meaning or established
industry use would mislead investors. Whether a fund is using a term
consistent with its plain English meaning or established industry use
could be derived from a variety of sources, including, but not limited
to, the dictionary, prior public disclosures, industry codes or
classifications, and/or a colloquial understanding of the term.
Regardless of this requirement, funds that use terms in a materially
misleading manner, for example, by using a term that has a plain
English meaning or established industry use but then defining that term
in disclosure in a materially different way, would generally violate
section 35(d) of the Act and potentially other provisions of the
Federal securities laws.
    Under the final amendments, funds are required to include in their
prospectus disclosure the definitions of the terms used in the fund's
name, and as discussed above funds have flexibility in defining the
terms under the policy that a fund adopts under the names rule.\355\
The plain English/established industry use requirement is designed to
prevent materially deceptive and misleading names in light of the
flexibility that funds otherwise have to define the terms in their
names. A name would be considered materially deceptive or misleading if
the fund's prospectus disclosure defines a given term in the name
inconsistent with the term's plain English meaning or established
industry use, even if that disclosure correctly describes the fund's
80% investment policy.\356\ While the final amendments require that the
fund's prospectus disclosure and the terms used in a fund's name not be
inconsistent, we recognize that prospectus disclosure may--and at times
is required to--provide further information about the terms used in the
name. For example, a ``solar energy'' fund's prospectus will need to
provide additional context to what the name term ``solar energy''
means. This disclosure may not, however, otherwise change the plain
English understanding of what solar energy means, for example, to
include a type of alternative energy company that does not include
solar energy.
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    \355\ See instructions to Item 4(a)(1) and Item 9(b)(1) of Form
N-1A; instruction to Item 8(2) of Form N-2; and instruction to Item
11 of Form N-8B-2; see also supra paragraph accompanying footnotes
92-94.
    \356\ Final rule 35d-1(a)(2)(iii) and (3)(ii).
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    The final rules' prospectus disclosure requirements provide
additional context to the terms used in a name. Prospectus disclosure
which, as a commenter highlighted, also has a plain English

requirement, is separate from the plain English meaning and established
industry use requirement we are adopting for fund names, which is
specifically focused on the meaning of terms used in the fund's
name.\357\ The plain English requirements applicable to prospectus
disclosures are focused on making prospectuses simpler, clearer, and
more useful to investors.\358\ Further, while a fund's disclosure in
its prospectus provides important information about how a fund defines
the terms used in its name and the criteria used to select investments
consistent with the fund's 80% investment policy, the plain English
requirement in the names rule addresses the goal that the name itself
is reasonably communicative and clear to an investor based on the plain
English or established industry use of terms that appear in the name.
The plain English and established industry use requirement is not meant
to be static and is designed to acknowledge that the language used in a
fund's name may evolve as industries change and grow and the words used
to describe funds and their investment focuses likewise change. While
we recognize commenters' concerns about the ``established industry
use'' of a term evolving over time, we are adopting this standard as
proposed in recognition that certain terms in fund names might not have
a plain English meaning, but still convey a particular focus to
investors. The reference to ``established industry use'' is not
designed to prevent a fund from defining a name term in reference to an
emerging or developing definition, or from defining a name term in a
way that is subject to industry debate. The fact that members of an
industry have different conceptions of a term's definition, and that
members of a particular industry are in good faith actively debating or
discussing a definition, would be an indication that the definition is
consistent with established industry use. That is, members of an
industry need not coalesce on a standard, singular definition of a term
for the term to be consistent with ``established'' industry use.
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    \357\ See, e.g., 17 CFR 230.421(d) and General Instruction B.4
of Form N-1A.
    \358\ See Plain English Disclosure, Securities Act Release No.
7497 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)].
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    Further, we recognize that certain fund name terms used in a way
that is standard within the fund industry could be less communicative
to reasonable investors if they must be translated into ``plain
English.'' Regarding the relationship between the ``plain English'' and
``established industry use'' standards, we are adopting a requirement
that includes both standards in recognition that the established
industry use of a particular term may not be the same meaning given to
the term in in a plain English context. The meaning of a term in
reference to a specific industry or investment strategy, however, may
be clear within the terminology of a particular industry or sector. For
example, an equity fund could use the term ``high beta'' in its name,
which is understood within the industry, and the investing public, to
mean that the fund seeks to invest in stocks with high sensitivity to
market movements, although arguably this term has no ``plain English''
usage. As another example, a fund might define the term ``value'' in
its 80% investment policy by referring to financial metrics that are
specific to value investing, and therefore may not be viewed as
reflecting the plain English meaning of the term ``value.'' The
``established industry use'' requirement is therefore an important
corollary to the ``plain English'' requirement. The use of certain fund
name terms, whose meanings are communicative to investors interested in
investing in funds focused in a particular industry or using a strategy
that uses a specific industry-specific lexicon, could be limited if we
were to adopt a plain English requirement without alternatively
permitting fund name terms to be consistent with their established
industry use.

D. Modernizing the Rule's Notice Requirement

    Consistent with the current rule, the final rule amendments will
continue to require that, unless a fund's 80% policy is a fundamental
policy, notice must be provided to shareholders of any change in the
fund's 80% policy.\359\ The amendments to the names rule's notice
requirement we are adopting, substantially as proposed, are designed to
specify further the content and delivery of the notice, and address
more directly the needs of investors who elect electronic delivery.
These changes reflect the Commission's commitment to adapting and
modernizing the way in which information is disseminated to the
investing public in response to changes in the industry and
technology.\360\ As an additional modification, the final amendments,
as proposed, will also require notices to describe not only a change to
the fund's 80% investment policy, but also an accompanying change in
the fund's name.
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    \359\ Final rule 35d-1(a)(2)(ii) and final rule 35d-1(d); see
also final rule 35d-1(g) (defining the term ``fundamental policy'').
    \360\ See, e.g., Use of Electronic Media for Delivery Purposes,
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458
(Oct. 13, 1995)] (providing Commission views on the use of
electronic media to deliver information to investors, with a focus
on electronic delivery of prospectuses, annual reports, and proxy
solicitation materials); Optional internet Availability of
Investment Company Shareholder Reports, Investment Company Act
Release No. 33115 (June 5, 2018) [83 FR 29158 (June 22, 2018)], at
n.18; Exchange-Traded Funds, Investment Company Act Release No.
33646 (Sept. 25, 2019) [84 FR 57162 (Oct. 24, 2019)] (``ETF Adopting
Release''), at n.229 (encouraging ETFs to consider whether there are
technological means to make their disclosure more accessible).
---------------------------------------------------------------------------

    The Commission proposed to modernize the current notice
requirements in several ways. Specifically, the proposed approach
would: (1) clarify the current requirement that the notice must be
provided separately from any other documents; (2) update the legend
requirements alerting the investor to a change in investment policy
and/or name; (3) specify the content that the notices include; and (4)
specify notices that may be delivered electronically. We are adopting
each of these requirements as proposed, as detailed below.
    The Commission received limited comments in response to these
proposed requirements. Some commenters generally supported the proposed
requirements, stating, for example, that the proposal would provide
greater flexibility and clarity with respect to how the notice
requirements translate to an electronic setting.\361\ One supporting
commenter recommended that the Commission further modernize shareholder
notice requirements by allowing funds to post notice of certain policy
changes on their websites rather than doing so through paper or email
communications.\362\
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    \361\ See Fidelity Comment Letter; J.P. Morgan Asset Management
Comment Letter; Dogwhistle Comment Letter; Environmental Defense
Fund Comment Letter; PRI Comment Letter.
    \362\ See Fidelity Comment Letter. This commenter stated that
electronic postings should be considered to be sufficient notice
where a change does not materially impact the risk profile of the
fund. Another commenter similarly advocated for a one-time exception
from the notice requirements for funds whose policies are not
``meaningfully'' changing. Dogwhistle Comment Letter.
---------------------------------------------------------------------------

Amendments Clarifying That Notice Be Provided Separately From Other
Documents
    The final amendments, as in the current rule, will continue to
require the notice to be provided in plain English and delivered
``separately from any

other documents.'' \363\ Further, as proposed, the final amendments
specifically provide that if the notice is delivered in paper form, it
may be provided in the same envelope as other written documents.\364\
This amendment is designed to clarify the current rule's provisions
that address when and how the notice can be provided with other written
documents, but not to alter these current provisions substantively.
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    \363\ While the requirement in the final rule that the notice be
provided ``separately from any other document'' is worded
differently than in the current rule, it is functionally the same as
the current rule's requirement. See final rule 35d-1(d)(1); rule
35d-1(c)(1) (``the notice will be provided in plain English in a
separate written document''). This rewording is designed to provide
clarity regarding what it means for the notice to be provided
separately from any other documents (i.e., the notice cannot be
built into the fund's prospectus or into other required shareholder
communications). See Proposing Release, supra footnote 2, at
paragraph accompanying nn.131-132.
    \364\ Final rule 35d-1(d)(1).
---------------------------------------------------------------------------

Amendments Updating Legend Requirement
    Similar to the current notice requirement and as proposed, the
final amendments require the notice contain the following prominent
statement, or similar clear and understandable statement, in bold-face
type: ``Important Notice Regarding Change in Investment Policy [and
Name].'' \365\ This requirement represents a change from the current
rule by requiring a fund to prominently indicate to investors any
changes made to its name that accompany a change in investment policy
in addition to changes made to the policy itself. This new requirement
is designed to put investors on alert that, going forward, the fund
that is described in various regulatory materials and other fund and
intermediary communications is the same fund in which they are
currently invested.
---------------------------------------------------------------------------

    \365\ Final rule 35d-1(d)(2).
---------------------------------------------------------------------------

    Under the current notice requirement, the mandated statement is
required to appear on the envelope in which the notice is delivered, or
if the notice is delivered separately from other communications to
investors, the statement must appear either on the notice or on the
envelope.\366\ Under the final rule, for any notice that is provided in
paper form, this required statement must also appear on the envelope in
which the notice is delivered.\367\ This expansion of the current
requirement is designed to help draw shareholders' attention to an
important document that provides them information about the change in
the fund's investment policy and, if applicable, the fund's name.
---------------------------------------------------------------------------

    \366\ Rule 35d-1(c)(3).
    \367\ Final rule 35d-1(d)(2)(i).
---------------------------------------------------------------------------

Amendments to Notice Content Requirements
    The final amendments include certain new requirements designed to
incorporate greater specificity on content the notices include.
Substantially as proposed, the final amendments will require that the
notice describe, as applicable, the fund's 80% investment policy, the
nature of the change to the 80% investment policy, the fund's old and
new names, and the effective date of any investment policy and/or name
changes.\368\ These requirements are designed to codify certain best
practices of some funds, help facilitate funds' compliance with the
notice requirement, and increase specificity in the content that
notices include in order to provide the information that fund
shareholders need to decide whether to stay invested in a fund whose
investment policy is changing.
---------------------------------------------------------------------------

    \368\ Final rule 35d-1(d)(3).
---------------------------------------------------------------------------

Amendments Providing Specificity for Notices That May Be Delivered
Electronically
    The final amendments also include certain requirements designed to
address the needs of investors who elect to receive notice
electronically. Substantially as proposed, for notices that are
provided electronically, the final rule will require that the statement
appear on the subject line of the email communication that includes the
notice.\369\ This new requirement is designed to highlight the purpose
of the electronic notice to shareholders, in the same way that the
current requirement for a statement to appear on the delivery envelope
highlights the purpose of the included paper notice. This aspect of the
final amendments is also intended to clarify the application of the
rule's requirements to electronic notices, which in turn will help
ensure that investors who have opted into electronic delivery will
receive the notices the names rule requires in the format that they
prefer.
---------------------------------------------------------------------------

    \369\ Final rule 35d-1(d)(2)(ii). As the Commission discussed at
proposal, the Commission's current guidance regarding electronic
delivery does not prohibit names rule notices from being delivered
electronically. See Proposing Release, supra footnote 2, at n.136.
Although paper is the default format for delivery of prospectuses
and certain other required disclosures such as the proposed notice,
the Commission has provided guidance noting that electronic delivery
may be used to satisfy prospectus and certain other required
disclosure delivery requirements if: (1) the investor has notice of
the availability of the information; (2) the use of the medium is
not so burdensome that intended recipients cannot effectively access
the information being provided; and (3) the issuer has evidence of
delivery. Id.
---------------------------------------------------------------------------

    As proposed, the final amendments do not permit funds to post
notices to their websites as an alternative to sending notice directly
to shareholders. As the Commission discussed in the Proposing Release,
requiring delivery of notice directly to shareholders, rather than
permitting funds to post notices to websites, increases the likelihood
that an investor would see and read the notice. This requirement will
play an important role in helping investors make informed decisions in
light of any changes to a fund's investment focus, portfolio holdings,
risks and returns.

E. Form N-PORT Reporting

    We are adopting amendments to Form N-PORT to include new reporting
items for registered management investment companies and exchange-
traded funds organized as a unit investment trust (``UIT''), other than
money market funds or small business investment companies,
(collectively, ``N-PORT funds'') regarding the 80% investment policy
that such a fund adopts in compliance with the names rule.\370\ As
proposed, the final rules require N-PORT funds that are required to
adopt an 80% investment policy to report on Form N-PORT: (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 the
value of the fund's assets.\371\
---------------------------------------------------------------------------

    \370\ All N-PORT funds are required to electronically file with
the Commission, on a quarterly basis, monthly portfolio investment
information on Form N-PORT, as of the end of each month. See
Investment Company Reporting Modernization Adopting Release, supra
footnote 47. As BDCs and money market funds are not subject to Form
N-PORT reporting requirements generally, they will not be subject to
the final amendments to Form N-PORT. This approach is consistent
with the proposal, and we did not receive any comments on this
aspect of the proposal. See Proposing Release, supra footnote 2, at
nn.146-147 and accompanying text. Exchange-traded funds organized as
a UIT will have to comply with the Form N-PORT reporting
requirements only if their initial deposit occurs after the
effective date of the final amendments. See infra section II.G.
Other UITs are not subject to reporting on Form N-PORT.
    \371\ See Item B.9 and Item C.2 of Form N-PORT. Consistent with
the final amendment's approach to derivatives generally, when
responding to Item B.9, the percentage that the fund reports in
response to Item B.9.b must reflect the use of notional amounts of
funds' derivatives instruments with certain adjustments, as well as
the value of assets sold short with respect to physical short
positions. This percentage also must reflect any reduction of the
value of the fund's assets resulting from, as applicable, those
exclusions provided in final rule 35d-1(g). See instruction to Item
B.9 and supra section II.A.3.
---------------------------------------------------------------------------

    In light of some of the changes to the proposed names rule
amendments that we are adopting, and in response to

comments, the final Form N-PORT amendments modify the proposed
reporting approach by requiring reported information for the third
month of each quarter, instead of for every month. Given that the final
amendments will not require continual names rule compliance monitoring
as proposed, and instead will require that funds review their
portfolios for compliance no less than quarterly, the reporting time
frame in the final Form N-PORT requirements therefore reflects the
period for review that will otherwise be mandated by the final
amendments.\372\
---------------------------------------------------------------------------

    \372\ The rationale for the required period for reporting this
information on Form N-PORT is based on the period of the quarterly
review requirement under the names rule and not the required period
for filing Form N-PORT. Although the Commission has separately
proposed to increase the frequency with which funds file reports on
Form N-PORT, that proposal, if adopted, would not affect the
requirement adopted in this release for funds to report names-
related information on Form N-PORT on a quarterly basis, providing
the information for the third month in each fiscal quarter. See,
e.g., Open-End Fund Liquidity Risk Management Programs and Swing
Pricing; Form N-PORT Reporting, Investment Company Act Release No.
34746 (Nov. 2, 2022) [87 FR 77172 (Dec. 16, 2022)].
---------------------------------------------------------------------------

    We are also adopting certain changes to the proposed approach to
names-related information that funds will report on Form N-PORT, which
we discuss in more detail below: (1) adding a new reporting item, in
which funds will report the definitions of terms used in the fund's
name; and (2) not adopting the proposed requirement that funds report
the number of days that that the value of the fund's 80% basket fell
below 80% of the value of the fund's total assets during the reporting
period.
    As discussed below, the final amendments to Form N-PORT are
designed to provide market-wide insight with respect to those
registered investment companies, other than money market funds and BDCs
that are subject to the 80% investment policy requirement for the
Commission, its staff, and market participants.
1. Investments To Be Included in a Fund's 80% Basket
    As proposed, we are adopting a new Form N-PORT reporting item that
requires N-PORT funds subject to the 80% investment policy requirement
to indicate, with respect to each portfolio investment, whether the
investment is included in the fund's 80% basket. Such N-PORT funds must
provide this new information, along with the other information they are
currently required to report, for each of their portfolio investments
on Form N-PORT, and as proposed the new information will be publicly
available. In a change from the proposal, we are adopting a requirement
that each N-PORT fund that is subject to the 80% investment policy
requirement must also report the definitions of the terms used in the
fund's name, including the specific criteria the fund uses to select
the investments the term describes, if any.\373\ These reporting
requirements are designed to provide investors as well as the
Commission and its staff insight into the types of investments a fund
includes in its 80% basket.
---------------------------------------------------------------------------

    \373\ The final amendments also require disclosure of these
definitions in funds' prospectuses. See supra section II.B.
---------------------------------------------------------------------------

    The Commission received several comments broadly supporting the
proposed Form N-PORT reporting requirements collectively.\374\ One of
these commenters stated that the proposed requirements would help
investors and other market participants understand which factors or
elements that a portfolio investment exhibits are consistent with a
fund's 80% policy.\375\ The Commission received several comments that
objected generally to the collective proposed Form N-PORT reporting
requirements.\376\ Commenters stated that the proposed reporting
requirements would be of little benefit to investors, as investors are
more prone to review prospectus disclosure rather than information
included on Form N-PORT.\377\ The Commission received a comment
questioning the rationale for the proposed reporting requirements given
the name rule's unique role in addressing materially deceptive and
misleading names, distinct from other disclosure requirements.\378\
Commenters stated that the costs and operational burdens of the
proposed requirements, in light of these concerns and particularly with
respect to the names that would be included in the proposed expanded
scope of the 80% investment policy requirement, would be significant
and questioned whether they would be warranted.\379\
---------------------------------------------------------------------------

    \374\ See, e.g., Comment Letter of Nate Regan (June 15, 2022)
(``Regan II Comment Letter''); Center for American Progress Comment
Letter; PRI Comment Letter; Fidelity Comment Letter.
    \375\ See PRI Comment Letter.
    \376\ See, e.g., SIFMA AMG Comment Letter; T. Rowe Comment
Letter; J.P. Morgan Asset Management Comment Letter; USCOC Comment
Letter; Nationwide Comment Letter; Federated Comment Letter;
WisdomTree Comment Letter; MFS Comment Letter; Invesco Comment
Letter; Capital Group Comment Letter; Seward & Kissel Comment
Letter; Dimensional Comment Letter.
    \377\ See, e.g., Nationwide Comment Letter; SIFMA AMG Comment
Letter; Federated Comment Letter; WisdomTree Comment Letter; MFS
Comment Letter; Invesco Comment Letter; Capital Group Comment
Letter; J.P. Morgan Asset Management Comment Letter; Dimensional
Comment Letter.
    \378\ See SIFMA AMG Comment Letter; see also Proposing Release,
supra footnote 2, at nn.4-6 and accompanying text.
    \379\ See, e.g., MFS Comment Letter; J.P. Morgan Asset
Management Comment Letter; T. Rowe Comment Letter.
---------------------------------------------------------------------------

    The Commission received several comments specific to the proposed
requirement that N-PORT funds report whether each investment is counted
towards the fund's 80% basket. One included a general comment stating
that this proposed reporting requirement would benefit investors and
other market participants.\380\ Several other commenters objected to
this reporting requirement.\381\ These commenters expressed concern
about the costs and burden of tagging each investment on a monthly
basis.\382\ The Commission also received a comment that the Commission
should not require funds to classify 100% of their portfolio when the
rule requires that only 80% of a given fund's portfolio be invested
consistent with the funds 80% investment policy.\383\
---------------------------------------------------------------------------

    \380\ See Center for American Progress Comment Letter.
    \381\ See, e.g., ICI Comment Letter; Nationwide Comment Letter;
Federated Comment Letter; J.P. Morgan Asset Management Comment
Letter; Fidelity Comment Letter; WisdomTree Comment Letter; Capital
Group Comment Letter; MFS Comment Letter; SIFMA AMG Comment Letter.
    \382\ See MFS Comment Letter.
    \383\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Some commenters questioned the usefulness of this reporting item
because Form N-PORT disclosure is by its nature backward-looking, and
so the reported information may not accurately represent what the
fund's portfolio looks like at the present time.\384\ Several
commenters stated that how a fund categorizes individual investments in
its portfolio is subjective and therefore not comparable across
funds.\385\ Without additional disclosure regarding how a fund may
categorize individual investments, we received comment asserting that
this disclosure may be confusing to investors.\386\ Separately, a
commenter stated that whether each investment qualifies as an 80%
basket investment under a fund's 80% investment policy may change on a
more frequent basis than the proposed monthly reporting period and that
the disclosure requirement therefore may overwhelm investors with
outdated information that would not help compare funds in a meaningful
way.\387\
---------------------------------------------------------------------------

    \384\ See, e.g., SIFMA AMG Comment Letter; Wellington Comment
Letter.
    \385\ See, e.g., ICI Comment Letter; J.P. Morgan Asset
Management Comment Letter; SIFMA AMG Comment Letter; Dimensional
Comment Letter.
    \386\ See Capital Group Comment Letter.
    \387\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Some commenters stated that the proposed new reporting item would

require the build-out of new systems, for daily testing and validation
of names rule compliance information, and for mapping this information
over for reporting on Form N-PORT.\388\ Additionally, commenters stated
that the new reporting requirements would consume compliance resources
to the extent compliance personnel would have to attend to the new
reporting requirements, which would impact other compliance
activities.\389\ Some commenters stated that funds may need to hire
third-party vendors for supplemental and specially tailored data on
their portfolio investments, in order to comply with the proposed new
reporting requirements.\390\ The use of third-party vendors may,
according to these commenters, lead to the homogenization in how funds
define certain terms.
---------------------------------------------------------------------------

    \388\ See, e.g., T. Rowe Comment Letter; Invesco Comment Letter;
Seward & Kissel Comment Letter.
    \389\ See, e.g., Nationwide Comment Letter; Federated Comment
Letter; Capital Group Comment Letter.
    \390\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    The requirement for an N-PORT fund to report whether each
investment is included in the 80% basket helps the Commission and
investors to have insight into how funds invest consistent with their
80% investment policies. The final amendments to Form N-PORT will
complement the required prospectus disclosure defining terms used in
fund names by providing additional information that is designed to
increase investor understanding of a particular fund's investment
focus, which will assist investors in making investment choices that
better match their investment preferences. While the new information
that funds would report on Form N-PORT is backward looking in that it
reflects, on a quarterly basis, how funds have implemented their 80%
policies, investors and third-party users who provide services to
investors could also use this information to understand on a going-
forward basis how funds may continue to implement their 80% investment
policies consistent with the fund's name. While investors may not be
directly accessing Form N-PORT, third-party service providers that
investors look to for assistance in selecting investments, such as
broker-dealers, investment advisers, and those that provide investment
information for analysis to fund investors, will be able to use this
information to analyze how a fund invests consistent with its name. We
recognize that the benefits of these new reporting requirements will
come with costs, as complying with the new reporting requirements will
entail new compliance activities, and potentially also systems and
operational modifications and the use of third-party service providers.
The Form N-PORT reporting requirements may generate costs of adding new
data tags for the new reporting items. By requiring less frequent Form
N-PORT reporting and reducing the amount of names-related information
that must be reported on N-PORT than was proposed, however, the final
amendments should, on balance, have lower costs compared to the
proposal.\391\
---------------------------------------------------------------------------

    \391\ See infra section IV.D.2.
---------------------------------------------------------------------------

    We also recognize that funds with similar names and investment
focuses may reasonably make different determinations regarding whether
an investment is appropriately within the 80% basket. Some funds may
have an investment focus where the selection of 80% basket investments
involves some degree of subjectivity. The reporting requirement we are
adopting provides transparency that should help investors and other
market participants providing transparency to investors, as well as
Commission staff, understand what specific portfolio investments a fund
may consider to be consistent with the fund's 80% investment policy and
those that they do not. The Commission, investors, and these other
market participants will also have the ability to examine, across N-
PORT funds with similar investment focuses, whether these funds may be
characterizing particular investments similarly. For example, investors
interested in funds with a growth investment focus will better be able
to compare across funds with similar names to determine whether
specific investments are characterized similarly or differently, and
therefore invest according to their specific preferences.
    In a change from the proposal, we are adopting an accompanying
reporting requirement to provide necessary context for this reporting.
Under the final amendments to Form N-PORT, a fund subject to the 80%
investment policy requirement must report the definitions of the terms
used in the fund's name, including the specific criteria the fund uses
to select the investments that the term describes, if any. This
required reporting leverages the same disclosure that funds will also,
under the final amendments, be required to include in their
prospectuses.\392\ This requirement addresses comments the Commission
received expressing concern that the portfolio-specific information
that would be required under the proposal lacked context.\393\ We are
requiring this information in both Form N-PORT and in the fund's
prospectus to ensure that a user of the investment categorization
information in Form N-PORT is not required to look to two documents to
understand how investments are categorized by the fund, and how funds
define the terms used in their names and the specific criteria the fund
uses to select the investments (which gives context for the investment
categorizations). With this additional information, investors will be
able to better contextualize how the specific investments made by the
fund adhere to the fund's stated criteria for how investments are
selected consistent with the fund's 80% investment policy.
---------------------------------------------------------------------------

    \392\ Given that funds can leverage efficiencies in reporting
the information that they will include in their prospectuses in
response to the final rules' disclosure requirements, we anticipate
that the burden of this additional reporting item should be minimal.
See infra section V.D.
    \393\ See, e.g., Capital Group Comment Letter; J.P. Morgan Asset
Management Comment Letter.
---------------------------------------------------------------------------

2. Investment Company Act Names Rule Investment Policy
    We are adopting, as proposed, the requirement for N-PORT funds that
adopt an 80% investment policy to report on Form N-PORT the value of
the fund's 80% basket as a percentage of the value of the fund's
assets.\394\ This reporting requirement is designed to increase the
effectiveness of the Commission's oversight of funds' compliance with
the names rule as well as provide investors meaningful information
about how funds comply with the names rule. This information also may
allow investors to make investment choices that are more consistent
with their investment preferences. As discussed below, we are not,
however, adopting the proposed requirement that an N-PORT fund report
the number of days that the value of the fund's 80% basket fell below
80% of the value of the fund's total assets during the reporting
period.
---------------------------------------------------------------------------

    \394\ To the extent a fund's name suggests an investment focus
that has multiple elements, and therefore must adopt an 80%
investment policy that addresses each element of that investment
focus, the fund must report a single percentage that reflects its
multi-element investment focus. See supra paragraph accompanying
footnotes 139-140. For example, a ``Wind and Solar Fund'' would
report the percentage of its assets invested in wind and solar
companies combined, rather than reporting separate percentages for
each of wind and solar.
---------------------------------------------------------------------------

    The Commission received some comments specific to the proposed
requirement that N-PORT funds report the value of the fund's 80% basket
as a percentage of the value of the fund's assets. Some commenters
stated that this proposed reporting requirement

would lead to inappropriate comparisons among funds.\395\ These
commenters stated that, because funds may have different 80% investment
policy formulations, despite having the same or similar terms in their
names, comparisons about the percentage of funds' assets invested in
their 80% baskets would not provide useful information to investors.
---------------------------------------------------------------------------

    \395\ See, e.g., SIFMA AMG Comment Letter; Dimensional Comment
Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

    We recognize that there are various reasonable ways in which funds
with a similar name could implement the 80% investment requirement, and
the Form N-PORT reporting requirements provide an important window into
exactly how funds implement their 80% investment policies.
Understanding how different funds with the same or similar terms in
their names may have different strategies that invest more or less of
the fund's assets outside of their 80% basket may provide investors
with important information that better enables investors to select the
investment that best meets their investment goals.\396\ The reported
information is designed to provide an additional data point that
supplements other reported and disclosed information about how a fund
invests in accordance with the focus its name suggests. This other
reported and disclosed information, including the definitions of funds'
name terms, will provide context that helps ensure that information
reported about the percentage of a fund's portfolio invested in 80%
basket assets is not misleading.
---------------------------------------------------------------------------

    \396\ See Proposing Release, supra footnote 2, at n.145 and
accompanying text for examples of how this may be the case.
---------------------------------------------------------------------------

    With respect to the proposed requirement that a fund report the
number of days that the value of the fund's 80% basket fell below 80%
of the value of the fund's total assets during the reporting period,
the Commission received one supporting comment.\397\ This commenter
stated that the proposed reporting requirement would assist
shareholders in comparing different funds as well as the Commission in
its role overseeing fund's compliance with the names rule. The
Commission received many comments, however, opposing this proposed
reporting requirement.\398\ For example, a commenter stated that
monitoring individual securities on a daily basis for name rule
compliance--which would de facto be a necessary corollary of the
proposed reporting requirement--would be operationally onerous and
should not be required by the final rule.\399\ The Commission also
received feedback that this proposed reporting requirement would be
confusing, as the information would be reported without context and may
raise unnecessary concern from investors.\400\ Commenters also
suggested that it was inappropriate to utilize Form N-PORT as a
compliance tool.\401\ Relatedly, a commenter stated that requiring the
proposed reporting of departures below 80%, without also requiring
reporting that would provide context of the investment team's judgment,
could create legal risk for the fund and result in the fund manager
taking more conservative portfolio management approaches despite the
fact that the names rule permits certain departures.\402\ At a minimum,
one commenter suggested that these reporting items, like similar ones
for liquidity and derivatives reporting, should be non-public.\403\
---------------------------------------------------------------------------

    \397\ See Fidelity Comment Letter.
    \398\ See, e.g., ICI Comment Letter; Nationwide Comment Letter;
J.P. Morgan Asset Management Comment Letter; Capital Group Comment
Letter; MFS Comment Letter.
    \399\ See, e.g., J.P. Morgan Asset Management Comment Letter.
The commenter who supported this reporting item also suggested a
longer compliance monitoring period than what was proposed. See
Fidelity Comment Letter.
    \400\ See, e.g., ICI Comment Letter and J.P. Morgan Asset
Management Comment Letter; Capital Group Comment Letter; MFS Comment
Letter; see also ICI Comment Letter III (discussing particular
challenges for certain tax-exempt funds that apply the income test
pursuant to rule 35d-1(a)(3)(i)(B)).
    \401\ See, e.g., USCOC Comment Letter.
    \402\ See J.P. Morgan Asset Management Comment Letter.
    \403\ See ICI Comment Letter.
---------------------------------------------------------------------------

    We are not adopting this proposed reporting requirement. The
temporary departures provision we are adopting as part of the final
names rule amendments does not require funds to monitor names rule
compliance on a continual basis, but instead adopts a time-of-
investment test with a minimum quarterly review of the investments in
the fund's portfolio. A requirement to report the number of days that
the value of the fund's 80% basket fell below 80% of the value of the
fund's total assets would be inconsistent with this approach to
temporary departures, because it would require daily compliance
monitoring.

F. Recordkeeping

    Consistent with the proposed amendments, the final rule will
require funds that are subject to the 80% investment policy requirement
to maintain certain records documenting their compliance with the rule,
including changes that reflect the final rule's approach to temporary
departures.\404\ As a modification to the proposal, the final
amendments do not include the proposed requirement for funds that do
not adopt an 80% investment policy to maintain a written record of
their analysis that the policy is not required under the names rule.
---------------------------------------------------------------------------

    \404\ Final rule 35d-1(b)(3).
---------------------------------------------------------------------------

    We are adopting recordkeeping requirements designed to enable
Commission staff, as well as a fund's compliance personnel, to evaluate
a fund's compliance with the names rule. Neither the current rule nor
the general recordkeeping rule under the Act includes a recordkeeping
requirement specific to names rule compliance-related topics.
Consistent with the proposal, under the final amendments, funds that
are required to adopt an 80% investment policy will be required to
maintain written records documenting their compliance with the names
rule. Specifically, these funds will be required to maintain: \405\
---------------------------------------------------------------------------

    \405\ The new Form N-PORT reporting requirements would not
satisfy the record-keeping requirements of rule 35d-1(b)(3). The
Form N-PORT requirements reflect a snapshot of the fund's
investments at the end of the reporting period. The recordkeeping
requirement, however, reflects the fund's ongoing names rule
compliance activity.
---------------------------------------------------------------------------

     Written records, at the time the fund invests its assets,
documenting (1) whether the investment is included in the fund's 80%
basket and, if so, the basis for including that investment in the 80%
basket; and (2) the value of the fund's 80% basket, as a percentage of
the value of the fund's assets; \406\
---------------------------------------------------------------------------

    \406\ These recordkeeping requirements apply as well to any
derivatives that a fund includes in its 80% basket (either because
the derivatives instrument provides investment exposure to
investments suggested by the fund's name, or investment exposure to
one or more of the market risk factors associated with the
investment focus that the fund's name suggests). See supra section
II.A.3.
---------------------------------------------------------------------------

     Written records documenting the fund's review of its
portfolio investments' inclusion in the fund's 80% basket, to be
conducted at least quarterly, including whether each investment is
included in the fund's 80% basket and the basis for including each
investment in the 80% basket;
     If during this review or otherwise the fund identifies
that the 80% requirement is no longer met due to drift, written records
documenting the date this was identified and the reason for any
departures from the 80% investment policy; \407\
---------------------------------------------------------------------------

    \407\ As a technical change to the proposed rule text, the final
amendments do not specify that a fund's reason for any departure
must be ``pursuant to paragraphs (b)(1)(2)'' of the rule. This is
because final rule amendments do not address specific circumstances
under which temporary departures from the 80% investment requirement
would be permitted. See supra section II.A.2.
---------------------------------------------------------------------------

     If there was a departure from the 80% requirement in
other-than-normal

circumstances, written records documenting the date of any such
departure and reason why the fund departed (including why the fund
determined that circumstances are other-than-normal); and
     Any notice sent to the fund's shareholders pursuant to the
rule.
    All of these records must be maintained for at least six years
following the creation of each required record (or, in the case of
notices, following the date the notice was sent), the first two years
in an easily accessible place.\408\
---------------------------------------------------------------------------

    \408\ The six-year retention period under the final amendments
is designed to be generally consistent with other recordkeeping
retention periods provided in rules under the Act. See, e.g., rule
31a-1; rule 2a-7. This consistency with other retention periods will
likely reduce the compliance burden of the recordkeeping
requirements under the final amendments.
---------------------------------------------------------------------------

    Functionally, under these recordkeeping requirements, each time a
fund procured an investment, the fund would record the basis for
including that investment in the 80% basket and the value of the 80%
basket. A fund would also make or update such records in connection
with its quarterly review reassessing the characteristics of
investments in the fund's 80% basket (or any time the fund otherwise
determines that certain investments' characteristics are inconsistent
with the fund's 80% investment policy).\409\
---------------------------------------------------------------------------

    \409\ See supra paragraph following footnote 165; supra
paragraph following footnote 174.
---------------------------------------------------------------------------

    Some commenters expressed general support for the proposed
recordkeeping requirements, stating that these requirements would allow
Commission staff to better understand and evaluate funds' compliance
with the names rule, as well as encourage good governance and internal
controls.\410\ The majority of commenters, however, expressed
opposition to the proposed recordkeeping requirements. Several
commenters stated that the proposed requirement to maintain
documentation of each investment included in a fund's 80% basket would
be overly burdensome on funds' compliance and management
personnel.\411\ Certain commenters stated that they expected this
requirement to be particularly burdensome in light of the increased
scope of the names rule's 80% investment policy requirement.\412\ One
of these commenters stated that the requirements would necessitate
portfolio management personnel devoting significant time to documenting
the basis for each investment, including short-term investments.\413\
Other commenters stated that some of the proposed recordkeeping
requirements may not be easily automated, including the requirement to
state the basis for including each investment in the 80% basket.\414\
Some commenters also argued that this requirement would reduce a fund's
capacity to focus on other aspects of compliance.\415\
---------------------------------------------------------------------------

    \410\ See J.P. Morgan Asset Management Comment Letter;
Environmental Defense Fund Comment Letter.
    \411\ See ICI Comment Letter; T. Rowe Comment Letter; USCOC
Comment Letter; Invesco Comment Letter; Federated Comment Letter;
Dechert Comment Letter; SIFMA AMG Comment Letter; Seward & Kissel
Comment Letter.
    \412\ ICI Comment Letter; T. Rowe Comment Letter; USCOC Comment
Letter; Federated Comment Letter; SIFMA AMG Comment Letter; Dechert
Comment Letter.
    \413\ Dechert Comment Letter.
    \414\ Invesco Comment Letter; Seward & Kissel Comment Letter.
    \415\ Invesco Comment Letter; Federated Comment Letter; Dechert
Comment Letter.
---------------------------------------------------------------------------

    After considering commenters' input, the final amendments retain
the proposed requirement for funds required to adopt 80% policies to
maintain documentation of each investment it includes in the 80%
basket.\416\ The records resulting from this requirement will enable
our staff to evaluate a fund's treatment of specific investments, and
the interaction of such investments with the overall operation of a
fund's 80% investment policy. This information will allow our staff to
identify deficiencies and assess compliance of the overall rule as
amended.
---------------------------------------------------------------------------

    \416\ Final rule 35d-1(b)(3).
---------------------------------------------------------------------------

    As discussed above, the final rule's requirements related to
temporary departures from the 80% requirement are different from what
was proposed, particularly by retaining the time-of-investment test;
requiring a quarterly, as opposed to continual, review; and creating
different requirements for departures in other-than-normal
circumstances as opposed to drift discovered during this quarterly
review. We are providing more detail in the final rule to reflect these
changes and make clear which records funds must maintain and when funds
must create them under the final amendments. For example, the final
rule provides specific requirements on which records a fund will be
required to maintain pursuant to its quarterly review reassessing the
characteristics of each investment in the fund's 80% basket (or any
time the fund otherwise determines that certain investments'
characteristics are inconsistent with the fund's 80% investment
policy).\417\
---------------------------------------------------------------------------

    \417\ See supra paragraph following footnote 165; supra
paragraph following footnote 174.
---------------------------------------------------------------------------

    These changes also help to address questions as to when funds
should make records under the final rule. Some commenters, discussing
expected burdens, anticipated the need to monitor a fund's 80% basket
on a daily basis to comply with the proposed recordkeeping
requirements.\418\ As adopted, the frequency with which records under
the final rule will be made would be at the time of investment, as well
as when the fund engages in an activity that the rule requires which
triggers a record (e.g., conducts a quarterly review), consistent with
the changes to the temporary departure requirements. Making records at
each of these times will produce documentation supporting the fund's
compliance with the rule and its 80% investment policy at the time a
fund invests its assets, and in reflection of the fact that the fund's
80% basket and investments included in the 80% basket could change
following initial investment, as provided in the rule. The frequency of
records will, as a practical matter, vary based on the specific
activities and compliance needs of the fund, and many funds would make
certain of these records daily in order to reflect ongoing investment
activity. For example, if a fund (for instance, an actively-managed
fund whose portfolio turns over regularly, or a fund that frequently
buys and sells portfolio assets in response to high or volatile
investor flows) were making investments daily, that fund would keep
daily records. These records would document whether the investments
made each day are included in the fund's 80% basket (and, if so, the
basis for that determination) and of the value of the fund's 80%
basket, as a percentage of the value of the fund's assets.
---------------------------------------------------------------------------

    \418\ USCOC Comment Letter; T. Rowe Comment Letter.
---------------------------------------------------------------------------

    As discussed above, the final amendments will require funds to
conduct at-least quarterly--rather than continual--assessment of
portfolio investments' inclusion in the 80% basket. This modification,
in turn, could mitigate some of the anticipated costs of certain of the
recordkeeping obligations compared to the proposal to the extent these
anticipated costs assumed continual monitoring and assessment of
portfolio investments, as well as recordkeeping requirements that would
reflect this continual monitoring. We recognize that the recordkeeping
requirements under the final amendments will still entail certain
costs, particularly those associated with those records that certain
funds (those

that make investments on a daily basis) would make daily under the
final rules and records that may not easily lend themselves to
automation (due to the nature of certain investments, or otherwise). We
continue, however, to anticipate that much of the required
recordkeeping would be able to be at least partially automated.\419\ We
also recognize that there may be multiple reasonable approaches to
documenting the basis for an investments' inclusion in a fund's 80%
basket in compliance with the final amendments.
---------------------------------------------------------------------------

    \419\ See infra section IV.D.2; see also, e.g., J.P. Morgan
Asset Management Comment Letter (stating that, for funds within the
current scope of the names rule, ``routine testing for compliance
can be done in a highly automated fashion,'' and stating that
``bespoke automated processes'' have already been developed for
funds the sponsor offers that use ESG-related terms in their names,
but expressing concern that for certain names that would be brought
within the proposed broadened scope, compliance testing would be
relatively more manual. But see supra footnote 71 and accompanying
text (discussing commenters who suggested that it would be
challenging to establish automated compliance monitoring solutions
for terms in fund names where subjective criteria are part of the
decision-making process). As the Commission stated in the Proposing
Release, records that do not lend themselves to automation would
need to be created on an as-needed basis.
---------------------------------------------------------------------------

    As proposed, the final amendments will not prescribe the particular
form of documentation required to be maintained but will instead
provide flexibility in how a fund documents the information delineated
in the recordkeeping requirement. Funds, however, should generally
maintain appropriate documentation that would be sufficient for a third
party to verify the matter covered by each record and would be readily
available to Commission staff.
    The final rule will not include a requirement for funds that do not
adopt 80% investment policies to maintain a written record of their
analysis as to why such policy is not required.\420\ Numerous
commenters opposed this requirement.\421\ While one commenter expressed
general support for this provision, several others voiced general
opposition, asserting that requiring funds to demonstrate affirmatively
that a rule does not apply would be inconsistent with the general
character of the Federal securities laws.\422\ One commenter stated
that this requirement would not provide a meaningful benefit to
shareholders, and another expressed concern that it could potentially
imply that funds' boards of directors were required to make or approve
a finding that the fund is not required to adopt an 80% policy.\423\
---------------------------------------------------------------------------

    \420\ Final rule 35d-1(b)(3).
    \421\ See Comment Letter of Independent Directors Council (Aug.
16, 2022) (``IDC Comment Letter''); ICI Comment Letter; Seward &
Kissel Comment Letter; Dechert Comment Letter; SIFMA AMG Comment
Letter; USCOC Comment Letter; Invesco Comment Letter.
    \422\ See J.P. Morgan Asset Management Comment Letter. But see
ICI Comment Letter; Seward & Kissel Comment Letter; Dechert Comment
Letter.
    \423\ See Invesco Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we have determined that this provision
is not necessary to motivate proper determinations of when a fund is
required to adopt an 80% policy. Moreover, the obligations imposed on
funds through the substantive operation of the names rule as amended
will continue to provide safeguards by generally requiring funds to
adopt 80% investment policies where a fund name contains terms
suggesting that the fund focuses in investments that have, or
investments whose issuers have, particular characteristics. In
addition, a fund with a name that appears to Commission staff to be
within the scope of the 80% investment policy requirement, but that
determines not to adopt an 80% investment policy, would nonetheless be
responsible for sharing its analysis as to why it is not in violation
of the names rule if requested by the Commission's examinations and
enforcement staff.\424\
---------------------------------------------------------------------------

    \424\ It would be appropriate for such a fund to compile a
written analysis at the time it receives any such request from
staff. This would be consistent with final rule's recordkeeping
requirements, which do not include a requirement for funds that do
not adopt 80% investment policies to maintain a written record of
their analysis as to why such policy is not required. To be clear,
the lack of a requirement to maintain a record of the analysis does
not mean the fund would not be required to determine the
applicability of the 80% investment policy requirement in the first
instance.
---------------------------------------------------------------------------

G. Unit Investment Trusts

    The 2022 Proposal included exceptions for UITs that made their
initial deposit of securities prior to the proposed amendments'
effective date. Specifically, the Commission proposed to except these
UITs from the requirements to adopt an 80% investment policy and
maintain written records relating to the rule, unless the UIT already
adopted--or was required to adopt at the time of the initial deposit--
an 80% investment policy under the current rule.\425\ This proposed
approach was designed to be generally consistent with the treatment of
UITs under the current names rule, and also to retain the existing
exception from the 80% investment policy requirements for UITs that
pre-date the original rule. In a modification from the 2022 Proposal,
the final amendments will simply provide that the 80% investment policy
and recordkeeping requirements will apply to UITs only at the time of
initial deposit. This modification is designed to accommodate the
practical realities that UITs would encounter if required to comply
with the new provisions in the final amendments that require periodic
review and potential rebalancing of a fund's portfolio.
---------------------------------------------------------------------------

    \425\ See generally Proposing Release, supra footnote 2, at
nn.159-162 and accompanying text.
---------------------------------------------------------------------------

    Commenters expressed broad support for the proposed
exceptions.\426\ These commenters suggested, however, that for UITs
that do not qualify for the exemption, the requirements of the names
rule should apply only at the time of initial deposit and not on an
ongoing basis. As these commenters observed, UITs typically maintain a
fixed and transparent portfolio of securities and are limited in how
and under what circumstances they can acquire or sell securities in
their portfolio. These commenters therefore asserted that UITs are
marketed as pro rata portions of a fixed portfolio and investors
generally understand that security weightings will change during the
life of the UIT due to market fluctuations. These commenters suggested
that maintaining compliance with the temporary departure provisions of
the proposed amendments could result in a UIT having to rebalance its
portfolio post-deposit, which could create potential operational and
legal issues.
---------------------------------------------------------------------------

    \426\ See ICI Comment Letter; SIFMA AMG Comment Letter; Invesco
Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we are modifying the proposed
approach to better align the rule's new requirements with the way in
which UITs are constructed. Unlike the current rule, the final
amendments will require a fund to review its portfolio assets'
inclusion in its 80% basket as least quarterly and will also require
that, if a fund drifts out of compliance with its 80% basket, the fund
must come back into compliance within 90 days.\427\ Because UITs are
passively managed vehicles with fixed portfolios, it would be
challenging for them to adjust their portfolios to comply with the new
portfolio maintenance and testing requirements in the final amendments.
If UITs were required to comply with the new requirements for temporary
departures, portfolio changes could result over time that could be
inconsistent with the requirements of UITs' governance documents or
investor expectations.\428\ Accordingly, we have modified the proposed
exceptions for UITs to provide that the 80% investment policy and
recordkeeping

requirements will apply only at the initial deposit.\429\
---------------------------------------------------------------------------

    \427\ See final rule 35d-1(b)(1)(i); see also supra section
II.A.2.
    \428\ See Proposing Release, supra footnote 2, at n.160 and
accompanying text.
    \429\ See final rule 35d-1(e). Functionally, UITs that have made
their initial deposit prior to the compliance date of the final
amendments, including those that would have been subject to the
exception in the 2022 Proposal because they pre-date the original
rule, will not be required to adopt a new 80% investment policy or
comply with the recordkeeping requirements in the final amendments.
---------------------------------------------------------------------------

    As a result, UITs that have names that are implicated by the final
amendments and whose initial deposit occurs after the compliance date
of the final amendments will need to adopt an appropriate 80%
investment policy, including making such a policy fundamental or
providing notice to investors in the event of a change of the policy,
if appropriate. However, such UITs will not be required to engage in
the monitoring and other requirements associated with the final
amendments' temporary departure requirements nor will they be required
to keep records under the final amendments beyond the initial deposit.
Also consistent with the proposal, all UITs will be subject to the
rule's other requirements under the final amendments, as applicable, as
well as those of the Federal securities laws generally, including
section 35(d) of the Investment Company Act.\430\ For example, all UITs
will continue to be subject to the prohibition on names that suggest a
guarantee by the U.S. Government regardless of the date of initial
deposit.\431\ Consistent with the 2022 Proposal, we continue to believe
that the ability to provide prospectus disclosure is not precluded by
the fixed nature of a UIT's portfolio.\432\ As a result, UITs will be
subject to the plain English requirements and the prospectus disclosure
requirements, including the requirement to tag newly required
information in the prospectus using Inline XBRL.\433\
---------------------------------------------------------------------------

    \430\ A few commenters suggested that the Commission should
expressly exclude from the 80% investment policy requirement sub-
accounts of insurance company separate accounts classified as UITs
that fund variable annuity contracts and variable life insurance
contracts when the sub-account invests in a single, designated
underlying fund and has substantially the same name as the
corresponding underlying fund. See Dechert Comment Letter; IRI
Comment Letter; Comment Letter of Committee of Annuity Insurers
(Aug. 16, 2022). These UITs should comply with the 80% investment
policy requirement at initial deposit if they use a term in their
name that suggests an investment focus. See also supra discussion in
section II.A.1.c) (it would generally be reasonable for a fund of
funds or other acquiring fund to include the entire value of its
investment in an appropriate acquired fund when calculating
compliance with the 80% investment requirement without looking
through to the acquired fund's underlying investments, provided that
the acquired fund has an 80% investment policy, unless it knows that
the underlying fund is not investing consistent with the acquiring
fund's investment focus).
    \431\ See final rule 35d-1(a)(1). In addition, ETFs organized as
a UIT will be subject to the Form N-PORT reporting requirements
regarding a fund's 80% investment policy post-deposit, consistent
with their current reporting obligations. See supra section II.E.
Other UITs will not be required to make these reports as they are
not required to report on Form N-PORT generally. See supra footnote
371.
    \432\ See Proposing Release, supra footnote 2, at section II.H.
    \433\ See supra sections II.B and II.C. One commenter stated
that the Inline XBRL tagging requirements would introduce new costs
for UITs without significant benefit to investors. See Invesco
Comment Letter. But see XBRL US Comment Letter (supporting the
proposed requirement that all funds subject to the new disclosure
requirements provide these disclosures in Inline XBRL format, for
the reasons discussed at supra footnote 336 and accompanying text,
and expressing that UITs can avail themselves of the same
applications and processes used by other fund types that report
information using Inline XBRL data language). These costs and
benefits are discussed in more depth in infra section IV.D.
---------------------------------------------------------------------------

H. Compliance Dates

    The compliance date for the final amendments is [FILL IN date 24
months following amendments' effective date] for larger entities, and
[FILL IN date 30 months following amendments' effective date] for
smaller entities.\434\ We are adopting this tiered compliance period to
provide existing funds with adequate time to prepare to come into
compliance with the final amendments. We proposed a one-year compliance
period for all funds that would be subject to the amendments,
regardless of asset size, and we solicited comment on whether the
transition period should be shorter or longer, and whether it should be
the same for all funds. We received comments on this aspect of the
proposal, with many commenters stating that a one-year compliance
period is an inadequate timeframe given the legal, compliance, and
operational challenges associated with implementing the various
components of the rule.\435\ Some commenters specifically stated that
funds will need time to evaluate the impact of the amendments,
determine necessary changes, and seek board and/or shareholder approval
of any required changes to funds' names or investment strategies.\436\
Other commenters stated that service providers assisting with ongoing
assessment of funds' portfolios will need time to develop and update
systems necessary to support the rule.\437\ One commenter stated that
many small funds would be particularly burdened by heavy legal and
compliance costs.\438\
---------------------------------------------------------------------------

    \434\ For purposes of the final rules' tiered compliance period,
larger entities are funds that, together with other investment
companies in the same ``group of related investment companies'' (as
such term is defined in rule 0-10 under the Investment Company Act
[17 CFR 270.0-10]) have net assets of $1 billion or more as of the
end of the most recent fiscal year, and smaller entities are funds
that together with other investment companies in the same ``group of
related investment companies'' have net assets of less than $1
billion as of the end of the most recent fiscal year. This standard
is consistent with prior Commission approaches for tiered compliance
dates based on asset size for rules affecting registered investment
companies. See, e.g., Investment Company Reporting Modernization
Adopting Release, supra footnote 47; Liquidity Adopting Release,
supra footnote 214; Inline XBRL Filing of Tagged Data, Securities
Act Release No. 10514 (June 28, 2018) [83 FR 40846 (Sep. 17, 2018)].
In our experience, this threshold is a reasonable means of
distinguishing larger and smaller entities for purposes of tiered
compliance dates for rules affecting investment companies. We
estimate that, as of December 2022, 77% of registered investment
companies would be considered to be larger entities. This estimate
is based on data reported in response to Items B.5, C.9, and F.11 on
Form N-CEN. We estimate that, as of March 2023, 48% of BDCs would be
considered to be larger entities. This estimate is based on data
from Refinitiv BDC Collateral.
    \435\ See ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Comment Letter; TIAA-Nuveen Comment Letter; IRI Comment
Letter; MFS Comment Letter; Invesco Comment Letter; Nasdaq Comment
Letter; J.P. Morgan Asset Management Comment Letter; Fidelity
Comment Letter; Dechert Comment Letter; Capital Group Comment
Letter; XBRL US Comment Letter.
    \436\ See ICI Comment Letter; SIFMA AMG Comment Letter; TIAA-
Nuveen Comment Letter; J.P. Morgan Asset Management Comment Letter;
Fidelity Comment Letter; Dechert Comment Letter; Capital Group
Comment Letter.
    \437\ See ICI Comment Letter; Fidelity Comment Letter; Dechert
Comment Letter; Capital Group Comment Letter.
    \438\ See Freeman Capital Management Comment Letter.
---------------------------------------------------------------------------

    After consideration of commenters' concerns, we are adopting a
compliance period of 24 months following the final amendments'
effective date for larger entities, and 30 months following the final
amendments' effective date for smaller entities. The tiered compliance
period we are adopting is designed to strike the appropriate balance
between allowing funds adequate time to adjust their compliance
practices, and allowing investors and shareholders to benefit from the
amended names rule framework. This tiered compliance period also
recognizes commenter concerns related to the operational challenges
associated with compliance with the final amendments. In considering
the adequacy of this compliance period, we also have considered that
certain funds' current investment policies may already be in line with
the final amendments or could be readily conformed without material
change.\439\ Furthermore, certain provisions of the final amendments
will reduce both the initial and ongoing costs associated with
compliance compared to the proposed amendments from which some
commenter concerns

stemmed. We anticipate that smaller entities will benefit from having
an additional six months to come into compliance with the final
amendments, based on feedback from commenters and to the extent that
smaller entities may face additional or different challenges in coming
into compliance with the amendments than larger entities.
---------------------------------------------------------------------------

    \439\ See infra section IV.D.2.
---------------------------------------------------------------------------

    We disagree with the commenter who asserted that the amended rule
is impermissibly retroactive.\440\ The compliance period that we are
adopting ensures that the rule amendments will operate and will be
enforced prospectively. That regulated entities may have to take action
to come into compliance with the rule does not make that rule
retroactive.\441\
---------------------------------------------------------------------------

    \440\ See Stradley Comment Letter.
    \441\ See Mobile Relay Assocs. v. FCC, 457 F.3d 1, 11 (D.C. Cir.
2006) (``It is often the case that a business will undertake a
certain course of conduct based on the current law, and will then
find its expectations frustrated when the law changes. This has
never been thought to constitute retroactive lawmaking, and indeed
most economic regulation would be unworkable if all laws disrupting
prior expectations were deemed suspect.'') (internal quotation marks
omitted).
---------------------------------------------------------------------------

    Staff in the Division of Investment Management are reviewing its
no-action letters and other statements addressing compliance with the
names rule to determine which letters and other staff statements, or
portions thereof, should be withdrawn in connection with the final
amendments. Some of these letters and other staff statements, or
portions thereof, may be moot, superseded, or otherwise inconsistent
with the final rule and, therefore, may be withdrawn by the staff. The
staff's review includes, but is not necessarily be limited to, the
staff no-action letters and other staff statements listed below.
     Frequently Asked Questions about Rule 35d-1;
     Disclosure by Funds Investing in Government Sponsored
Enterprises (staff letter to the ICI, Oct. 17, 2003);
     IM Guidance Update, No. 2013-12, Fund Names Suggesting
Protection from Loss (Nov. 2013).

III. Other Matters

    Pursuant to the Congressional Review Act,\442\ the Office of
Information and Regulatory Affairs has designated the final amendments
as a ``major rule'' as defined by 5 U.S.C. 804(2). If any of the
provisions of these rules, or the application thereof to any person or
circumstance, is held to be invalid, such invalidity shall not affect
other provisions or application of such provisions to other persons or
circumstances that can be given effect without the invalid provision or
application.
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    \442\ 5 U.S.C. 801 et seq.
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IV. Economic Analysis

A. Introduction

    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 2(c) of the Investment Company Act \443\
provides that when the Commission is engaging in rulemaking under the
Act and is required to consider or determine whether an action is
consistent with the public interest, the Commission shall also consider
whether the action will promote efficiency, competition, and capital
formation, in addition to the protection of investors. The following
analysis considers, in detail, the likely significant economic effects
that may result from the final rule amendments, including the benefits
and costs to investors and other market participants as well as the
broader implications of the final rule amendments for efficiency,
competition, and capital formation.
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    \443\ 15 U.S.C. 80a-2(c).
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    Many of the benefits and costs discussed below are difficult to
quantify. For example, the Commission cannot quantify how investors may
change their investments in funds in response to the final rule
amendments. Also, in some cases, data needed to quantify these economic
effects are not currently available and the Commission does not have
information or data that would allow such quantification. For example,
the costs for investors to search for funds and monitor them to ensure
that their investments are consistent with their preferences will
depend on investors' opportunity cost of time, which could differ
across investors. While the Commission has attempted to quantify
economic effects where possible, much of the discussion of economic
effects is qualitative in nature.

B. Broad Economic Considerations

    As discussed in section I above, we believe that a fund's name is
one important piece of information that investors use to select a fund,
and that asset managers give considerable thought to the fund names
that they choose. To the extent that investors value and can determine
whether a fund's investments comport with the fund's name, there are
reputational incentives for funds to hold such assets.\444\ However, it
is costly for individuals or third parties to analyze and monitor the
extent to which every fund invests in assets consistent with an
investment focus suggested by its name, or even to discover the
reputation of each fund. As a result, it may be more efficient for
investors to be able to rely on certain regulatory standards addressing
the relationship between a fund's name and its investments than to rely
on third parties or individual analyses for these purposes. Investors
within a fund also differ in their preferences, and this variability
mitigates an adviser's incentive to cater to those types of
preferences, such as preferences over risk or correlation with
particular market factors.
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    \444\ See Zycher Comment Letter.
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    Further, an adviser has an incentive for the fund to hold
investments different from those suggested by the fund's name to the
extent that doing so would lead to increased assets under management
and increased fee revenues. For example, a fund may be incentivized to
depart from the investment focus suggested by its name in an attempt to
outperform its peers and attract greater inflows and may act on this
incentive within regulatory and market constraints. Holding investments
not consistent with the investment focus that a fund's name suggests
could lead to investors holding investments that are inconsistent with
their goals and risk tolerances.
    Some commenters believed that the current names rule needs to be
amended.\445\ Some of these commenters stated, for example, that the
current scope of the 80% investment policy provision does not cover all
instances in which fund names create the reasonable expectation that a
fund will invest in a certain way.\446\ Funds that suggest an
investment focus but that are not currently covered by the names rule
are popular. For example, funds with ``growth'' or ``value'' in their
name make up over 15% of funds.\447\
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    \445\ For a fuller discussion, see section I.B.
    \446\ See supra footnote 26 and accompanying text.
    \447\ Based on an analysis of fund names as of Dec. 2022.
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    In addition, derivatives have become a more common tool used by
funds since the inception of the names rule, and many funds that use
derivatives do so in ways that amplify, rather than hedge, their non-
derivative positions.\448\ Because the market value of derivatives

tends to be small relative to the exposures they create, certain
derivatives may currently provide funds a way to create large exposures
not suggested by a fund's name without falling out of compliance with
an 80% investment policy if derivatives are valued using their market
value.\449\
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    \448\ See R. Kaniel, and P. Wang, Unmasking Mutual Fund
Derivative Use, CEPR Discussion Paper 17755 (2022) (``Kaniel
Paper''). The authors find that 26% of active equity mutual funds
use derivatives. Of these, 63% have derivative returns that
correlate positively with their non-derivative returns. The median
correlation was 0.25. For comparison, J Koski and J Pontiff, How are
Derivatives Used? Evidence from the Mutual Fund Industry, Journal of
Finance, Volume 54(2), 791-816 (1999) finds that only 21% of similar
funds use derivatives.
    \449\ See Kaniel Paper. The authors find that, among funds that
use derivatives, derivatives are, on average, 2% of the market value
of those funds. By contrast, derivatives make up, on average, 21% of
those same funds' gross notional exposure. See also supra footnote
238 and accompanying text (stating that using a derivatives
instrument's market value for purposes of assessing names rule
compliance could result in a fund being in compliance with its 80%
investment policy despite the fund having significant exposure to
investments that are not suggested by the fund's name).
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    Researchers have studied whether a fund's name can drive investor
behavior above and beyond the investment strategy of the fund. That is,
they have studied whether an incentive exists for managers to use names
to attract fund flows in ways that are not reflected in the investment
allocation of the fund. Research has found that fund names have an
impact on fund flows in different types of environments.\450\
Researchers have also found that certain funds have changed their names
to suggest changes in style, but the funds do not subsequently change
styles.\451\ Gaps between the investment style implied by a fund's name
and the actual style of the fund are consistent with self-interest of
the fund's adviser. For example, research findings suggest that fund
managers may alter funds' investment styles during the last part of a
year, without changing their names to reflect a new style, in an effort
to outperform their peers and attract greater inflows over the
remainder of the year.\452\ Research findings also suggest that funds'
name changes that do not also involve a style change may be intentional
and aimed at attracting investors.\453\ In particular, these fund name
changes tend to suggest fund styles that have performed well recently
and that have received a disproportionate amount of fund flows.\454\
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    \450\ See e.g., S. El Ghoul, and A. Karoui, What's in a (Green)
Name? The Consequences of Greening Fund Names on Fund Flows,
Turnover, and Performance, Finance Research Letters, Volume 39,
101620 (2021). The authors find that, following a fund name change
suggesting socially responsible investment, fund inflows increase
but there is a statistically insignificant change in fund exposure
to socially responsible investment. See also B. Candelon, J. B.
Hasse, J.-Q. Lajaunie, ESG-Washing in the Mutual Funds Industry?
From Information Asymmetry to Regulation, Risks, 9, 199 (2021). The
authors provide empirical evidence that some asset managers portray
their funds as socially responsible yet do not make tangible
investment decisions consistent with that portrayal. See also C. Wu
and W. Chen, What's an AI Name Worth? The Impact of AI ETFs on Their
Underlying Stocks, Finance Research Letters, Volume 46 (B), 102474
(2022). The authors compare returns between the stocks in two
different kinds of AI ETFs: those with and without ``AI'' in their
name. They find that the constituent stocks of the group with ``AI''
in the name has a higher cumulative abnormal return than the
constituent stocks of the group without ``AI'' in the name, and
attribute this to differential fund flows to the different groups.
    \451\ See Michael J. Cooper, Huseyin Gulen, and P. Raghavendra
Rau, Changing Names with Style: Mutual Fund Name Changes and Their
Effects on Fund Flows, Journal of Finance, Volume 60, 2825-2858
(2005) (``Cooper Paper''). The authors identify 296 equity mutual
funds that make a style name change over the period April 1994 to
July 2001. They find that 63% of style-related name changes are
`misleading' in that they are not accompanied by corresponding
changes in investment style to reflect the investment style
suggested by the new name. See also Susanne Espenlaub, Imtiaz ul
Haq, and Arif Khurshed, It's all in the name: Mutual fund name
changes after SEC Rule 35d-1, Journal of Banking and Finance, Volume
84, 123-134 (2017) (``Espenlaub Paper''). The authors examine 2,677
fund name changes among 2,110 funds from the fourth quarter of 2001
through the fourth quarter of 2011. The authors find 435
``misleading'' name changes in their sample.
    \452\ See Anne-Florence Allard et al., When Mutual Fund Names
Misinform (working paper, 2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3628293. The researchers
find that funds that perform poorly over the first three quarters of
a year, and funds that have experienced poor fund flows over the
first three quarters of a year, are more likely to change to an
investment style that is inconsistent with the style implied by the
fund's name. These results suggest that funds that have performed
poorly over the first three quarters of a year, and funds that have
experienced poor fund flows over the first three quarters of a year,
would bear an opportunity cost if they continued to follow the
investment style consistent with the strategy implied by the funds'
names.
    \453\ See Espenlaub Paper, supra footnote 451. The researchers
find that ``superficial'' name changes result in increased fund
flows but do not result in either higher performance or lower fees.
See also Cooper Paper, supra footnote 451. The researchers find that
funds that change their names: (1) experience negative flows,
relative to their peers, prior to changing their names, (2) have
performed poorly on a risk-adjusted basis, and (3) are in a style,
irrespective of a fund's individual performance, that has recent
poor performance.
    \454\ See Cooper Paper, supra footnote 451.
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    Some commenters disputed the relevance of this research to the
proposed amendments to the names rule, claiming that it predates the
current names rule, misuses terms like ``growth'' and ``value,'' and
does not demonstrate that investors have been misled.\455\ While some
of this evidence does predate the current names rule, it also reflects
styles that are not within the scope of the current names rule but are
in the scope of the amended rule (i.e., growth and value funds). As
such, we do not anticipate that the current names rule impacted the
main findings of these studies. Further, we believe that the totality
of the academic research, both before and after the enactment of the
names rule, suggests that fund names affect investor behavior above and
beyond what can be explained by a fund's returns, risk level,
correlation with market risk factors, or classification by third
parties. This is not to suggest that names are solely determinative in
investor decisions. While the above research is consistent with some
investors unknowingly choosing funds that invest in assets outside of
the investment focus suggested by their names, this is not the only
possible explanation for the given findings. For example, funds with
names that superficially suggest popular styles may be included more
often in investors' initial screenings for funds, and investors may
nonetheless disproportionately choose these funds after investigating
them more thoroughly despite this fact. However, this would still
suggest inefficiencies in the investor-fund matching process that could
be improved by more precise naming and establishes the existence of an
incentive for managers to choose names that maximize fund flows, even
if the chosen name is not indicative of the investment practice of the
fund. The academic research cited generally does not distinguish
whether funds were purchased directly by investors or by a fiduciary or
other intermediary. However, the rule is intended to increase search
efficiency for both retail investors and fiduciaries.
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