\455\ See ICI Comment Letter and SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    Some commenters also criticized the proposed amendments for the
costs they would impose on funds and, by extension, investors.
Prevalent among these were concerns that the expansion of the scope of
the rule would encompass many funds whose names have terms that are
defined at least partially by managerial judgment.\456\ These funds,
commenters argued, would have significantly higher costs of compliance
with the names rule than would funds that are already scoped into the
rule. In particular, commenters were worried that automated processes
could not be implemented that would categorize each asset and determine
whether it fell in its 80% basket.\457\ These concerns were heightened
because the approach in the proposing release effectively would have
required funds to do this categorization continually (and in some
circumstances daily) in order to determine the number of days that a
fund was out of

compliance with its 80% investment policy.
---------------------------------------------------------------------------

    \456\ See, e.g., ICI Comment Letter, SIFMA AMG Comment Letter;
J.P. Morgan Asset Management Comment Letter.
    \457\ See, e.g., ICI Comment Letter, J.P. Morgan Asset
Management Comment Letter; T. Rowe Comment Letter.
---------------------------------------------------------------------------

    The final amendments have taken several steps to mitigate costs for
most funds relative to the amendments in the proposing release. For
example, the final rule does not include a requirement for continual or
daily monitoring to reassess the characteristics of the investments in
the fund's 80% basket, alleviating the need for daily recategorization.
However, a fund must review its portfolio investments on a quarterly
basis to determine whether or not the fund's investments continue to be
consistent with its 80% investment policy. As is true under the
baseline, a fund must also categorize an asset at its time of
investment. If a fund is trading each of its assets daily then the cost
mitigation described above would not apply.

C. Economic Baseline

    The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the final rule are
measured consists of the current state of the fund market, current
practice as it relates to fund names and investment policies, and the
current regulatory framework. The economic analysis appropriately
considers existing regulatory requirements, including recently adopted
rules, as part of its economic baseline against which the costs and
benefits of the final rule are measured.\458\
---------------------------------------------------------------------------

    \458\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C.
Cir. 2022). This approach also follows SEC staff guidance on
economic analysis for rulemaking. See Staff's ``Current Guidance on
Economic Analysis in SEC Rulemaking'' (March 16, 2012), available at
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic
consequences of proposed rules (potential costs and benefits
including effects on efficiency, competition, and capital formation)
should be measured against a baseline, which is the best assessment
of how the world would look in the absence of the proposed
action.''); Id. at 7 (``The baseline includes both the economic
attributes of the relevant market and the existing regulatory
structure.''). The best assessment of how the world would look in
the absence of the proposed or final action typically does not
include recently proposed actions, because doing so would improperly
assume the adoption of those proposed actions.
---------------------------------------------------------------------------

1. Fund Industry Overview
    The fund industry has grown and evolved substantially in past
decades in response to various factors, including investor demand,
technological developments, and an increase in domestic and
international investment opportunities, both retail and institutional.
As of December 2022, there were 9,533 mutual funds (excluding money
market funds) with approximately $21,861 billion in total net assets,
2,735 ETFs organized as an open-end fund or as a share-class of an
open-end fund with approximately $8,843 billion in total net assets,
748 registered closed-end funds with approximately $389 billion in
total net assets, and 45 UITs with approximately $812 billion in total
net assets.\459\ There also were 355 money market funds with
approximately $5,556 billion in total net assets.\460\ Finally, as of
December 2022, there were 125 BDCs with approximately $138 billion in
total net assets.\461\
---------------------------------------------------------------------------

    \459\ Estimates of the number of registered investment companies
and their total net assets are based on an analysis of Form N-CEN
filings as of Dec. 31, 2022. For open-end management funds, closed-
end funds, and management company separate accounts, total net
assets is the sum of monthly average net assets across all funds in
the sample during the reporting period (see Item C.19.a of Form N-
CEN). For UITs, we count only N-CEN UIT filers that indicated
registration on Form S-6 or Form N-8B-2. Furthermore, we use the
total assets as of the end of the reporting period (see Item F.11 of
Form N-CEN), and for UITs with missing total assets information, we
use the aggregated contract value for the reporting period instead
(see Item F.14.c of Form N-CEN).
    \460\ Estimates of the number of money market mutual funds and
their total net assets are based on an analysis of Form N-MFP
filings as of Dec. 31, 2022.
    \461\ Estimates of the number of BDCs and their net assets are
based on an analysis of Form 10-K and Form 10-Q filings as of Dec.
31, 2022. Our estimate includes BDCs that may be delinquent or have
filed extensions for their filings.
---------------------------------------------------------------------------

    The final rule amendments would also affect current and prospective
individual investors who invest in funds. According to an association
representing registered funds, as of 2022, 71.7 million (54.7%) U.S.
households and 120.5 million individuals owned shares in U.S.
registered investment companies.\462\ Median mutual fund assets of
mutual fund-owning households were $125,000 with the median number of
mutual funds held being three.\463\ Moreover, registered funds play an
important role in individuals' retirement savings. 72% of households
had tax-advantaged retirement savings with $10.1 trillion invested in
mutual funds either through defined contribution plans or IRAs.\464\
---------------------------------------------------------------------------

    \462\ See Investment Company Institute, 2023 Factbook (2023)
(``2023 ICI Factbook'') available at https://icifactbook.org/pdf/2023-factbook.pdf.
    \463\ Id.
    \464\ Id.
---------------------------------------------------------------------------

2. Market Practice
    Fund names are an important mechanism in marketing funds to
investors. Although investors have access to the entirety of a fund's
disclosures, a fund's name is often the first piece of fund information
investors see and can have a significant impact on their investment
decision. Several commenters stated that the name of a fund is vital to
an investor's decision-making process and can have a large impact on
its fund flows.\465\ Fund names commonly include words that describe
the fund's investment focus--for example, the asset class(es) in which
the fund invests, as well as the fund's investment strategy. For
example, the words ``equity'' or ``stock''--terms that convey an
investment type and therefore subject funds to the existing names
rule's 80% investment policy requirement--appear in 1,393 fund names
(approximately 10.6% of non-money market funds).\466\ The words
``growth,'' ``income,'' and ``value''--terms that do not convey an
investment type--appear in 1,167 (8.9% of non-money market funds),
1,472 (11.2%), and 829 (6.3%) fund names, respectively.\467\
---------------------------------------------------------------------------

    \465\ See, e.g., Better Markets Comment Letter, Consumer
Federation of America Comment Letter, Center for American Progress
Comment Letter.
    \466\ Based on an analysis of fund names as of Dec. 2022.
    \467\ Certain word pairs are also common in fund names. For
example, the word pair ``small cap'' appears in 3.6% of fund names.
Other common word pairs include ``large cap'' (2.5% of funds),
``high yield'' (2.0% of funds), and ``emerging markets'' (3.5% of
funds).
---------------------------------------------------------------------------

    A review of fund filings suggests that approximately 82% of funds
have investment policies specifying a minimum percentage of investments
consistent with a certain fund focus,\468\ while 67% of all funds have
such a policy with a minimum threshold of 80% or higher.\469\ Certain
funds also specify investment maximums as a

percentage of fund assets.\470\ The review also found that 60% of funds
are required under the current names rule to maintain an 80% investment
policy.\471\
---------------------------------------------------------------------------

    \468\ This estimate is based on a random stratified sample of
100 fund names, which is a representative sample based on fund size
randomly selected from the population of N-CEN filings as of Dec.
31, 2022. Specifically, 497 and 485BPOS fund prospectuses filed in
2021 or 2022 that match to the sample of 100 funds are parsed both
programmatically and manually for keywords and phrases indicative of
minimum investment commitment policies. 485BPOS refers to any post-
effective amendments to the initial registration statement or
prospectus filed pursuant to Securities Act rule 485(b). The
investment policies for ten funds could not be identified in the 497
and 485BPOS fund prospectuses filed in 2021 or 2022. Therefore,
these ten funds are excluded for this estimate. The random sample of
100 funds referenced here is the same sample of funds as that used
to estimate the percentage of funds whose names implicate the 80%
requirement. See infra section IV.C.3
    \469\ 22% of funds that have investment policies specifying a
minimum percentage of investments consistent with a certain fund
focus specify a percentage less than 80%. While 67% of funds have an
investment policy requiring at least 80% of fund investments be
consistent with a certain investment strategy, we estimate that 60%
of funds have names that trigger the 80% requirement (discussed
below). These results suggest that funds may adopt 80% investment
policies even if they are not currently within the scope of the
names rule's current requirement to adopt an 80% investment policy.
    \470\ For example, a fund may specify that it invests no more
than a given percentage of fund assets in a given country or
geographic region.
    \471\ See section IV.C.3 for details on the current regulatory
requirement.
---------------------------------------------------------------------------

    Funds' use of derivatives has grown in the time since the names
rule was originally adopted in 2001, with 26% of funds now having some
derivatives exposure.\472\ Funds use derivatives in a variety of ways,
including increasing or hedging their exposure to certain risk factors.
Funds primarily do this through the use of futures and swaps contracts
but other derivatives, such as options, are also widely used.\473\ For
example, a fund may wish to hedge the currency risk of a foreign asset
through the use of a forward contract or its interest rate risk using a
swap. Similarly, a fund may gain exposure to certain equities or
commodities through the use of forward and option contracts. Funds also
use derivatives for cash management purposes when fund flows are
high,\474\ for tax efficiency,\475\ or to arbitrage market mispricing.
---------------------------------------------------------------------------

    \472\ See supra footnote 448 and accompanying text.
    \473\ See Kaniel Paper.
    \474\ See, e.g., A. Frino, A. Lepone, and B Wong, Derivative
Use, Fund Flows and Investment Manager Performance, Journal of
Banking & Finance, Volume 33, 925-933 (2009).
    \475\ For example, 60% of futures contracts profits may be taxed
at the long-term capital gains rate regardless of duration of the
investment.
---------------------------------------------------------------------------

3. Current Regulatory Framework
    As discussed above, section 35(d) of the Act authorizes the
Commission to define certain fund names or titles as materially
deceptive or misleading.\476\ The current names rule applies to a
registered investment company and any series of the investment
company.\477\ The rule generally requires that if a fund's name
suggests a particular type of investment, industry, or geographic
focus, the fund must invest at least 80% of its assets in the type of
investment, industry, country, or geographic region suggested by its
name.\478\ The names rule also provides that a fund's 80% investment
policy applies ``under normal circumstances'' \479\--giving funds
flexibility to take cash or other defensive positions during market
crises. The names rule also imposes an 80% investment policy
requirement for tax-exempt funds.\480\ Under the rule, a fund may
generally elect to make its 80% investment policy a fundamental policy
(i.e., a policy that may not be changed without shareholder approval)
or instead provide shareholders notice at least 60 days prior to any
change in the 80% investment policy.\481\ The names rule also requires
a fund with a name suggesting that the fund focuses its investments in
a particular country or geographic region to disclose in its prospectus
the specific criteria used by the fund to select these
investments.\482\
---------------------------------------------------------------------------

    \476\ See supra section I.A.
    \477\ Rule 35d-1(d)(1).
    \478\ See rule 35d-1(a)(2)(i), (a)(3)(i).
    \479\ Id.
    \480\ Alternatively, at least 80% of the income that it
distributes will be exempt. See rule 35d-1(a)(4); see also supra
footnote 15.
    \481\ See rule 35d-1(a)(2)(ii), (a)(3)(iii). An 80% investment
policy relating to a tax-exempt fund, however, must be a fundamental
policy.
    \482\ Rule 35d-1(a)(3)(ii).
---------------------------------------------------------------------------

    The current names rule has no express provision for how derivatives
are to be treated in a fund's 80% calculation. In practice however,
funds typically use a derivative's market value consistent with the
definition of the term ``value'' in the Investment Company Act.\483\
---------------------------------------------------------------------------

    \483\ 2020 Request for Comment, supra footnote 20.
---------------------------------------------------------------------------

    A review of fund names suggests that approximately 60% of funds
have names that implicate the 80% investment policy requirement, but
that approximately 67% of funds have an investment policy that covers
at least 80% of investment assets.\484\
---------------------------------------------------------------------------

    \484\ This estimate is based on a random stratified sample of
100 fund names. See supra footnote 468.
---------------------------------------------------------------------------

    The 80% investment policy requirement generally applies at the time
when an investment company invests its assets.\485\ If an investment
causes a fund to no longer satisfy its 80% investment policy, then all
future investments must be made in a manner that will bring the fund
back into compliance with the 80% investment policy.\486\
---------------------------------------------------------------------------

    \485\ Rule 35d-1(b); see also 2001 Names Rule Adopting Release,
supra footnote 8.
    \486\ Rule 35d-1(b). As described in greater detail in the
Proposing Release, supra footnote 2, funds' compliance with the
baseline rule is facilitated by Commission staff review of funds'
initial registration statements, post-effective amendments, proxy
statements, and annual reports. Likewise, the names rule's 80%
investment policy requirement has never been intended to create a
safe harbor from liability under section 35(d) for materially
deceptive or misleading fund names generally. See supra section
II.A.5; see also 2001 Names Rule Adopting Release, supra footnote 8,
(stating that the Division would ``continue to scrutinize investment
company names not covered by the proposed rule . . . and [i]n
determining whether a particular name is misleading, the Division
w[ould] consider whether the name would lead a reasonable investor
to conclude that the company invests in a manner that is
inconsistent with the company's intended investments or the risks of
those investments''). Funds that anticipate oversight may be more
likely to take steps to align their investment practices with the
terminology used in these funds' names.
---------------------------------------------------------------------------

    Because the current rule applies to all registered investment
companies, it applies to UITs as well as mutual funds and registered
closed-end investment companies.\487\ UITs are passively managed
vehicles that operate pursuant to a trust indenture or a similar
document and have fixed portfolios. They are also generally subject to
the 80% investment policy requirement of the current names rule at the
time of investment. However, UITs that have made an initial deposit of
securities before the compliance date of the original rule are exempted
from this requirement.\488\
---------------------------------------------------------------------------

    \487\ 2001 Names Rule Adopting Release, supra footnote 8.
    \488\ Rule 35d-1(b).
---------------------------------------------------------------------------

    BDCs, while not registered investment companies, are subject to
requirements of section 35(d) of the Act, and thus the names rule, by
operation of section 59 of the Act.\489\ Accordingly they must meet the
current rule's 80% investment policy requirement including to either
adopt the required 80% investment policy as a fundamental policy or
provide shareholders 60 days' advance notice for any change in the
investment policy.\490\ Unlisted registered closed-end funds and BDCs,
however, do not issue redeemable shares or list their shares on a
national securities exchange. Shareholders in an unlisted registered
closed-end fund or BDC generally will have no ready recourse, such as
the ability to redeem or quickly sell their shares, if the fund were to
change its investment policy and the investment focus that the fund's
name indicates.\491\
---------------------------------------------------------------------------

    \489\ See supra footnote 13 (citing 15 U.S.C. 80a-58).
    \490\ Rule 35d-1(a)(2)(ii), (a)(3)(iii).
    \491\ See Proposing Release, supra footnote 2, at n.99 and
accompanying text.
---------------------------------------------------------------------------

    All registered management investment companies (other than money
market funds and small business investment companies), as well as ETFs
organized as UITs, file Form N-PORT with the Commission on a monthly
basis. Form N-PORT requires reporting of a fund's complete portfolio
holdings in a structured data language, with every third month
available to the public 60 days after the end of the fund's fiscal
quarter.

D. Benefits, Costs, and Effects on Efficiency, Competition and Capital
Formation

    The final amendments are designed to modernize and enhance the
investor protections that the names rule currently provides. The final
amendments are designed to improve, and broaden the scope of, the
requirement for certain funds to adopt a

policy to invest at least 80% of their assets in accordance with the
investment focus that the fund's name suggests. These amendments
further the name rule's objective of preventing fund names from
misrepresenting a fund's investments and risks by ensuring that a
fund's investment activity is consistent with the investment focus its
name communicates. The final amendments also update the rule's notice
requirements, establish recordkeeping requirements, and require
enhanced prospectus disclosure and reporting on Form N-PORT.
1. Benefits
    The investor protections provided by the names rule benefit
investors by helping to ensure investors' assets in funds are invested
in accordance with their investment goals and risk tolerances. The
distinction in the current rule between a type of investment--which
implicates the 80% requirement under the baseline--and an investment
strategy--which does not implicate this requirement--is not useful from
an investor protection perspective because any fund name that may
connote a particular investment focus can result in reasonable investor
expectations regardless of whether the fund's name describes a strategy
or a type of investment. Also, under certain circumstances, the current
structure of the rule may not protect investors from funds departing
from the investment focus suggested by their name over time. For
example, funds may passively hold assets whose characteristics change,
such as a small-cap firm becoming a mid-cap firm. Since funds are
currently required only to assess assets at the time of investment,
changes in the relative value of the assets of a fund could allow a
fund's portfolio to drift such that its holdings no longer reflect the
investment focus suggested by its name, which could mislead new or
existing investors. Additionally, the investor protections provided by
the names rule are not designed to address funds' increasing use of
derivatives.
    The benefits associated with the final amendments may vary based on
funds' current practices. We estimate that 82% of funds, and over half
of funds not currently subject to the names rule, currently have in
place practices related to investing a certain percentage of their
assets in a particular type of assets or assets that have certain
characteristics.\492\ Depending on the extent to which those practices
differ across funds or differ from the final amendments' requirements,
the benefits realized by fund investors, as detailed below, may vary
across fund investors.
---------------------------------------------------------------------------

    \492\ See supra footnote 468 and accompanying text.
---------------------------------------------------------------------------

    Generally, the final rules should increase investor confidence that
funds' portfolios are aligned with the investment focus suggested by
their names. The provisions are intended to align fund investments with
the preferences of investors. To the extent that funds change their
behavior and invest in assets more suited to investor preferences,
allocation efficiency will increase.
    One commenter questioned the general benefits of the amendments on
the basis of a lack of enforcement actions or lawsuits arising from the
current names rule.\493\ We disagree with this assessment. There are a
number of factors that determine whether and when the Commission brings
enforcement actions, meaning the presence or absence of such actions
does not necessarily indicate whether rulemaking is or is not
justified. For the reasons discussed throughout, including the
Commission and staff's experience with the names rule over the past two
decades and developments in the fund industry, the Commission believes
that this rulemaking is justified.\494\
---------------------------------------------------------------------------

    \493\ See SIFMA AMG Comment Letter.
    \494\ See supra section II.A.1.
---------------------------------------------------------------------------

    Names Suggesting an Investment Focus. To the extent fund names are
not representative of funds' investment focuses, existing and potential
investors may hold, or invest in, funds with risk and return
characteristics that differ from investors' reasonable expectations.
Absent investor protections with respect to fund holdings, existing
investors may expend resources they otherwise would not expend to
confirm that fund investments are consistent with their expectations
based on the fund's name, or they may choose to reduce or eliminate
their investments in funds. Similarly, uncertainty about fund holdings
despite the fund's name could cause potential investors to expend
greater resources to confirm fund investments prior to investment or
could lead potential investors to invest less or forgo investment
altogether. The final amendments would extend the provisions of the
names rule to a broader set of fund names.
    Specifically, we estimate that approximately 8,100 (60%) funds are
currently subject to the names rule's 80% investment policy requirement
and that our final amendments would increase this number to
approximately 10,300 (76%) funds.\495\ We believe that investors in
these additional funds would benefit to the extent that the scope
expansion helps ensure that a fund's investment activity is consistent
with the investment focus its name communicates and, thus, the investor
expectations the name creates.
---------------------------------------------------------------------------

    \495\ See supra footnotes 468-469. The percentage estimate is
applied to the total number of funds (13,541) listed in section
IV.C.1.
---------------------------------------------------------------------------

    Temporary Departures. The final amendments will continue to permit
a fund to depart temporarily from the requirement to invest at least
80% of the value of its assets in accordance with the investment focus
its name suggests. The final rule requires that a fund must invest in
accordance with its 80% investment policy under normal circumstances.
Funds must review their portfolios on a quarterly basis for compliance
with the 80% investment requirement. In instances where a fund
identifies that its portfolio is out of compliance with the 80%
investment requirement, the fund must make future investments in a
manner that would bring the fund into compliance as soon as reasonably
practicable and in all circumstances within 90 consecutive days of the
fund's identification that the requirements are no longer met. If the
fund departs from the requirements in other-than-normal circumstances,
the fund is not required to come back into compliance as soon as
reasonably practicable but must come back into compliance within 90
consecutive days of the initial departure.
    In addition, funds are permitted under the final rule to
temporarily depart from the 80% investment requirement in connection
with a reorganization (for which the final rule does not specify a
required time frame for accompanying temporary departures) or a fund
launch (departure not to exceed the period of 180 consecutive days) or
when a notice of a change in a fund's policy in certain circumstances
has been provided to fund shareholders.\496\
---------------------------------------------------------------------------

    \496\ See supra section II.A.2 for a full description of the
requirement.
---------------------------------------------------------------------------

    The current rule requires a fund to determine at the time it
invests whether the security is appropriately included in the fund's
80% basket. As a result, a fund that does not frequently trade could
potentially have assets that comported with the name of the fund at the
time of investment, but whose characteristics have changed with time.
As a result, the requirement in the final rule for a fund to reassess
the characteristics of a fund's assets on a quarterly basis will
benefit investors by

ensuring that funds cannot passively drift such that their name no
longer reflects their holdings for a prolonged period.
    The final rule will also benefit investors by imposing a limit to
the amount of time that a fund can invest less than 80% of the value of
its assets in accordance with the fund's investment focus in other-
than-normal circumstances. The new deadline gives a predictable
timeline for discrepancies to be resolved, during which funds can
investigate a name change and shareholders can determine whether to
redeem their shares. Some commenters highlighted the benefit of
increased investor protection that this would produce.\497\ For
example, the final rule would disallow a departure for longer than 90
consecutive days to address a market disruption. This will benefit
investors to the extent that such a departure would frustrate the
expectation of investors who may expect the fund to invest consistent
with its stated investment focus even during market disruptions, and
therefore may choose to rebalance investments on their own rather than
relying upon the fund to do so.
---------------------------------------------------------------------------

    \497\ See, e.g., NASAA Comment Letter; Center for American
Progress Comment Letter; Consumer Federation of America Comment
Letter.
---------------------------------------------------------------------------

    Because UITs are passively managed vehicles that have fixed
portfolios, it would be difficult to adjust their portfolios to comply
with the rule's portfolio composition requirements.\498\ Accordingly,
UITs are exempted from this provision and the associated benefits
discussed above do not apply to UITs.
---------------------------------------------------------------------------

    \498\ See supra footnote 428.
---------------------------------------------------------------------------

    Considerations Regarding Derivatives in Assessing Names Rule
Compliance. The final amendments also address the valuation of
derivatives instruments for purposes of determining a fund's compliance
with its 80% investment policy, as well as the derivatives that a fund
may include in its 80% basket. The final amendments generally require
that, in calculating its assets for purposes of names rule compliance,
a fund must value each derivatives instrument using its notional
amount, with certain adjustments.\499\ The final amendments also, in a
change from the proposal, require a fund to exclude from the
calculation derivatives transactions that it uses to hedge currency
risk associated with one or more specific foreign-currency-denominated
equity or fixed-income investments held by the fund provided that: (1)
such currency derivatives are entered into and maintained by the fund
for hedging purposes, and (2) the notional amounts of such derivatives
do not exceed the value of the hedged investments (or the par value
thereof, in the case of fixed-income investments) by more than 10
percent. The final amendments will permit a fund, in determining
compliance with its 80% investment policy, to deduct cash and cash
equivalents and U.S. Treasury securities with remaining maturities of
one year or less from assets (i.e., the denominator in the 80%
calculation) up to the notional amounts of the fund's derivatives
instruments, as well as any closed-out positions if those positions
result in no credit or market exposure to the fund.\500\ The final
amendments also specify that, in addition to any derivatives instrument
that a fund includes in its 80% basket because the derivatives
instrument provides investment exposure to the investments suggested by
the fund's name, the fund also may include in its 80% basket a
derivatives instrument that provides investment exposure to one or more
of the market risk factors associated with the investment focus
suggested by a fund's name.
---------------------------------------------------------------------------

    \499\ Interest-rate derivatives must be adjusted to their 10-
year bond equivalent, and options must be delta-adjusted. Physical
short positions must instead use the value of the asset sold short.
See discussion in supra section II.A.3.
    \500\ See final rule 35d-1(g).
---------------------------------------------------------------------------

    As discussed above, a derivatives instrument's ``value,'' as
defined in the Act, will not be the same as the investment exposure
created by the derivatives instrument.\501\ We believe the notional
amount generally serves as a better measure (than market value) of the
fund's investment exposure to the underlying reference asset or metric.
Also, as discussed in section II.A.3 above, using derivatives
instruments' market values for purposes of assessing names rule
compliance could result in a fund being in compliance with the fund's
80% investment policy despite the fund having significant exposure to
investments that are not suggested by the fund's name, as is allowed
under the baseline. The final amendments will benefit investors by
allowing funds that use derivatives to use names that may more
effectively communicate their investments and risks and reduce the risk
that a fund may use derivatives to invest in a manner inconsistent with
the investment focus suggested by the fund's name. The final amendments
also provide clarity to funds and investors on how to value derivatives
for the purpose of the 80% investment test, and make the test a more
effective tool in assessing names rule compliance. Comments on
different aspects of the proposed approach to using notional amounts
were mixed; however, commenters largely agreed that using an approach
that better reflects the economic exposure obtained by a derivatives
instrument, rather than the market value, would result in the benefits
outlined for this aspect of the rule.\502\
---------------------------------------------------------------------------

    \501\ See discussion in supra section II.A.3.
    \502\ See, e.g., Consumer Federation of America Comment Letter;
Capital Group Comment Letter; J.P. Morgan Asset Management Comment
Letter.
---------------------------------------------------------------------------

    Unlisted Registered Closed-End Funds and BDCs. Unlisted registered
closed-end funds and BDCs do not issue redeemable shares or list their
shares on a national securities exchange. Under the baseline,
shareholders in an unlisted registered closed-end fund or BDC generally
would have no ready recourse, such as the ability to redeem or quickly
sell their shares, if the fund were to change its investment policy.
Under the final rule amendments, unlisted registered closed-end funds
and BDCs will not be permitted to change their 80% investment policies
without shareholder approval unless an appropriate liquidity event is
offered a certain time prior to the implementation of such a
change.\503\ This rule will increase investor protections by requiring
that investors have a choice when a fund takes action to change its 80%
investment policy, either in the form of a vote or in the ability to
disinvest.
---------------------------------------------------------------------------

    \503\ See supra section II.A.4 for a discussion of the rule
requirement.
---------------------------------------------------------------------------

    The proposed rule would have required that 80% investment policies
for unlisted registered closed-end funds and BDCs be fundamental
policies. We believe that the final rule's approach to unlisted
registered closed-end funds and BDCs achieves the same investor
protection benefits that the proposal would have provided relative to
the current rule, because investors who no longer wish to invest in a
fund after a change in investment policy will be able to either vote on
such a change or liquidate their position. For most investors, we
assume that the ability to liquidate is at least as strong a recourse
as the ability to vote in this context.
    Effect of Compliance with an 80% Investment Policy. We are adopting
a new provision in the names rule providing that a fund's name may be
materially deceptive or misleading under section 35(d) 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.\504\ The

Commission has previously stated that the names rule's 80% investment
policy requirement is not intended to create a safe harbor for fund
names, and the provision we are adopting codifies this position.\505\
We anticipate that investors will benefit from this codification of the
prior guidance to the extent that it deters funds from investing 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, as communicated to
investors. It may also lead funds to consider further ways in which
their names could be materially deceptive and misleading even outside
of compliance with the 80% investment policy requirement and modify
their names and/or investment practices accordingly.
---------------------------------------------------------------------------

    \504\ See supra section II.A.5 and final rule 35d-1(c).
    \505\ See supra section II.B; see also 2001 Names Rule Adopting
Release, supra footnote 8, section II.A.1.
---------------------------------------------------------------------------

    Prospectus Disclosure. We are also adopting amendments to funds'
registration forms that would require each fund that is required to
adopt and implement an 80% investment policy to disclose in its
prospectus the definitions of the terms used in its name, including the
specific criteria the fund uses to select the investments that the
terms describe, if any.\506\ These provisions are intended to help an
investor understand whether the investment focus the name suggests is
consistent with the investor's investment goals and risk tolerance. The
final amendments will also reduce costs for investors to search for
funds that match their investment preferences and facilitate monitoring
by investors or third parties as well as facilitate oversight by the
Commission.\507\
---------------------------------------------------------------------------

    \506\ See Proposing Release, supra footnote 2, at n.104 and
accompanying text.
    \507\ See section II.B, section II.C, section II.E, and section
II.F for discussions of how the proposed prospectus disclosure
requirements, plain English requirements, N-PORT reporting
requirements, and recordkeeping requirements, respectively,
facilitate monitoring of fund investments by investors or third
parties as well facilitate oversight by the Commission.
---------------------------------------------------------------------------

    The final amendments will require funds to tag most of the new
prospectus disclosure in Inline XBRL, a structured, machine-readable
data language.\508\ This requirement is designed to make the tagged
prospectus disclosures more readily accessible for aggregation,
comparison, filtering, and other analysis. As a point of comparison,
XBRL requirements for public operating company financial statement
disclosures have been observed to improve investor understanding of the
disclosed information.\509\ While those observations are specific to
operating company financial statement disclosures (including
footnotes), and not to disclosures from funds outside the financial
statements, they indicate that the final rule's Inline XBRL
requirements will provide fund investors with increased insight into
term definitions and investment selection criteria at specific funds
and across funds, asset managers, and time periods.\510\ An Inline XBRL
requirement is designed to ensure that all disclosures on these forms--
including both structured and unstructured disclosures--will be human-
readable, because Inline XBRL enables a single document to include both
human-readable and machine-readable disclosure.
---------------------------------------------------------------------------

    \508\ See supra section II.B. For Forms N-2, N-8B-2, and S-6,
all new prospectus disclosures will be tagged in Inline XBRL. For
Form N-1A, the new summary prospectus disclosures in Item 4 will be
tagged in Inline XBRL. While the new statutory prospectus
disclosures in Item 9(b) will not be tagged in Inline XBRL, this
disclosure will be reported on Form N-PORT, where it will be tagged
in XML format.
    \509\ See, e.g., Birt, J., Muthusamy, K. & P. Bir, XBRL and the
Qualitative Characteristics of Useful Financial Information,
Accounting Research Journal, 30 (2017) (finding ``financial
information presented with XBRL tagging is significantly more
relevant, understandable and comparable to non-professional
investors''); Cahan, S.F., Chang, S., Siqueira, W.Z. & K. Tam, The
roles of XBRL and processed XBRL in 10-K readability, Journal of
Business Finance & Accounting (2021) (finding 10-K file size reduces
readability before XBRL's adoption since 2012, but increases
readability after XBRL adoption, indicating ``more XBRL data
improves users' understanding of the financial statements'');
Efendi, J., Park, J.D. & C. Subramaniam, Does the XBRL Reporting
Format Provide Incremental Information Value? A Study Using XBRL
Disclosures During the Voluntary Filing Program, Volume 52, Issue 2,
Abacus, 259 (2016) (finding XBRL filings have larger relative
informational value than HTML filings).
    \510\ The SEC's fund XBRL data are frequently accessed; for
example, during the final week of Jun. 2023, over 37,000 investment
company XBRL files were accessed via EDGAR. EDGAR access data is
available at https://www.sec.gov/about/data/edgar-log-file-data-sets. As another example, the Commission's quarterly XBRL datasets
for mutual fund prospectus risk/return summaries garnered over
13,000 pageviews from June 2022 to June 2023, according to a Google
Analytics query of the Commission's XBRL dataset web page. The web
page is available at https://www.sec.gov/dera/data. Even if some
pageviews are not from investors themselves, investors may
indirectly benefit from the processing of XBRL data by information
intermediaries such as financial media, data aggregators, academic
researchers, et al.). See, e.g., Trentmann, N., Companies Adjust
Earnings for Covid-19 Costs, but Are They Still a One-Time Expense?,
The Wall Street Journal (2020) (citing an XBRL research software
provider as a source for the analysis described in the article);
Bloomberg Lists BSE XBRL Data (Mar. 17, 2019), available at https://www.xbrl.org/news/bloomberg-lists-bse-xbrl-data/; Hoitash, R & U.
Hoitash, Measuring accounting reporting complexity with XBRL, The
Accounting Review, Volume 93, 259-287 (2018). Also, in contrast to
XBRL financial statements (including footnotes), which consist of
tagged quantitative and narrative disclosures, the disclosures here
do not expressly require the disclosure of any quantitative values
(if a fund were to include any quantitative values as nested within
the required discussion--for example by disclosing as a selection
criterion a specific upper limit of company revenues from industries
the fund deems incongruent with its definition of ``ESG''--those
values will also be individually detail tagged, in addition to the
block text tagging of the narrative discussion). Tagging narrative
disclosures can facilitate analytical benefits such as automatic
comparison/redlining of these disclosures against prior periods and
the performance of targeted artificial intelligence/machine learning
(``AI/ML'') assessments (tonality, sentiment, risk words, etc.) of
specific definition and selection criteria disclosures rather than
the entire unstructured document.
---------------------------------------------------------------------------

    Plain English/Established Industry Use Requirement. We are also
requiring that any terms used in the fund's name that suggest either an
investment focus, or that the fund is a tax-exempt fund, must be
consistent with those terms' plain English meaning or established
industry use. 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. Because terms may inherently have
multiple meanings, and the amended rule provides flexibility to funds
to define the terms in their name, this provision will provide a
safeguard to investors by helping to ensure that these chosen
definitions are within a term's plain English meaning or established
industry use.
    While many commenters agreed with the benefits of this requirement,
some stated that this benefit may be mitigated in certain instances;
for example, if the name uses terms that evolve over time, or if the
plain English meaning of a term differs from its established industry
use. These commenters suggested that investors would need to look at
the prospectus disclosure to reasonably understand these terms and so
there would be no additional benefit to requiring that terms in the
name comport to either their plain English meaning or established
industry use.\511\ While investors should look to prospectus disclosure
to understand how terms in a fund's name are defined, this provision
would still benefit investors in those circumstances by allowing them
to more quickly search for funds that match their investment goals by
more effectively filtering for funds with names that could be related
to their desired investment allocation.
---------------------------------------------------------------------------

    \511\ See supra footnotes 357-358 and accompanying text for a
discussion responding to the issues raised by these commenters.
---------------------------------------------------------------------------

    New Form N-PORT Reporting Requirements. We are also amending Form
N-PORT to include new reporting

items.\512\ Registered investment companies, other than money market
funds, required to adopt an 80% investment policy would be required to
report on Form N-PORT: (1) with respect to each portfolio investment,
whether the investment is included in the fund's 80% basket, (2) the
value of the fund's 80% basket, as a percentage of the value of the
fund's assets, and (3) the definitions of terms used in the name and
any selection criteria associated with these terms. The new information
that funds will be required to report on Form N-PORT filings will
facilitate the Commission's oversight of funds' names rule compliance
and assist Commission staff in examination, enforcement, and monitoring
with respect to the consistency between funds' portfolio investments
and the investment focus that the fund's name suggests. In addition to
assisting the Commission in its regulatory functions, investors and
other potential users will benefit from the periodic public disclosure
of the information reported on Form N-PORT. Although Form N-PORT is not
primarily designed for disclosing information directly to individual
investors, we intend that entities providing services to investors,
such as investment advisers, broker-dealers, and entities that provide
information and analysis for fund investors, will also utilize and
analyze the new information that will be required by the final
amendments to Form N-PORT to monitor fund investments for consistency
with investment focuses suggested by fund names. The analysis done by
these parties will make it easier for all investors to determine
whether or not a fund's investment strategy is consistent with their
goals and preferences. Accordingly, whether directly or through third
parties, the final new disclosure on Form N-PORT is intended to benefit
all fund investors.
---------------------------------------------------------------------------

    \512\ As discussed above, the final amendments to Form N-PORT,
like all Form N-PORT reporting requirements, apply to registered
investment companies other than money market funds. BDCs are not
subject to any Form N-PORT reporting requirements and thus would not
be subject to the final amendments to Form N-PORT. See supra
footnote 370.
---------------------------------------------------------------------------

    Recordkeeping. The final amendments require funds to maintain
certain records if the fund is required to adopt an 80% investment
policy.\513\ While the amendments do not prescribe the particular form
of documentation required to be maintained, funds generally should
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. These requirements will provide our
staff, and a fund's compliance personnel, the ability to evaluate the
fund's compliance with the proposed amendments and thereby will benefit
investors.
---------------------------------------------------------------------------

    \513\ See final rule 35d-1(b)(3). The recordkeeping requirements
will apply to UITs only at the time of initial deposit, and with
respect to any notice sent to shareholders.
---------------------------------------------------------------------------

    Notice Requirement. The final amendments also protect investors by
modifying the current notice requirements when a fund chooses to change
its investment policy. The final amendments are designed to specify
further the content and delivery of the notice, and address more
directly the needs of investors who elect electronic delivery. The rule
change benefits shareholders by requiring more prominent notice, and by
requiring notice of both policy changes and corresponding name changes.
This is intended to help ensure that investors are aware of any name
and/or policy change, including to help prevent confusion when
investors begin receiving fund materials referring to the new name. The
rule change also benefits funds by expressly permitting use of email
for notices and by permitting paper notices to be bundled with other
shareholder correspondence. These changes could result in cost savings
for funds that may be passed on to investors.
2. Costs
    We believe that compliance costs associated with the final
amendments, particularly those that expand the current scope of the
names rule or create new requirements, would vary based on a fund's
current practices with respect to adopting policies to invest a
particular percentage of fund assets in investments that have, or whose
issuers have particular characteristics. We assume that certain funds'
current investment policies may already be in line with many of the
final rule's requirements or could be readily conformed without
material change. For example, as discussed in section IV.C.3 above, a
review of fund filings suggests that approximately 7% of funds have
investment policies that cover at least 80% of investment assets but
are not required to do so under the current names rule. Over 80% of
these funds would be newly scoped into the rule. Since we also estimate
that 16% of funds will be newly subject to the rule, this means that
roughly one third of funds that will be newly subject to an 80%
investment policy requirement already have an 80% investment policy,
though the exact implementation of this policy may differ from that
required by the rule. Even more funds not currently scoped into the
names rule already have a minimum investment policy covering less than
80% of assets. These funds will have lower implementation costs than
they would have if they did not already have such an investment policy.
For example, these funds are likely already to track the value of their
assets on an initial and periodic basis for purposes of complying with
such policy, as well as whether a particular asset is part of the
percentage of their assets consistent with the investment policy.\514\
---------------------------------------------------------------------------

    \514\ Implementations of such existing 80% investment policies
may vary, for example with respect to the kind and frequency of the
determinations being made. Cost savings would be greater for funds
whose existing implementation can more easily be adapted to meet the
specific requirements of the final rule.
---------------------------------------------------------------------------

    We expect that funds would incur costs to review the proposed
rule's requirements and modify, as necessary, their investing
practices, policies and procedures, and recordkeeping to comply with
the proposed rule, or may decide to instead change their name. Even
though we understand that many funds, even those that are not currently
within the scope of the names rule, currently have in place practices
related to investing a certain percentage of their assets in a
particular type of assets or assets that have certain characteristics,
those practices may differ across funds and also may differ from the
proposed rule's requirements.
    Certain costs may be fixed, while other costs may vary with the
size of the fund and its investment focus. For instance, certain funds
may determine that, in furtherance of the 80% investment policy that
the rule requires, they will need to create or purchase data to track
whether selected investments are consistent with the fund's investment
focus. In certain circumstances, this cost may be relatively low and
not vary much across similar funds. For example, some growth funds may
rely on U.S. financial data when selecting fund portfolio investments.
Even if different funds use different metrics to choose their
investments, or invest in different industries, the cost of obtaining
and using their data will likely be similar across funds unless they
are able to share this cost across funds in a fund complex. Further,
the cost of aggregating and analyzing financial data is likely to be
relatively low because Generally Accepted Accounting Principles promote
consistency and comparability in reported financial information, and
because in most cases these data are

already tagged in XBRL so they can be parsed automatically. Conversely,
other growth funds may rely on other metrics or more subjective
criteria, and so the cost of creating or acquiring a dataset to track
whether selected investments are consistent with the fund's investment
focus may be higher. In general, this cost is likely to be relatively
larger for smaller funds or funds with more esoteric or bespoke
strategies.
    Similarly, the cost of data that funds will likely use to comply
with the rule may vary across funds based on the investment focus. For
example, funds with an ESG focus may face a lack of consistent and
comparable ESG information since different vendors of ESG ratings come
to different conclusions about the same investment assets. This
disparity arises from differing methodologies as well as differing
inputs. Data vendors may charge a premium for their relatively more
bespoke analysis compared to vendors of other more consistent data,
such as financial statement data. Further, some funds may integrate
multiple sources of information themselves to determine whether a
particular asset is consistent with a fund's investment focus, further
increasing the cost.
    Also, while larger funds or funds that are part of a large fund
complex may incur higher costs in absolute terms, larger funds may find
it less costly, per dollar managed, to meet the requirements of the
final amendments. For example, larger funds may have to allocate a
smaller portion of existing resources, and fund complexes may realize
economies of scale in complying with the final amendment's requirements
for several funds.
    Names Suggesting an Investment Focus. The final amendments broaden
the scope of the names rule's current 80% investment policy requirement
to also apply to fund names that include terms suggesting that the fund
focuses in investments that have, or whose issuers have, particular
characteristics.\515\ As discussed above, we estimate that this
amendment would subject an additional 2,200 funds to this
requirement.\516\ Fund registration forms currently require each fund
to include disclosure in its prospectus that describes its principal
investment strategies (including the type or types of securities in
which the fund invests or will invest principally).\517\
---------------------------------------------------------------------------

    \515\ See section II.A.1 and supra footnote 56.
    \516\ See supra footnote 495 and accompanying text.
    \517\ See, e.g., Item 9(b)(1) of Form N-1A. Instruction 2 to
Item 9(b)(1) of Form N-1A states that a fund shall, in determining
whether a strategy is a principal investment strategy, consider,
among other things, the amount of the fund's assets expected to be
committed to the strategy, the amount of the fund's assets expected
to be placed at risk by the strategy, and the likelihood of the
fund's losing some or all of those assets from implementing the
strategy. See also Item 8(2)(b) of Form N-2. Item 8(2)(b) requires
the registrant to disclose the investment objectives and policies of
the registrant that will constitute its principal portfolio emphasis
as well as how it proposes to meet its objectives, including: (1)
the types of securities in which the registrant invests or will
invest principally, and (2) the identity of any particular industry
or group of industries in which the registrant proposes to
concentrate.
---------------------------------------------------------------------------

    Some commenters projected that the costs of compliance with the
expanded scope will be substantially larger than was estimated in the
Proposing Release.\518\ Regarding the modifications of systems to
comply with the proposed amendments, one commenter suggested that
``programming and testing efforts are far more complex and time
consuming than contemplated by the Commission.'' \519\ Another stated
that ``[t]his type of compliance monitoring for an investment strategy
would be novel and potentially require substantial changes and updates
to compliance systems.'' \520\ We believe funds with names that would
be newly scoped into the names rule's 80% investment policy requirement
under the final amendments already have systems in place for monitoring
compliance with existing principal investment strategy disclosure
requirements, as these requirements predate the amendments we are
adopting and funds presumably have systems to ensure that their
investments are in line with these disclosures. Similarly, some of
these funds already have minimum percentage investment policies in
place and would have systems in place to monitor their portfolios in
compliance with these policies.\521\ As a result, we believe that most
funds with names that would be newly scoped in already have internal
systems that could be modified to assess compliance with the final
rule. Further, many fund complexes will use the same automated systems
across their funds, and so these costs could be shared across their
funds. However, funds would need to develop new, or revise existing,
recordkeeping processes as discussed below.
---------------------------------------------------------------------------

    \518\ See, e.g., J.P. Morgan Asset Management Comment Letter, T.
Rowe Comment Letter, Stradley Comment Letter.
    \519\ ICI Comment Letter.
    \520\ SIFMA AMG Comment Letter.
    \521\ See supra footnotes 419 and 469 and accompanying text.
---------------------------------------------------------------------------

    Funds with names that are not currently scoped into the 80%
investment policy requirement may face costs in the need to determine
whether a specific asset would qualify as part of a fund's 80% basket.
One commenter stated that conducting an 80% test on terms that rely on
judgment on the part of a fund manager ``could become a highly manual
process of confirming and recording the judgment of investment
professionals with respect to each holding in a fund.'' \522\ We
believe that to the extent that fund names covered by the amended rule
include terms that represent the judgment of their fund managers, the
rule could create additional compliance costs. Assessing compliance
with the 80% test for funds with such terms could be more costly
(relative to doing so for terms with more automatable criteria) as this
process is less scalable and potentially introduces more operational
risk than would similar automated compliance processes. For example,
manual entry of data is more prone to error than is an automated
system.
---------------------------------------------------------------------------

    \522\ J.P. Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    The difficulty in scaling this process was particularly highlighted
by some commenters.\523\ These commenters stated that for certain terms
used in fund names, particularly ``growth'' and ``value,'' there might
be no reliable data from a third-party vendor that would match internal
definitions.\524\ According to these commenters, the definition of
these terms and therefore the classification of certain assets may even
differ across fund managers at the same firm, so any classification
system would need to allow tags at the fund level rather than
globally.\525\ Such classification, in some of these cases, may be
difficult to automate or outsource. As a result, some classifications
may need to be done manually, with costs being incurred each time a
fund performs the classification process.
---------------------------------------------------------------------------

    \523\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
J.P. Morgan Asset Management Comment Letter.
    \524\ See, e.g., ICI Comment Letter, SIFMA AMG Comment Letter;
J.P. Morgan Asset Management Comment Letter.
    \525\ See, e.g., ICI Comment Letter, SIFMA AMG Comment Letter;
T. Rowe Comment Letter.
---------------------------------------------------------------------------

    Commenters' concerns about the scalability of this process were
based on the proposed rule, which in effect would have required funds
to engage in continual compliance testing to reassess the
characteristics of investments in a fund's 80% basket. The final
amendments are considerably less burdensome relative to the proposal in
that such a test would need to take place only quarterly, in
association with Form N-PORT reporting, or for each new investment (not
the entire portfolio) at

the time of the investment.\526\ A fund subject to the 80% investment
policy requirement that trades its entire portfolio each day would
still be required to make a daily assessment for each asset of whether
the asset belongs in a fund's 80% basket. However, funds whose
disclosure of principal investment strategies indicates that the fund
invests in assets with particular characteristics are presumably
already doing the type of analysis required for such classification at
the time of investment.\527\ The primary new burden of the amended rule
in this respect is that the analysis must be redone for each asset on a
quarterly basis. At this frequency, the classification process should
be manageable even if done manually, though we recognize that this will
be more costly for funds with names that include terms involving
managerial judgment than it will be for funds whose names evoke a
strategy where compliance testing is more easily automated.
---------------------------------------------------------------------------

    \526\ See supra section II.A.2.
    \527\ See supra footnote 486.
---------------------------------------------------------------------------

    Many commenters stated that the expanded scope will create
interpretive questions.\528\ For example, funds that were not
previously required to have an 80% investment policy will need to
evaluate whether their current fund name would subject them to this
requirement. In addition, some commenters were concerned that including
more ``subjective'' terms into the scope of the rule would engender
``second-guessing'' by the Commission or staff on a fund's choice of
definition of these key terms.\529\ The amended rule will require that
these definitions comport with their plain English meaning or
established industry use.\530\ So to the extent that a term is
relatively more subjective, funds will have discretion to define it
consistent with the fund's investment strategy. Regardless of the
chosen definition, a fund manager must make investments by applying
specific criteria set forth in the fund's prospectus \531\ related to
the fund's investment focus or strategies such as ``growth'' or
``value.'' \532\ The investment decision is guided by definitions and
methodologies prescribed in advance and publicized by the fund,
mitigating the concern expressed by the commenters. Nonetheless, to the
extent that ``subjective'' terms in a fund's name cause the fund's
managers to be concerned about ``second-guessing,'' funds may spend
more resources to comply with the final rule.
---------------------------------------------------------------------------

    \528\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Stradley Comment Letter.
    \529\ See, e.g., ICI Comment Letter; CCMC Comment Letter;
Dechert Comment Letter.
    \530\ See supra footnote 341 and accompanying text.
    \531\ See Forms N-1A, N-2, and N-8B-2, as amended.
    \532\ See final rule 35d-1(a)(2)(ii).
---------------------------------------------------------------------------

    Some commenters were concerned that wherever fund names that are
newly subject to an 80% test employ terms that are based on projections
or otherwise forward-looking metrics, the Commission might evaluate
their compliance with these terms retrospectively based on the outcomes
of the investments.\533\ For example, a fund that calls itself a
``growth'' fund, on the basis of its projection that fund assets will
grow in value, might be concerned that if those assets do not grow, its
name could be construed as misleading. However, the amended rule is
designed for funds to retain reasonable discretion in establishing
their 80% investment policies and defining the terms in their names.
This discretion includes the use of forward-looking metrics and models
in their selection process, just as is allowed under the baseline in
certain circumstances.
---------------------------------------------------------------------------

    \533\ See, e.g., SIFMA AMG Comment Letter; J.P. Morgan Asset
Management Comment Letter.
---------------------------------------------------------------------------

    Newly scoped index funds may also face higher costs of compliance
than those already subject to the rule. One commenter was concerned
that ``managers of index funds could be required to develop new
fundamental analysis capabilities to evaluate each index constituent
against the index name,'' and this sentiment was shared by several
commenters.\534\ Commenters also suggested that an index fund's
tracking error could increase as a result, which could also frustrate
investor expectations.\535\ As is true under the baseline, index funds
should generally adopt and implement written policies and procedures
reasonably designed to ensure that the names of their selected indexes
are not materially misleading themselves.\536\ However, for terms whose
meanings may vary across people or time, such as ``growth'' or
``value,'' we acknowledge that funds may incur a higher cost for
determining that the indexes they rely on are not themselves
misleading.
---------------------------------------------------------------------------

    \534\ WisdomTree Comment Letter. But see also, e.g., Fidelity
Comment Letter; Dechert Comment Letter; SIFMA AMG Comment Letter.
    \535\ See supra footnote 319 and accompanying text.
    \536\ See supra section II.A.5.
---------------------------------------------------------------------------

    Similarly, funds may not take a position that would undermine the
investment focus suggested by the fund's name, even if such a position
contributes less than 20% of the fund's total assets. Ensuring that a
fund's investments are not inconsistent with its name in this way is
likely to be costlier for funds that are newly scoped into the rule
than it is for those already subject to an 80% investment policy
requirement. In response to an example in the 2022 Proposal, some
commenters highlighted what they characterized as the subjective nature
of deciding whether an investment is ``antithetical'' to the
description of the fund, particularly when no specific prohibitions are
included in the fund's name.\537\ We agree that such a determination of
whether 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 may be more difficult to make in some
cases and accordingly come with higher costs of compliance.
---------------------------------------------------------------------------

    \537\ See, e.g., ICI Comment Letter; J.P. Morgan Asset
Management Comment Letter; Capital Group Comment Letter. This
release does not incorporate the ``antithetical investment''
language that the 2022 Proposal included, as final rule 35d-1(c) 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.
---------------------------------------------------------------------------

    Finally, to the extent that funds choose to rename their funds in
more generic ways to avoid having to comply with the amended names
rule, investors may face increased search costs in determining their
optimal fund allocation. However, this cost will exist only to the
extent that those funds who choose to change their name previously had
names that provided useful information to investors for their
investment allocation decision.
    Temporary Departures. The final amendments would retain a fund's
ability to depart temporarily from the 80% investment requirement. The
final amendments require that a fund must invest in accordance with its
80% investment policy under normal circumstances. Funds must reassess
their portfolio assets' inclusion in the fund's 80% basket at least
quarterly. In instances where a fund identifies that its portfolio is
out of compliance with the 80% investment requirement, the fund must
make future investments in a manner that would bring the fund into
compliance as soon as reasonably practicable and in all circumstances
within 90 consecutive days of the fund's identification that the
requirements are no longer met. If the fund, in other-than-normal
circumstances, invests in a manner not consistent with the 80%
investment policy, the fund is not required to come back into
compliance as soon as reasonably practicable, but

must come back into compliance within 90 consecutive days of the
initial departure. Funds are permitted under the final rules to
temporarily depart from the 80% investment requirement in connection
with a reorganization (for which the final rule does not specify a
required time frame for accompanying temporary departures) or a fund
launch (departure not to exceed the period of 180 consecutive days) or
when a notice of a change in a fund's policy in certain circumstances
has been provided to fund shareholders.
    This change could create a cost for investors under circumstances
where departing from the 80% investment requirement for an extended
period of time would be beneficial to the fund and its shareholders,
and such a departure would have been allowed absent the adopted
amendments. For example, investors may experience lower returns if
funds are forced to sell assets at depressed prices, or in a tax-
disadvantaged manner, or if funds are forced to purchase less liquid
securities in a compressed timeframe, which could drive up their cost
for those securities. Also, to the extent that funds' assets become
less liquid during a market crisis, funds' ability to manage liquidity
risk may be affected as well as funds' ability to meet redemptions.
    These costs are generally mitigated by the length of the period of
time for resolving departures from investment compliance. In many
circumstances, 90 days is significantly longer than we understand would
be required for a fund to remedy departures from its 80% investment
policy.\538\ This cost is also mitigated by flexibility in the amended
rule for funds to instigate a name change as an alternative to
returning to compliance.
---------------------------------------------------------------------------

    \538\ See, e.g., supra footnote 207 and accompanying text.
---------------------------------------------------------------------------

    When a fund manager considers purposely departing from the fund's
80% investment policy, the manager must weigh the risks of bearing
these costs against the potential benefit. Accordingly, these costs
should arise only when the likelihood of bearing such costs is small
relative to the upside of the departure. More often, the cost of this
aspect of the rule will be reflected in any unearned excess return that
the fund does not earn because it chose not to depart from its
investment focus or tax treatment when it otherwise would have, absent
the amended rule.
    To the extent that funds do not already have systems in place for
doing so, they would have to set up systems to identify departures from
the 80% investment requirement during quarterly testing, and systems to
monitor the time limits for returning to the 80% investment requirement
after a temporary departure. This will entail additional costs.
    Many commenters were concerned that a UIT would be required to
monitor and change its assets in a case where its assets passively
drifted such that they would no longer be consistent with the fund's
80% investment policy.\539\ The final rule clarifies that UITs are
subject to the 80% investment policy requirement at the time of initial
deposit, but not on an ongoing basis. As a result, the costs associated
with ongoing monitoring of portfolio investments for consistency with
the fund's 80% investment policy discussed for other funds above will
not be present for UITs.
---------------------------------------------------------------------------

    \539\ See, e.g., SIFMA AMG Comment Letter; Invesco Comment
Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    The final rule's approach to temporary departures differs from that
in the Proposing Release, which would have enumerated four specific
cases in which funds would be allowed to depart temporarily from
compliance with the 80% test for a period of, generally, no longer than
30 days. Many commenters interpreted this as requiring daily or
otherwise constant monitoring of their assets in regard to the 80%
test, even when they were not trading.\540\ The final amendments
mitigate this concern by requiring a fund to review its portfolio
investments on a quarterly basis to determine whether the fund's
investments continue to be consistent with its 80% investment policy.
Many commenters were also concerned with the enumerated exceptions to
compliance with the 80% requirement and preferred the current standard
in which compliance was required ``under normal circumstances.'' \541\
Some commenters wanted more specific exceptions to be added if the
final rule were to include a prescribed list.\542\ Still more
commenters were concerned that unforeseeable events might occur which
would reasonably cause managers and investors to agree that a temporary
change in investment focus was warranted.\543\ We agree that
enumerating the circumstances in which a fund could deviate from their
80% investment policy would have provided significantly less
flexibility to fund managers. Under the final rule the loss of
flexibility is significantly less than under the proposed rule,
relative to the baseline. A fund's use of its flexibility in accordance
with investors' preferences will also promote capital allocation
efficiency. Conversely, compared to the proposal, the final rule may be
less effective at protecting investors to the extent that fund managers
do not effectively manage their funds to the benefit of the fund's
investors (for example, because fund managers do not fully internalize
investors' preferences over risk or diversification benefits). However,
we intend that the newly established timeline for returning to
compliance with an 80% investment policy will limit this potential
harm.
---------------------------------------------------------------------------

    \540\ See, e.g., J.P. Morgan Asset Management Comment Letter; T.
Rowe Comment Letter; ICI Comment Letter.
    \541\ See, e.g., Dimensional Comment Letter; Seward & Kissel
Comment Letter; Nasdaq Comment Letter.
    \542\ See, e.g., ICI Comment Letter; Dechert Comment Letter;
SIFMA AMG Comment Letter.
    \543\ See, e.g., SIFMA AMG Comment Letter; Dimensional Comment
Letter; J.P. Morgan Asset Management Comment Letter.
---------------------------------------------------------------------------

    Considerations Regarding Derivatives in Assessing Names Rule
Compliance. The final amendments address the valuation of derivatives
instruments for purposes of determining the fund's compliance with its
80% investment policy requirement. Specifically, the final amendments
require that, in calculating its assets for purposes of names rule
compliance, a fund must generally use the notional amount \544\ of each
derivatives instrument, with certain adjustments as discussed above,
and may reduce the value of its assets by excluding cash, cash
equivalents, and certain Treasury securities up to the notional amounts
of the derivatives instrument(s) and the value of asset(s) sold short
and by excluding closed-out derivative positions.\545\ An exception to
this requirement is the use of currency derivatives associated with one
or more specific foreign-currency-denominated equity or fixed-income
investments held by the fund, that are entered into and maintained by
the fund for hedging purposes, which must be excluded.\546\ The final
rule also specifies that a fund may include in its 80% basket
derivatives that provide investment exposure to one or more of the
market risk factors associated with investments suggested by the fund's
name.\547\
---------------------------------------------------------------------------

    \544\ In the case of a physical short, a fund would use the
value of the asset sold short.
    \545\ See final rule 35d-1(g).
    \546\ See supra discussion following footnote 234.
    \547\ See final rule 35d-1(b)(2).
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    Our understanding is that funds that use derivatives typically
calculate notional amounts for purposes other than names rule
compliance, and that such a calculation, if not already performed,
would not be burdensome.\548\ As such, we do not

anticipate that there will be additional costs associated with
calculating notional values. While some funds may not currently
calculate one or more of the adjustments to notional value required by
the rule, we do not expect that doing so will entail significant costs.
The inputs required for these calculations are widely available,
including on most platforms that allow for trading these derivatives,
and they can be automated with widely used and accessible software. The
level of sophistication required to implement these calculations is
significantly lower than that needed to manage the risk of the
derivatives instruments in question. We understand, however, that
meeting the requirements of this aspect of the final amendments could
require reprogramming of internal systems for funds not currently
subject to the names rule, and reprogramming of existing systems used
for monitoring names rule compliance by funds currently subject to the
names rule. However, we anticipate that the marginal contributions to
cost of calculating the adjusted notional value will be minimal given
that these same systems will need to be updated to comply with the rule
generally.
---------------------------------------------------------------------------

    \548\ For example, rule 18f-4 includes an exception from certain
of the rule's requirements that requires the calculation of notional
amounts. More generally, however, funds that use derivatives
typically consider notional amounts, and not solely their market
value, when entering into derivatives contracts or when considering
the economic effects of a derivatives contract within an existing
portfolio.
---------------------------------------------------------------------------

    The goal of the treatment of derivatives under the final rule is to
align the value of the derivative being used for compliance with the
80% requirement with the exposure that this derivative provides to
investors. There are inherent trade-offs in achieving this goal,
however, because derivatives instruments are so varied in their
purposes and details of execution. On the one hand, a uniform standard
has the danger of being inappropriate in certain cases that could alter
the incentives for its use. On the other hand, allowing greater
flexibility runs the risk of being too permissive in a way which could
undermine the purpose of this aspect of the amended rule.
    Many commenters were particularly concerned with the costs
associated with a uniform derivatives valuation approach that limits
their flexibility to choose a valuation that would be most appropriate.
Some of these commenters suggested alternatives, such as additional
flexibility to decide whether to incorporate the required adjustments
or whether the notional value or some other value would best represent
a particular derivative's exposure, which they stated could alleviate
these costs.\549\ One particular concern shared by many commenters was
that derivatives used to hedge risk exposures unrelated to the name of
the fund could cause the fund to fail an 80% test.\550\ As discussed
above, the final amendments require currency derivatives used as a
hedge to be excluded from the 80% test calculation, and this approach
addresses certain of the concerns commenters raised. However, this
exception is limited to only currency hedges, and there are other
possible hedges (such as those on interest rates) whose notional values
will remain in the denominator, and not the numerator, of an 80% test
calculation. As a result, the final amendments may disincentivize some
funds from using derivatives to hedge risks other than those related to
currency risk in the part of a fund's portfolio that is not used to
satisfy the 80% requirement.
---------------------------------------------------------------------------

    \549\ See, e.g., ICI Comment Letter; T. Rowe Comment Letter;
Dechert Comment Letter.
    \550\ See, e.g., Dechert Comment Letter; Fidelity Comment
Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    The final rule will also allow funds to include derivatives in
their 80% basket for the purposes of complying with an 80% investment
policy test so long as those derivatives provide exposure to one or
more risk factors associated with the name. While in most cases, this
will more accurately account for the derivative's effect on a
portfolio's exposure to risks associated with the name, there may be
instances in which this will overstate the amount of exposure a
derivative creates. For example, in certain cases, a derivative may be
modifying the risk of another asset in the portfolio rather than
creating a new exposure. It may be possible for a fund to count both
the derivative (at its notional value) and the underlying asset in the
80% basket for the purposes of compliance with an 80% test, even though
a more useful valuation might rightfully treat these as a single asset
for the purposes of representing risk exposures. This double counting
could, in these instances, make the 80% test more lenient than
intended. To the extent that this reduces the investor protection
intended in the rule, this would create a cost to investors. This cost
is mitigated by the rule's codification of the effect of compliance
with an 80% investment policy since a fund's name may still be
misleading even if the fund technically complies with the 80%
investment policy requirement.\551\
---------------------------------------------------------------------------

    \551\ See supra section II.A.5.
---------------------------------------------------------------------------

    Unlisted Registered Closed-End Funds and BDCs. Under the current
rule, unless a fund's name suggests that it is a tax-exempt fund, an
unlisted registered closed-end fund's or BDC's 80% investment policy
must either be a fundamental policy or subject to a requirement in the
rule to provide shareholders 60-days' advance notice of any change in
the policy. Under the final rule amendments, unlisted registered
closed-end funds and BDCs will not be permitted to change their 80%
investment policies without shareholder approval unless, among other
things, the fund provides a 60-day notice and a tender or repurchase
offer that is not oversubscribed.\552\
---------------------------------------------------------------------------

    \552\ This will only impact existing funds if they currently
rely on a 60-day notice period, since funds whose 80% investment
policy is a fundamental policy already require a shareholder vote to
change the policy.
---------------------------------------------------------------------------

    Funds that currently rely on a 60-day notice period thus have two
options for complying with the final amendments. Some funds may choose
to seek shareholder approval to change their 80% investment policy.
These funds would incur costs including legal and accounting fees
incurred in connection with preparing proxy materials, the costs of
printing and mailing the proxy materials, the cost of an external proxy
solicitor, if one is used, and the cost of holding an annual or special
meeting of the shareholders.\553\
---------------------------------------------------------------------------

    \553\ In 2019, the ICI surveyed its member firms with respect to
the costs of obtaining shareholder approval for proposals requiring
funds to obtain a quorum of greater than 50% to approve. The ICI
reports that 64 member firms with over $18 trillion of US-registered
fund assets responded. Cost estimates for 145 separate campaigns
totaled $373 million. The ICI also reports that: (1) 22 campaigns
had costs greater than, or equal to, $1 million, (2) eight had costs
greater than or equal to $10 million, and (3) the most expensive
campaign was $107 million. The ICI report does not disaggregate data
on the cost of obtaining shareholder approval for changes to a
fund's fundamental investment policies. See Comment Letter of the
Investment Company Institute regarding the SEC Roundtable on the
Proxy Process (File No. 4-725) (Dec. 23, 2019), available at https://www.sec.gov/comments/4-725/4725-6580709-201124.pdf. In a 2002
rulemaking related to fund mergers, we estimated the cost of
obtaining shareholder approval to be $75,000. We did not receive any
comments on that estimate. See Investment Company Mergers,
Investment Company Act Release No. 25666 (July 18, 2002). Adjusting
for inflation, $75,000 at the beginning of 2002 would imply a cost
of approximately $128,800 as of May 2023. See Bureau of Labor
Statistics CPI Inflation Calculator, available at https://www.bls.gov/data/inflation_calculator.htm. While this estimate is
significantly lower than the average estimate from ICI, the
distribution of costs in their sample is heavily skewed by a
relatively small number of very expensive campaigns. The Commission
estimate is more analogous to the median of that distribution.
Further, the kinds of votes included in the ICI survey are much
broader than those considered here and contain votes on more
contentious issues over which funds may spend more resources on
marketing and other costs.
---------------------------------------------------------------------------

    Other funds may instead opt to make a repurchase or tender offer if
doing so

is cheaper or otherwise more advantageous to the fund's sponsor than
holding a shareholder vote. The costs incurred would include legal and
accounting fees associated with preparing offer documents and filing
documents with the Commission such as Schedule TO, the cost of
disseminating offer materials and information, and underwriting costs.
There may also be costs associated with the fund needing to fulfill the
offer and thus no longer having an adequate capital stock to take
advantage of some investment opportunities. Some commenters noted that
many of the funds subject to this requirement already make periodic
tender or repurchase offers and so allowing this alternative would
significantly reduce their costs.\554\ For such funds, if the proposed
change in the investment policy would not create an oversubscription to
their regular tender or repurchase offer, the cost of compliance may be
minimal. Exercising this option will be more costly for funds that are
not already regularly providing tender or repurchase offers.\555\
---------------------------------------------------------------------------

    \554\ See, e.g., Stradley Comment Letter; Dechert Comment
Letter; ICI Comment Letter.
    \555\ We are unable to quantify the total of these costs because
we do not have data on the magnitude of many of the sources of these
costs, such as underwriting costs, which are privately negotiated.
Further, these costs are likely to vary largely depending on the
specific circumstances of the fund. However, the SEC has previously
estimated the PRA burden of a Schedule TO at approximately $9,000
per response. See Filing Fee Disclosure and Payment Methods
Modernization, Investment Company Act Release No. 34396 (Oct. 13,
2021) [86 FR 70166 (Dec. 9, 2021)].
---------------------------------------------------------------------------

    The cost of the final rule will therefore be the difference between
the cost of either seeking shareholder approval or making a tender or
repurchase offer and the cost of issuing notice under the baseline.
Instead of incurring these costs some funds may instead choose simply
not to change their policy when faced with these costs. The value of
any foregone investment opportunities that would have benefited
investors if the fund had changed its investment policy would be a cost
of the final rule.
    The Proposing Release would have required that 80% investment
policies for unlisted registered closed-end funds and BDCs be
fundamental policies, with no alternative. While unlisted registered
closed-end funds and BDCs generally offer a periodic repurchase tender
offer, these offers are limited and unlikely to provide recourse to
investors in the case where a large number of investors are
dissatisfied with the change. Even discretionary repurchases as
permitted under 17 CFR 270.23c-3(c) are generally limited to 25% of the
common stock outstanding.\556\ This amount could be too low to address
the investor protection the rule is designed to address. In the
Proposing Release, we were concerned that a large tender offer for all,
or substantially all, of the outstanding shares could prove even more
costly to these funds than a shareholder vote and could result in the
fund's liquidation.
---------------------------------------------------------------------------

    \556\ See 17 CFR 270.23c-3(a)(3), (b)(5), and (c).
---------------------------------------------------------------------------

    Some commenters highlighted the costs of the proposed
approach,\557\ and stated that an alternative in which investors were
able to liquidate would be valuable.\558\ We believe that the costs of
the final rule are lower than those of the proposed rule, since these
funds may now, instead, offer a repurchase opportunity, and funds can
choose the lower-cost alternative.
---------------------------------------------------------------------------

    \557\ See, e.g., Invesco Comment Letter; Stradley Comment
Letter; SIFMA AMG Comment Letter.
    \558\ See, e.g., ICI Comment Letter; Simpson Thacher Comment
Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    Effect of Compliance with an 80% Investment Policy. The amended
rule states that a fund's name may be materially deceptive or
misleading under section 35(d) even if the fund adopts an 80%
investment policy and otherwise complies with the rule's requirement to
adopt and implement the policy.\559\ The Commission has previously
stated that the names rule's 80% investment policy requirement is not
intended to create a safe harbor for fund names, and the final
amendments will codify this view to make it clear.\560\ Because the
provision will codify an existing Commission position that that 80%
investment policy is not intended to create a safe harbor for fund
names and restate the existing scope and effect of section 35(d), we do
not anticipate that the provision creates new costs.
---------------------------------------------------------------------------

    \559\ Final rule 35d-1(c).
    \560\ See Proposing Release, supra footnote 2, at n.101.
---------------------------------------------------------------------------

    Some commenters stated that they believed that this provision
created new requirements that were not clear from previous statements
by the Commission. These comments largely addressed a fund's
responsibilities to monitor the indexes that they track \561\ and
relatively small positions that commenters questioned whether, in
response to an example in the 2022 Proposal, would be ``antithetical''
to those suggested by a fund's name.\562\ To the extent that funds
comply with the final rules in a way that may be costlier for names
with certain terms, this represents a cost of the rule's scope
expansion, and not from a separate provision under the final
amendments.\563\
---------------------------------------------------------------------------

    \561\ See, e.g., Fidelity Comment Letter; Dechert Comment
Letter; SIFMA Comment Letter.
    \562\ See, e.g., ICI Comment Letter; J.P. Morgan Asset
Management Comment Letter; Capital Group Comment Letter; see also
supra footnote 537.
    \563\ See supra the text following footnote 525 through the text
accompanying footnote 537 for a discussion of these costs.
---------------------------------------------------------------------------

    Prospectus Disclosure. The final amendments to funds' registration
forms--specifically, Form N-1A, Form N-2, Form N-8B-2, and Form S-6--
require each fund that is required to adopt and implement an 80%
investment policy to 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 terms describe, if any.\564\ We
received one comment stating that the costs of prospectus disclosure
were underestimated.\565\
---------------------------------------------------------------------------

    \564\ See instruction to Item 4(a)(1) of Form N-1A; instruction
to Item 9(b)(1) of Form N-1A; instruction 2 to Item 8(2) of Form N-
2; instruction 2 to Item 11 of Form N-8B-2, and instruction 1(a) of
the Instructions as to the Prospectus of Form S-6. Based on the
results of the PRA analysis provided in Tables 2, 3, 4, and 5 infra
it is estimated that the annual internal costs, plus initial costs
annualized over a 3-year period, attributable to information
collection requirements associated with this aspect of the final
amendments will be $53,694,312. The annual external costs are
estimated to be $12,453,730. However, as we understand that
including the prospectus disclosure that the final amendments would
require is currently a common practice, the PRA estimates likely
overestimate the costs associated with the final amendments for
those funds whose disclosure is currently in line with the
disclosure the amendments would require. See infra section V.C.
    \565\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    The final amendments require funds to tag most of the new
prospectus disclosure in Inline XBRL.\566\ This will impose on Form N-
1A and Form N-2 filers the cost of adding new data tags for the new
disclosures on Form N-1A and Form N-2, but will not include any initial
implementation costs associated with structuring data, because those
forms are already subject to structuring requirements. Thus,
notwithstanding one commenter's statement that the costs associated
with Inline XBRL tagging as proposed would be significant, we do not
believe the Inline

XBRL tagging requirement would impose significant costs on Form N-1A
and Form N-2 filers.\567\ For UITs and their sponsors, as noted by
another commenter, the cost of adding new Inline XBRL tags for the new
disclosures on Form N-8B-2 and Form S-6 is more likely to entail
initial implementation costs because UITs are not currently subject to
Inline XBRL requirements.\568\ As discussed in further detail below,
notwithstanding this commenter's recommendation to except UITs from
Inline XBRL tagging requirements, we are including all funds (including
UITs) within the scope of tagging requirements under the final
rule.\569\
---------------------------------------------------------------------------

    \566\ See supra footnote 508. Based on the results of the PRA
analysis provided in Table 7 infra it is estimated that the ongoing
external costs attributable to Inline XBRL tagging requirements will
be $749,550 for Form N-1A, Form N-2, Form N-8B-2 and Form S-6
filers, and the ongoing internal costs, plus initial costs
annualized over a 3-year period, will be $1,562,678 for those
filers. Form N-8B-2 and Form S-6 filers (i.e., UITs) are not subject
to any current Inline XBRL requirements (or Inline XBRL requirements
with compliance dates in the future) and will thus incur initial
implementation costs associated with structuring disclosures in
Inline XBRL (such as the cost of training in-house staff to prepare
filings in Inline XBRL, and the cost to license Inline XBRL filing
preparation software from vendors). For Form N-1A and Form N-2
filers, who are subject to current Inline XBRL requirements, the PRA
estimate does not incorporate any such implementation costs.
    \567\ See SIFMA Comment Letter.
    \568\ See supra text accompanying footnote 337; Invesco Comment
Letter.
    \569\ See infra section IV.E.4.
---------------------------------------------------------------------------

    Plain English/Established Industry Use Requirement. For funds that
are required to adopt an 80% investment policy, the final amendments
would require that any terms used in the fund's name that suggest
either an investment focus, or that the fund is a tax-exempt fund, must
be consistent with those terms' plain English meaning or established
industry use.\570\ To the extent that funds are currently using terms
in their names that are not consistent with either, funds would bear
costs to either change their name or their investment policy so that
they can define the terms in such a way that would comply with this
provision. These costs will be similar to those described above for
funds changing their name or investment policies and practices for
other reasons.
---------------------------------------------------------------------------

    \570\ See supra footnote 341 and accompanying text.
---------------------------------------------------------------------------

    New Form N-PORT Reporting Requirements. The final amendments
include new Form N-PORT reporting items regarding the 80% investment
policy that a fund will be required to adopt in compliance with the
names rule.\571\ As proposed, the final rule requires 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; (2) the value of the fund's 80% basket, as a
percentage of the value of the fund's assets. The final amendments also
add a new reporting item, in which funds will report the definitions of
terms used in the fund's name including specific criteria a fund uses
to select the investments the term describes, if any.\572\
---------------------------------------------------------------------------

    \571\ Based on the results of the PRA analysis provided in Table
6, it is estimated that the ongoing annual internal costs, plus
initial costs annualized over a 3-year period, attributable to
information collection requirements for reporting about an 80%
investment policy are $8,059,912. The annual external costs are
estimated to be $11,216,380.
    \572\ Based on the results of the PRA analysis provided in Table
6, it is estimated that the ongoing annual internal costs, plus
initial costs annualized over a 3-year period, attributable to
information collection requirements for investments to be included
in a fund's 80% basket are $56,419,384. The annual external costs
are estimated to be $11,216,380.
---------------------------------------------------------------------------

    Under the baseline, funds covered by the rule likely already
tracked whether a particular asset was a part of the fund's 80% basket,
as well as the total value of the 80% basket as a share of the total
assets of the fund, as an aspect of their compliance practices.
However, we recognize that reporting these items on Form N-PORT could
necessitate periodic reassessments that might not otherwise occur. It
may also require modifications to compliance systems and the use of
third-party service providers.
    Although the final amendments will not increase the frequency of
public disclosure, they will increase the amount of information
available about certain funds' portfolio investments. Form N-PORT data,
however, is made public only for the third month of each quarter, and
on a 60-day delayed basis. We do not believe that quarterly public
disclosure with a 60-day lag will have a significant, additional
competitive impact.
    The proposed rule required reporting information for each month of
the quarter, while the final rule instead requires reporting
information only for the last day of the third month of the quarter.
The proposed rule also would have required certain information to be
reported on Form N-PORT that is not included in the final Form N-PORT
amendments (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), although the final reporting requirements
include a new reporting item that was not included in the proposal (the
definitions of terms used in the fund's name and criteria for selecting
the investments the name describes, if any). The final rule should, on
balance, have lower costs compared to the proposal because of the
reduced amount of information reported on net, and efficiency gains in
aligning a fund's compliance review with its reporting
obligations.\573\
---------------------------------------------------------------------------

    \573\ See supra section II.E.
---------------------------------------------------------------------------

    The compliance cost associated with the new Form N-PORT reporting
requirements includes the cost of adding new data tags for the newly
reported items.\574\ It does not include any initial implementation
costs associated with structuring data, because the form is already
subject to structuring requirements.
---------------------------------------------------------------------------

    \574\ See supra footnote 571.
---------------------------------------------------------------------------

    Recordkeeping. The final rule requires funds to maintain certain
records if the fund is required to adopt an 80% investment policy.\575\
The final rule does not prescribe the particular form of documentation
required to be maintained but would instead provide flexibility in how
a fund documents the information delineated in the recordkeeping
requirements. However, a fund that is subject to the requirement to
adopt an 80% investment policy generally should 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.\576\
---------------------------------------------------------------------------

    \575\ See final rule 35d-1(b)(3). The recordkeeping requirements
will apply to UITs only at the time of initial deposit, and with
respect to any notice sent to shareholders.
    \576\ Based on the results of the PRA analysis provided in Table
1, it is estimated that the internal annual costs, plus initial
costs annualized over a 3-year period, attributable to recordkeeping
requirements would be $30,450 per fund, with an additional $565 of
external annual costs.
---------------------------------------------------------------------------

    We anticipate that much of the recordkeeping required in this rule
can be at least partially automated for most funds.\577\ For example,
we anticipate that records relating to the value of the fund's 80%
basket and whether a particular investment is included in that basket
can be automated for most funds, though for some funds this process may
necessitate more manual steps as outlined above. For those records that
can be automated, we believe that the marginal contribution to the
costs of automating these systems above and beyond those which would be
required to otherwise comply with the rule are relatively small, since
the systems that retain this information will be similar to those
necessary to ensure compliance at the time of investment or on a
quarterly reassessment. We recognize, however, that some records, such
as those documenting the reasons for any departures from the 80%
investment policy, are unlikely to be easily automated.
---------------------------------------------------------------------------

    \577\ See supra footnote 419 and accompanying text.
---------------------------------------------------------------------------

    The final rule differs from the proposed amended rule in ways that
may reduce costs in comparison to the proposal. First, under the final
amendments funds are required to reassess the characteristics of
individual assets on only a quarterly rather than ongoing basis. Since
it may be difficult for some funds to fully automate the creation of a
record with the basis for an asset's inclusion in the 80% basket,

particularly if its 80% investment policy relies on managerial
judgment, this change could substantially lower the cost. However, to
the extent that funds hold particular assets for less than two
consecutive days, this change will not provide much cost mitigation
since funds are also required to keep such records at the time of
investment.
    Further, this rule as initially proposed would have additionally
required funds that are not required to adopt an 80% investment policy
to also maintain records of their analysis in that determination. Since
the final rule will omit this requirement, the cost of complying with
the rule will be lower for these funds than under the proposal.
    Notice Requirement. The names rule requires that unless the 80%
investment policy is a fundamental policy of the fund, notice must be
provided to fund shareholders of any change in the fund's 80%
investment policy.\578\ The final amendments would incorporate some
modifications to the current notice requirement that are designed to
better address the needs of shareholders who have elected electronic
delivery and to incorporate additional specificity about the content
and delivery of the notice. We do not believe that these alterations
would materially increase the cost to prepare the notice.\579\
---------------------------------------------------------------------------

    \578\ Final rule 35d-1(a)(2)(ii).
    \579\ Like the current rule, based on the results of the PRA
analysis provided in Table 1, it is estimated that the internal
annual costs, plus initial costs annualized over a 3-year period,
attributable to notice requirements would be $8,500 per fund, for
those funds providing notices. We also estimate an additional $565
in external annual costs attributable to notice requirements.
---------------------------------------------------------------------------

    Quantified Compliance Costs. We estimate that the initial costs to
establish and implement practices designed to meet the requirements of
the final amendments as described above will range from $50,000 to
$500,000 per fund, depending on the particular facts and circumstances
of the fund.\580\ We believe the costs would be closer to the lower end
of the range for funds whose current practices are more similar to the
requirements of the final rule.\581\
---------------------------------------------------------------------------

    \580\ We believe that the low end of this range is reflective of
a fund that incurs costs only to analyze the application of the
rule, or that is covered by the rule and already has practices in
place that could be readily adapted to meet the final rule's
requirements. In the latter case the fund would incur costs
associated with analyzing its current practices relative to the
final rule's requirements.
    \581\ We believe the costs would be closer to the lower end of
the range for funds that belong to large fund families because
certain aspects of the costs, such as most aspects of system
automation or the costs of reviewing rule requirements, are fixed
costs that could be spread across multiple funds.
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    The direct estimated costs of compliance are broadly attributable
to the following activities: (1) reviewing the final rule's
requirements; (2) determining whether to change a fund's name or comply
with the new requirements, as applicable; (3) developing new (or
modifying existing) practices, reporting, and recordkeeping
requirements to align with the requirements of the final rule; (4)
integrating and implementing those practices, reporting, and
recordkeeping requirements to the rest of the funds' activities; and
(5) preparing new training materials and administering training
sessions for staff in affected areas.
    The estimated range in this section is aimed at quantifying the
full direct compliance cost associated with the final amendments'
provisions. As a result, the estimates in this section encompass more
costs than do the estimates discussed below in section V for purposes
of the Paperwork Reduction Act of 1995 (``PRA''). Further, note that
the estimated range of costs above is the same as that included in the
economic analysis in the proposing release. Keeping the estimated range
the same reflects our assessment that the funds with the highest
compliance costs, such as those whose entire portfolio turns over on a
nearly daily basis, will face costs similar to those that would have
been incurred under the proposed rule. The low end of the range is
reflective of a fund that only incurs cost associated with analyzing
the requirements of the rule.
    However, the final amendments are different from the proposed
amendments in many ways that mitigate costs for most but not all funds.
Compared to the Proposing Release, we believe that the largest
reduction in cost comes from changing the provisions that would have
effectively required continual, manual monitoring of whether funds'
portfolio investments are consistent with the fund's 80% investment
policy. This is consistent with many commenters' concerns.\582\ Since
this is not required under the final rule unless all assets are traded
daily, and other changes have also been made to mitigate costs, we
believe that the typical cost for a fund to comply with the final rule
will, while still contained within the same range, be significantly
lower than the cost of compliance under the approach that the Proposing
Release described.
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    \582\ See, e.g., J.P. Morgan Asset Management Comment Letter; T.
Rowe Comment Letter; ICI Comment Letter.
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    Some funds may change their name rather than comply with the
amended rule. For these funds, we estimate that the total direct
burden, including analyzing the rule and deciding to change their name,
is a one-time cost range of $75,000 to $250,000. Funds that decide to
change their name rather than comply with the new requirements will
also incur indirect costs associated with changing fund names, which
include a potential loss in market share. However, this will translate
to a cost to investors only to the extent that there is a decrease in
efficiency resulting from investors being less able to find appropriate
funds as a result of the rule.
    Without providing specifics, some commenters requested the
Commission analyze Commission rules and proposals holistically.\583\
The Commission's economic analysis in each adopting release considers
the incremental benefits and costs for the specific rule--that is the
benefits and costs stemming from that rule compared to the baseline.
One commenter stated that the Commission should consider ``practical
realities such as the implementation timelines as well as operational
and compliance requirements.'' \584\ The Commission acknowledges that
resource limitations can lead to higher compliance costs in some cases
when two or more rules affecting the same parties have overlapping
compliance periods. In determining compliance periods, the Commission
considers the benefits of the rules as well as the costs of delayed
compliance periods and potential overlapping compliance periods.
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    \583\ See, e.g., ICI Comment Letter III (``The Commission has
issued a wide range of interconnected rule proposals . . . [that] in
the aggregate warrant further analysis by the Commission. . . . The
Commission's failure to consider the Interconnected Rules
holistically is a widespread concern among other market
participants.''); USCOC Comment Letter (urging the Commission to
``determine the cumulative impact of its regulatory agenda upon
economic activity or capital formation''). Commenters also
specifically suggested the Commission consider the interaction
between the final rule and the ESG Disclosure Proposal and/or its
proposal relating to outsourcing by investment advisers. See Dechert
Comment Letter, ICI Comment Letter, and AIC Comment Letter; see also
Outsourcing by Investment Advisers, Investment Advisers Act Release
No. 6176 (Oct. 26, 2022) [87 FR 68816 (Nov. 16, 2022)]. These
proposals have not been adopted and thus have not been considered as
part of the baseline here. To the extent those proposals are adopted
in the future, the baseline in those subsequent rulemakings will
reflect the regulatory landscape that is current at that time.
    \584\ ICI Comment Letter III. See also USCOC Comment Letter
(``Regulated entities would have to divert substantial resources to
comply with a host of new rules in a condensed time frame.'').
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    In this regard, some commenters \585\ mentioned the recent
Shareholder

Reports Final Rule \586\ and the recent Money Market Funds Final
Rule.\587\ Overlapping compliance periods for these rules may result in
economic costs for some entities that are also in the scope of the
final amendments.\588\ For the reasons discussed above, we have adopted
longer compliance periods relative to the proposal.\589\ In analyzing
the costs of this final rule relative to the proposal, we believe the
potential for heightened costs is mitigated by those longer compliance
periods. The costs from overlapping compliance periods for smaller
entities are even further mitigated by the longer compliance period for
those entities relative to the compliance period for larger entities.
Moreover, commenters raised concerns about the costs of overlapping
compliance periods in the context of the proposal and, as discussed
above, we have taken steps to reduce costs of the final rule in several
ways from the proposal.\590\
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    \585\ See, e.g., ICI Comment Letter III.
    \586\ See Tailored Shareholder Reports for Mutual Funds and
Exchange-Traded Funds; Fee Information in Investment Company
Advertisements, Investment Company Act Release No. 34731 (Oct. 26,
2022) [87 FR 72758 (Nov. 25, 2022)] (``Shareholder Reports Final
Rule''). The compliance date for those rules will be in July 2024.
Certain fund managers, such as managers to mutual funds and ETFs,
that will manage funds subject to the final rule are also generally
subject to different aspects of the Shareholder Reports Final Rule.
    \587\ See Money Market Fund Reforms; Form PF Reporting
Requirements for Large Liquidity Fund Advisers; Technical Amendments
to Form N-CSR and Form N-1A, Investment Company Act Release No.
34959 (Jul. 12, 2023) [88 FR 51404 (Aug. 3, 2023)] (``Money Market
Fund Final Rule''). The compliance dates for these rules vary
between Oct. 2023 and Oct. 2024. Certain fund managers, namely
managers to money market funds, who will be subject to the final
rule will also be subject to the Money Market Funds Final Rule.
    \588\ The Commission also considered the fact that, to the
extent recently adopted rules address matters related to those in
the final rules, the benefits of the final rules may be impacted to
the extent recently adopted rules already offer certain investor
protections or to the extent that recently adopted rules and the
final rules offer synergies. However, we do not believe that there
are significant interacting effects with recently adopted rules with
respect to benefits in this case, because recently adopted rules do
not address the same set of issues as those addressed in the final
rule.
    \589\ As discussed above, 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. See supra section II.H; see also infra section
IV.D.3.
    \590\ For example, as discussed throughout this section,
relative to the proposed rule the final rule has fewer recordkeeping
tasks, fewer items on Form N-PORT, and removes the need for daily
assessments of portfolio compliance with an 80% investment policy
for assets that are not actively traded. See supra section IV.D.2.
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    As a result, we believe that for both larger and smaller entities,
any higher costs due to overlapping compliance periods raised in the
context of the proposal may generally be mitigated under the final
rules. We therefore do not believe that the overlap between the final
rules, the Shareholder Reports Final Rule, and the Money Market Funds
Final Rule will significantly increase the compliance costs of the
final rule for small or large entities.
3. Effects on Efficiency, Competition and Capital Formation
    To the extent the final amendments will help ensure that fund names
are more appropriately representative of a fund's investment focus, we
predict that investors will benefit. Developing a dollar figure for
this predicted benefit is complex, however. We do not observe
investors' decision-making and resources expended in the management of
their investment portfolio, nor do we observe the cost to investors
from being invested in a fund that does not match their preferences. To
the extent fund names would be more appropriately representative of the
fund investment focus under the final amendments and to the extent
those more appropriately representative fund names will allow investors
to more easily select funds that better match their preferences,
however, we would expect the efficiency of investment to increase.
Conversely, if, as a result of the final rules, some funds change their
names and investment policies in ways that lead to less efficient
matching between funds and some investors or increase search costs for
some investors, capital allocation efficiency may decrease. For
example, some funds may decide to use more generic names so as not to
convey an investment focus with their name. If these funds previously
had names that conveyed information that investors found more useful,
then investors will either face higher costs in finding the funds best
suited to their goals, or choose funds less tailored to those goals.
    Additionally, the final amendments may disincentivize some funds
from investing in assets with characteristics that do not readily lend
themselves to popular investment focuses and incentivize investment in
assets that do. Depending on whether any such change aligns with the
preferences of investors or runs counter to their preferences, capital
allocation efficiency may increase or decrease.
    To the extent the final amendments increase efficiency of
investment in the fund market, then we may observe a change in
investment in funds. For example, if there are investors who currently
do not invest in certain funds (or invest less than they would have)
because they lack confidence that funds' names accurately convey funds'
investment focuses, then to the extent the final amendments lower those
costs and enhance investor protections, we would expect to observe more
investors entering the funds market.\591\ The increased demand for
securities could, in turn, facilitate capital formation. We note,
however, that to the extent increased investment in funds reflects
substitution from other investments, the effect on capital formation
would be attenuated.
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    \591\ For example, by decreasing potential greenwashing
concerns, the final amendments, in turn, may increase investor
confidence in selecting funds with names implying an ESG strategy
and increase capital formation among ESG issuers.
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    More investors entering the funds market could also increase
competition, to the extent that competition in a market is related to
the size of the market. The final amendments may affect competition
through an additional channel: certain funds may have established
reputations for making investments consistent with the investment focus
the fund's name suggests. Investors wishing to invest in funds with
specific investment focuses may have greater confidence investing in
funds with established reputations for investing in a way consistent
with the investment focus the fund's name suggests.\592\ There may be
investors who do not invest in funds lacking established reputations
for making investments consistent with the focuses their names suggest
(or invest less than they would have) because those investors are less
confident that such funds will make investments consistent with their
names. We would expect the investor protections offered by the final
amendments, which are designed to ensure that funds' names accurately
convey funds' investment focuses, could enhance the ability of funds
without established reputations to compete with those funds with
established reputations. This could, in turn, lead to increased
investment for funds without established reputations.\593\
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    \592\ Investors may believe that these funds have an incentive
to protect the value of their reputations by continuing to invest in
ways consistent with their names. See Klein, Benjamin and Keith B.
Leffler, The Role of Market Forces in Assuring Contractual
Performance, Journal of Political Economy 89, 615-641 (1981)
(``Klein Paper'').
    \593\ This argument assumes that fund reputation and investor
protections provided by regulatory requirements are substitute
mechanisms for providing assurances to investors.
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    However, the compliance costs of the rule may also result in
negative competitive effects by causing firms to close their funds and
reducing the competitive alternatives investors have. Relative to the
proposed rule, the final rule took steps to mitigate these costs in
several ways. For example, relative to

the proposed rule, the final rule has fewer recordkeeping tasks, fewer
items on Form N-PORT, and removes the need for daily assessments of
portfolio compliance with an 80% investment policy for assets that are
not actively traded.\594\
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    \594\ See supra section IV.D.2.
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    In addition, as stated above, some commenters requested the
Commission consider interactions between the economic effects of the