CURRENT MONTH (January 2025)

SEC Staff Issues 2025 Names Rule FAQs

By Karen Liu, Reid & Wise LLC

On January 8, 2025, the staff of the Division of Investment Management (the “Staff”) under the U.S. Securities and Exchange Commission (the “SEC”) released the 2025 Names Rule FAQs, which is an update of the Staff’s 2001 Names Rule FAQs, by withdrawing some questions and answers (“Q&As”) and amending other Q&As.

On September 20, 2023, the SEC adopted amendments (the “2023 Names Rule”) to Rule 35d-1 under the Investment Company Act of 1940 (the “Company Act”). The 2023 Names Rule took effect on December 10, 2023. Its compliance date is December 10, 2025, for larger entities, and June 10, 2026, for smaller entities.

Rule 35d-1 was originally adopted by the SEC in 2001 (the “2001 Names Rule”). Compared to the 2001 Names Rule, one big change in the 2023 Names Rule is that it broadened the scope of “names suggesting an investment focus” under rule 35d-1(a)(2) by adding a catch-all category, namely, any fund name with terms suggesting that the fund focuses in “investments that have, or whose issuers have, particular characteristics.” Funds with such “names suggesting an investment focus” are subject to the 80% investment policy requirement. The 2025 Names Rule FAQs, to a large extent, updated the Q&As in the three sections of the 2001 Names Rule FAQs (which was issued in accordance with the 2001 Names Rule) to reflect such new change, renumber the Q&As, delete obsolete language, and make certain other updates.

With respect to Q&As in the section “Adoption of 80% Investment Policy,” the 2025 Names Rule FAQs:

  • Withdrew Q&A 2.
  • Updated Q&A 1, because the 2001 Names Rule increased the threshold of investment policy requirement from 65% to 80%, and therefore the transition from a 65% investment policy to an 80% investment policy as mentioned in the previous Q&A 1 was no longer relevant.

With respect to Q&As in the section “Tax-Exempt Funds,” the 2025 Names Rule FAQs:

  • Withdrew Q&A 5.
  • Updated Q&A 3 by (i) updating cross-references to rule numbers, (ii) removing the paragraph clarifying single state tax-exempt funds are not subject to rule 35d-1(a)(3), and (iii) renumbering it into Q&A 2.
  • Updated Q&A 4 by (i) updating cross-references to rule numbers, (ii) adding the clarifying phrase “in the staff’s view,” and (iii) renumbering it into Q&A 3.

With respect to Q&As in the section “Specific Terms Commonly Used in Fund Names,” the 2025 Names Rule FAQs:

  • Withdrew Q&A 6, Q&A 10, Q&A 11, Q&A 12, Q&A 14, and Q&A 15.
  • Updated Q&A 7 by (i) clarifying that the term “high-yield” signifies corporate bonds with “particular characteristics,” (ii) adding the clarifying phrase “in the staff’s view,” (iii) clarifying that a fund with “high-yield municipal” or “high-yield tax-exempt” in its name would need to adopt an 80% policy to invest in “municipal” securities or “tax-exempt” securities, but does not necessarily need to invest 80% of assets in high-yield investments, and (iv) emphasizing that a fund with “high-yield municipal” or “high-yield tax-exempt” in its name is still subject to prohibition on materially deceptive or misleading names under section 35(d) of the Company Act and anti-fraud provisions of the federal securities laws regarding disclosures to investors, and (iv) renumbering it into Q&A 4.
  • Updated Q&A 8 by (i) clarifying that “tax-sensitive” references overall characteristics of the fund’s portfolio, rather than suggesting “particular characteristics” of the investments, and therefore would not require the fund to adopt an 80% investment policy, (ii) adding the phrase “in the staff’s view,” (iii) emphasizing that even if a fund name does not communicate “particular characteristics” of investments, the fund is still subject to section 35(d) of the Company Act and federal anti-fraud provisions, and (iv) renumbering it into Q&A 5.
  • Updated Q&A 9 by (i) streamlining the answer through comparing the term “income” with the term “fixed income,” (ii) adding the clarifying phrase “in the staff’s view,” and (iii) renumbering it into Q&A 6.
  • Updated Q&A 13 by (i) toning down certain clarifications, (ii) adding the phrase “in the staff’s view,” and (iii) renumbering it into Q&A 7.

The table below is a brief summary of the fund names discussed in the 2025 Names Rule FAQs.

Term in a fund name

Does the term communicate “particular characteristics” of the investments?

Does the fund need to adopt an 80% investment policy?

“high yield”

Yes

Yes

“high yield municipal”

Yes

Yes, in order to invest in “municipal” securities, but okay to invest less than 80% of assets in high-yield bonds if historical practice justifies so

“high yield tax-exempt”

Yes

Yes, in order to invest in “tax-exempt” securities, but okay to invest less than 80% of assets in high-yield bonds if historical practice justifies so

“tax-sensitive”

“tax-efficient”

“tax-advantaged”

“tax-managed”

“tax aware”

No

No

No

No

No

No

No

No

No

No

“income”

No, if it does not refer to “fixed income” securities

No

“fixed income”

Yes

Yes

“money market”

Yes

Yes

“XYZ U.S. Treasury Money Market Fund”

Yes

Yes

“XYZ Money Market Fund”

Yes

No, because rule 2a-7, in any event, requires the fund to invest solely in eligible securities

SEC Rescinds Staff Accounting Bulletin on Custody of Crypto-Assets

By Thomas W. White, Retired Partner, WilmerHale

On January 23, the SEC’s accounting staff rescinded Staff Accounting Bulletin 121 (SAB 121), which expressed staff views on the accounting for obligations to safeguard crypto-assets that an entity holds for platform users.

SAB 121, which was issued in March 2022, asserted that an entity that operates crypto platforms and undertakes to hold and safeguard a platform user’s crypto-assets, including by maintaining cryptographic key information, faces “unique risks and uncertainties.” These included an increased risk of financial loss for failure to satisfy the entity’s obligation to safeguard crypto-assets held for platform users. The staff stated that the platform entity should present a liability on its balance sheet to reflect its safeguarding obligation, measured at fair value of the crypto-assets being held. The entity would also record a corresponding asset measured at the fair value of the crypto-assets held for platform users. The SAB also prescribed disclosures regarding the crypto-assets held by the entity for platform users.

SAB 121 was highly controversial. The staff stated that SABs represent only “staff interpretations and practices followed by the staff in the Division of Corporation Finance and the Office of the Chief Accountant.” However, a 2023 report by the Government Accountability Office concluded that SAB 121 was a “rule” subject to congressional override under the Congressional Review Act. In 2024, Congress passed, by bipartisan majorities, a resolution disapproving SAB 121. President Biden vetoed this resolution. Three days after President Trump’s inauguration, the SEC staff rescinded SAB 121.

Staff Accounting Bulletin 122, which effectuates the rescission of SAB 121, provides that going forward, “an entity that has an obligation to safeguard crypto-assets for others should determine whether to recognize a liability related to the risk of loss under such an obligation, and if so, the measurement of such a liability” by applying the existing standards for contingent liabilities under GAAP (ASC 450-20) or IFRS Accounting Standards (IAS 37), as applicable. The staff also reminded entities to continue to consider existing requirements to provide disclosures to understand an entity’s obligation to safeguard crypto-assets. These requirements included S-K items concerning business, risk factors, and MD&A (Items 101, 105, and 303), and GAAP disclosure requirements regarding loss contingencies (ASC 450-20) and risks and uncertainties (ASC 275).

Affected entities are required to give effect to the rescission on a fully retrospective basis in annual periods beginning after December 15, 2024, and may elect to do so in earlier interim or annual periods.

EDITED BY

Rani Doyle

Rani Doyle

Managing Editor, Securities Law

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