Names of All the Investment Companies by ykn12308


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									Gardner, Carton & Douglas
Client Memorandum                                                                                                 February 2001

Investment Management
                                                                                         A Service to Our Clients and Friends

                                   Investment Company Names
                                                      by Maureen A. Miller
Rule 35d-1 was adopted by the SEC to address particular             Tax-exempt funds are required to adopt the 80% investment
categories of investment company names that it believes             requirement as a fundamental policy. It is the Division of
could mislead investors. The National Securities Markets            Investment Management’s position that a tax-exempt fund
Improvement Act of 1996 amended Section 35(d) of the                may not change its tax-exempt status without shareholder
Investment Company Act to prohibit a registered                     approval.
investment company from using a name that the SEC by
rule finds to be materially deceptive or misleading. The            Time of Application
Release1 for Rule 35d-1 states that by amending Section             The 80% requirement applies at the time of investment.
35(d) “Congress reaffirmed its concern that investors may           The rule, however, does exclude a UIT that has made an
focus on an investment company’s name to determine the              initial deposit of securities before July 31, 2002.2
company’s investments and risks, and recognized that                Net Assets
investor protection would be improved by giving the                 The 80% requirement is based on a fund’s net assets plus
Commission rulemaking authority to address potentially              any borrowings for investment purposes. The SEC notes
misleading investment company names.” Rule 35d-1                    that a typical securities lending transaction would not be
applies to all registered open-end and closed-end                   considered borrowing for investment purposes.
investment companies and unit investment trusts.
                                                                    Temporary Departure from the 80% Requirement
80% Requirement                                                     The Rule as adopted requires investment companies to
Rule 35d-1 requires a registered investment company with            comply with the 80% requirement “under normal
a name suggesting that it focuses on a particular investment        circumstances.” The proposed rule 3 contemplated an
or industry to invest at least 80% of it assets in the suggested    exception for a “‘temporary defensive position’ to avoid
investment or industry. A fund can include a synthetic              losses in response to adverse market, economic, political
instrument in the 80% basket if the synthetic has economic          or other conditions.” The SEC agreed with the
characteristics similar to the investments included in the          commentators that a “temporary defensive position” would
80% basket. In addition, a fund can “look through” a                not cover situations such as investing in cash pending
repurchase agreement to the collateral underlying the               investment of recent purchases or in anticipation of large
repurchase agreement and include the value of the collateral        redemptions. “Under normal circumstances” does include
for purposes of calculating the 80%.                                highly liquid positions following large inflows or
                                                                    anticipated outflows. The SEC went on to state that net
Fundamental Policy vs. Notification
                                                                    new proceeds should be invested within six months and
Funds (other than tax-exempt funds) have the option of
                                                                    new mutual funds should be “fully invested within a much
adopting the 80% requirement as
                                                                    shorter time.”
•   a fundamental policy that would require shareholder
    approval to change, or                                          Certain Kinds of Investment Company Names
•   a policy as to which shareholders would be given 60             Certain Countries or Geographic Regions
    days’ advance notice before any change.                         A fund with a name suggesting investment in certain
                                                                    countries or geographic regions must have a policy to invest
If a fund elects the 60-day prior notice option, the policy         at least 80% of assets “in investments that are tied
must provide that the notice be in plain English in a               economically to the particular country or geographic
separate document (i.e., not included in the prospectus).           region suggested by its name.” The fund also must disclose
The notice, as well as the envelope, must include a                 in its prospectus the specific criteria that are used to select
statement such as “Important Notice Regarding Change                investments that meet this standard. (The proposed rule
in Investment Policy” in bold face. If the notice is included       would have required a fund to invest in securities
in a mailing by itself, either the notice or the envelope           containing one of three criteria outlined in the proposed
may contain this statement.                                         rule.)
Tax-Exempt Funds                                               Compliance Date
The SEC adopted substantially as proposed the requirement      The effective date of Rule 35d-1 is March 31, 2001. July
that a fund with a “tax-exempt” name adopt a fundamental       31, 2002 is the compliance date to allow “portfolio ad-
policy to                                                      justments; internal compliance system changes; and for
                                                               those companies that do not wish to be subject to the rule,
•   invest at least 80% of its assets in investments the       to adopt name changes.” The SEC also stated that an
    income from which is exempt from income tax, or            investment company should update its prospectus by
•   invest its assets so that at least 80% of the income it    sticker as soon as any changes in the investment policy
    distributes will be exempt from income tax.                have been decided, even if well before the compliance date.
The tax-exemption would apply to investments exempt
from federal income tax under the “regular” rules and the         Investment Company Names, Investment Company Act Release No.
                                                                 24828 (Jan. 17, 2001) (the “Release”).
alternative minimum tax rules. The final rule does not         2
                                                                  Since UITs are fixed portfolios, they would not be able to change their
contain a provision exempting single state tax-exempt            investments to comply with the Rule.
funds from the 80% requirement.                                   See, Investment Company Act Release No. 22530 (Feb. 27, 1997).
                                                                  See, footnote 42, the Release.
                                                                  The Division applies a 95% requirement to tax-exempt UITs.
Guarantee or Approval by U.S. Government
The Division’s long-standing prohibition on a fund name
implying guarantee, sponsorship, recommendation or             Jeffrey R. Blumberg                                   (312) 245-8514
approval by the U.S. Government has been codified as Rule
35d-1(a)(1).                                                   Paul H. Dykstra                                       (312) 245-8421
                                                               Glenn E. Ferencz                                      (312) 245-8679
What Was Not Included in Rule 35d-1                  
The Rule does not specifically include the positions of the    Karin J. Flynn                                        (312) 245-8727
Division regarding the terms “balanced,” “index,” “small,
mid- or large capitalization,” “international,” “global,”      Heidemarie Gregoriev                                  (312) 245-8861
“growth” or “value.” However, the footnotes 4 to the           Gary W. Howell                                        (312) 245-8763
Release state that “small, mid- or large capitalization” and
“index” indicate a focus on specific investments and thus      Charles R. Manzoni                                    (312) 245-8423
are subject to the 80% requirement. Balanced funds are
                                                               Doreen Meinck                                         (312) 245-8789
not subject to the Rule but should invest at least 25% of
assets in fixed-income senior securities and at least 25%      Maureen A. Miller                                     (312) 245-8495
in equities. A fund with “foreign” in its name is subject to
the 80% requirement although a fund with “international”       Paulita Pike-Bokhari                                  (312) 245-8759
or “global” in its name is not subject to the Rule. “Growth”   Jesse Ruiz                                            (312) 245-8869
and “value” are not included in the Rule because they are
investment strategies and not types of investments.            Timothy S. Scott                                      (312) 245-8741
                                                               Frederick L. White                                    (312) 245-8476
The SEC also announced that, contrary to the release, the
Division would continue to apply maturity criteria (less       Jennifer L. Wilson                                    (312) 245-8427
than 3 years, more than 3 years but less than 10 years and
more than 10 years) to debt funds calling themselves “short-   David E. Winebrenner                                  (312) 245-8775
term,” “intermediate-term” or “long-term” bond funds.
The SEC went on to state that where “the ‘duration’ of the
company’s portfolio was inconsistent with the sensitivity
to interest rates suggested by the company’s name, the name
may be misleading.”

The SEC expects index funds to invest at least 80% of
their assets in investments connoted by the applicable             Gardner, Carton & Douglas
index, and if they don’t, the SEC believes that to be                          
misleading. Similarly, a UIT with a name indicating that
its distributions are tax-exempt may have a misleading         This client memorandum is not intended as legal advice, which may
                                                               often turn on specific facts. Readers should seek specific legal advice
name even if it invests 80% of its assets in tax-exempt        before acting with regard to the subjects mentioned here.
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