Investment Company Act of 1940
Encyclopedia
The Investment Company Act of 1940 is an act of Congress
. It was passed as a United States
Public Law
(PL 76-768) on August 22, 1940, and is codified at through . Along with the Securities Exchange Act of 1934
and Investment Advisers Act of 1940
, and extensive rules issued by the Securities and Exchange Commission, it forms the backbone of United States financial regulation
. It has been updated by the Dodd-Frank Act of 2010.
in 1924, investor
s welcomed the innovation with open arms and invested in this new investment vehicle heavily. Five and a half years later, the Wall Street Crash of 1929
occurred in the stock market
, followed shortly thereafter by the United States entry into the Great Depression
. In response to this crisis, the United States Congress
wrote into law the Securities Act of 1933
and the Securities Exchange Act of 1934
in order to regulate the securities industry in the interest of the public.
Investment companies were still in their infancy in 1940. In order to instill investors' confidence in these companies and to protect the public interest from this new type of security
, Congress passed the Investment Company Act. The new law set separate standards by which investment companies should be regulated. The act defined and regulated investment companies, including mutual funds (which were virtually undefined prior to 1940).
s.
, rather than leaving the matter up to the individual states, it justified its action by including in the text of the bill its rationale for enacting the law:
Act of Congress
An Act of Congress is a statute enacted by government with a legislature named "Congress," such as the United States Congress or the Congress of the Philippines....
. It was passed as a United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
Public Law
Public law
Public law is a theory of law governing the relationship between individuals and the state. Under this theory, constitutional law, administrative law and criminal law are sub-divisions of public law...
(PL 76-768) on August 22, 1940, and is codified at through . Along with the Securities Exchange Act of 1934
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...
and Investment Advisers Act of 1940
Investment Advisers Act of 1940
The Investment Advisers Act of 1940, codified at through , is a United States federal law that was created to regulate the actions of investment advisers as defined by the law.-Overview:The law provides in part:-Contents:...
, and extensive rules issued by the Securities and Exchange Commission, it forms the backbone of United States financial regulation
Financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
. It has been updated by the Dodd-Frank Act of 2010.
Background
Following the founding of the mutual fundMutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
in 1924, investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s welcomed the innovation with open arms and invested in this new investment vehicle heavily. Five and a half years later, the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...
occurred in the stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
, followed shortly thereafter by the United States entry into the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. In response to this crisis, the United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
wrote into law the Securities Act of 1933
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
and the Securities Exchange Act of 1934
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...
in order to regulate the securities industry in the interest of the public.
Investment companies were still in their infancy in 1940. In order to instill investors' confidence in these companies and to protect the public interest from this new type of security
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
, Congress passed the Investment Company Act. The new law set separate standards by which investment companies should be regulated. The act defined and regulated investment companies, including mutual funds (which were virtually undefined prior to 1940).
Scope
The act's purpose, as stated in the bill, is "to mitigate and... eliminate the conditions... which adversely affect the national public interest and the interest of investors." Specifically, the act regulated conflicts of interest in investment companies and securities exchanges. It seeks to protect the public primarily by legally requiring disclosure of material details about each investment company. The act also places some restrictions on certain mutual fund activities such as short selling shares. However, the act did not create provisions for the U.S. Securities and Exchange Commission (SEC) to make specific judgments about or even supervise an investment company's actual investment decisions. The act requires investment companies to publicly disclose information about their own financial health.Jurisdiction
The Investment Company Act applies to all investment companies, but exempts several types of investment companies from the act's coverage. The most common exemptions are found in Sections 3(c)(1) and 3(c)(7) of the act and include hedge fundHedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
s.
Scale
When Congress wrote the act into federal lawFederal law
Federal law is the body of law created by the federal government of a country. A federal government is formed when a group of political units, such as states or provinces join together in a federation, surrendering their individual sovereignty and many powers to the central government while...
, rather than leaving the matter up to the individual states, it justified its action by including in the text of the bill its rationale for enacting the law:
- “The activities of such companies, extending over many states, their use of the instrumentalities of interstate commerce and the wide geographic distribution of their security holders, make difficult, if not impossible, effective state regulationState lawIn the United States, state law is the law of each separate U.S. state, as passed by the state legislature and adjudicated by state courts. It exists in parallel, and sometimes in conflict with, United States federal law. These disputes are often resolved by the federal courts.-See also:*List of U.S...
of such companies in the interest of investors.”
Type
The act divides the types of investment company to be regulated into three classifications:- Face-amount certificate companyFace-amount certificate companyA face-amount certificate company is an investment company which offers an Investment Certificate as defined by the Investment Company Act of 1940....
: an investment company in the business of issuing face-amount certificates of the installment type.
- Unit Investment TrustUnit Investment TrustA Unit Investment Trust is a US investment company offering a fixed portfolio of securities having a definite life. UITs are assembled by a sponsor and sold through brokers to investors.-Types:...
: an investment company which is organized under a trust indenture, contract of custodianship or agency, or similar instrument, does not have a board of directorsBoard of directorsA board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
, and issues only redeemable securitiesSecurity (finance)A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
, each of which represents an undivided interest in a unit of specified securities; but does not include a voting trust.
- Management Company: any investment company other than a face-amount certificate company or a unit investment trust. The most well-known type of management company is the mutual fundMutual fundA mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
.
Contents
- Sec. 1. Findings and Declaration of Policy.
- Sec. 2. General Definitions.
- Sec. 3. Definition of Investment Company.
- Sec. 4. Classification of Investment Companies.
- Sec. 5. Subclassification of Management Companies.
- Sec. 6. Exemptions.
- Sec. 7. Transactions by Unregistered Investment Companies.
- Sec. 8. Registration of Investment Companies.
- Sec. 9. Ineligibility of Certain Affiliated Persons and Underwriters.
- Sec. 10. Affiliations of Directors.
- Sec. 11. Offers of Exchange.
- Sec. 12. Functions and Activities of Investment Companies.
- Sec. 13. Changes in Investment Policy.
- Sec. 14. Size of Investment Companies.
- Sec. 15. Investment Advisory and Underwriting Contracts.
- Sec. 16. Changes in Board of DirectorsBoard of directorsA board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
; Provisions Relative to Strict Trusts. - Sec. 17. Transactions of Certain Affiliated Persons and Underwriters.
- Sec. 18. Capital Structure.
- Sec. 19. Dividends.
- Sec. 20. Proxies; Voting Trusts; Circular Ownership.
- Sec. 21. Loans.
- Sec. 22. Distribution, Redemption, and Repurchase of Redeemable Securities.
- Sec. 23. Distribution and Repurchase of Securities: Closed-End Companies.
- Sec. 24. Registration of Securities Under Securities Act of 1933Securities Act of 1933Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
.
- Sec. 25. Plans of Reorganization.
- Sec. 26. Unit Investment Trusts.
- Sec. 27. Periodic Payment Plans.
- Sec. 28. Face-Amount Certificate Companies.
- Sec. 29. Bankruptcy of Face-Amount Certificate Companies.
- Sec. 30. Periodic and Other Reports; Reports of Affiliated Persons.
- Sec. 31. Accounts and Records.
- Sec. 32. Accountants and Auditors.
- Sec. 33. Filing of Documents With Commission in Civil Actions.
- Sec. 34. Destruction and Falsification of Reports and Records.
- Sec. 35. Unlawful Representations and Names.
- Sec. 36. Breach of Fiduciary Duty.
- Sec. 37. LarcenyLarcenyLarceny is a crime involving the wrongful acquisition of the personal property of another person. It was an offence under the common law of England and became an offence in jurisdictions which incorporated the common law of England into their own law. It has been abolished in England and Wales,...
and EmbezzlementEmbezzlementEmbezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....
.
- Sec. 38. Rules, Regulations, and Orders; General Powers of Commission.
- Sec. 39. Rules and Regulations; Procedure for Issuance.
- Sec. 40. Orders; Procedure for Issuance.
- Sec. 41. Hearings by Commission.
- Sec. 42. Enforcement of Title.
- Sec. 43. Court Review of Orders.
- Sec. 44. Jurisdiction of Offenses and Suits.
- Sec. 45. Information Filed With Commission.
- Sec. 46. Annual Reports of Commission; Employees of the Commission.
- Sec. 47. Validity of Contracts.
- Sec. 48. Liability of Controlling Persons; Preventing Compliance With Title.
- Sec. 49. Penalties.
- Sec. 50. Effect on Existing Law.
- Sec. 51. Separability of Provisions.
- Sec. 52. Short Title.
- Sec. 53. Effective Date.
- Sec. 54. Election to Be Regulated As A Business Development Company.
- Sec. 55. Functions and Activities of Business Development Companies.
- Sec. 56. Qualifications of Directors.
- Sec. 57. Transactions With Certain Affiliates.
- Sec. 58. Changes in Investment Policy.
- Sec. 59. Incorporation of Provisions.
- Sec. 60. Functions and Activities of Business Development Companies.
- Sec. 61. Capital Structure.
- Sec. 62. Loans.
- Sec. 64. Accounts and Records.
- Sec. 65. Liability of Controlling Persons; Preventing Compliance With Title.
See also
- Securities Act of 1933Securities Act of 1933Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
- Securities Exchange Act of 1934Securities Exchange Act of 1934The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...
- Investment Advisers Act of 1940Investment Advisers Act of 1940The Investment Advisers Act of 1940, codified at through , is a United States federal law that was created to regulate the actions of investment advisers as defined by the law.-Overview:The law provides in part:-Contents:...
, 15 U.S.C. § 80-b1 et seq. - Jones v. Harris
- Alternative Investment Fund Managers DirectiveAlternative Investment Fund Managers DirectiveThe Alternative Investment Fund Managers Directive is a proposed European Union law which will put hedge funds and private equity funds under the supervision of an EU regulatory body. These kinds of business vehicle have not been subject to the same rules to protect the investing public as mutual...
External links
- Full text of the Investment Company Act of 1940, available from the Securities and Exchange Commission.
- Rules and Regulations promulgated under the Investment Company Act of 1940.
- Villanova Journal of Law & Investment Management a scholarly publication addressing the Investment Company Act of 1940.