Investment Companies - Restrictions on Mutual Fund Operations

The SEC prohibits a mutual fund from engaging in the following activities unless it meets strict financial and disclosure requirements:

  • Selling securities short
  • Buying securities on margin
  • Participating in joint investment or trading accounts

Otherwise, the fund must disclose these activities and the extent to which it plans to participate in these activities in its prospectus.

Affiliated and Interested Parties
The 1940 Act and its amendments identify two types of people, defined as affiliated and interested parties, who may influence the investment company's management and operations and whose actions must therefore be regulated and restricted by the SEC. They may not borrow money from the investment company or sell any security or property to the investment company or companies the management company controls.

  • An affiliated person is someone who controls an investment company's operations in any way.
     
  • An interested person includes those individuals who have a relationship with an affiliated person which the SEC deems influential in matters of fund operation. These people would include immediate family members of affiliated parties, legal counselors, broker-dealers, and so on.

Furthermore, the board of directors must have 40% outside representation: that is, at least 40% of the board must be made up of individuals who do not have a position with or affiliation to the fund. This restriction includes anyone associated with the underwriter, investment advisor, custodian or transfer agent.

Benefits of Mutual Fund Ownership
Related Articles
  1. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  2. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  3. Professionals

    Is a Google Robo-Advisor on the Horizon?

    It's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
  4. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  5. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  6. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  7. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  8. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  9. Investing Basics

    Online Portfolio Management, DIY or Fee-Based Financial Advisor: Which Is Right For You?

    Should you use an online financial planning service, or do professional, fee-based financial planners justify their higher costs?
  10. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  3. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  4. Series 79

    A examination to ensure a candidate is qualified to become a ...
  5. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  6. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
RELATED FAQS
  1. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
  2. What are some of the major regulatory agencies responsible for overseeing financial ...

    There are a number of agencies assigned to regulate and oversee financial institutions and financial markets, including the ... Read Full Answer >>
  3. Why is the Nasdaq more heavily weighted to tech stocks than other stock exchanges?

    The Nasdaq became the world's first electronic stock exchange at its inception in 1971. The exchange's dedication to advancing ... Read Full Answer >>
  4. How are margin calls regulated by the SEC?

    The Federal Reserve Board and the Financial Industry Regulatory Authority (FINRA), not the Securities and Exchange Commission ... Read Full Answer >>
  5. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  6. How does an underwriter syndicate work together on an initial public offering (IPO)?

    An underwriting syndicate is a group of investment banks that share the responsibility of marketing the shares of a company ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!