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. Professionals

    Structure, Management and Operation of Mutual Funds

    FINRA/NASAA Series 66 Section 1 - Structure, Management and Operation of Mutual Funds. In this section function of the board of directors, CEO, sponsor, custodian, investment adivisor, transfer ...
  2. Professionals

    Investment Company Act of 1940

    FINRA Series 6 Exam Study Guide - Investment Company Act of 1940. This section explains the Investment Company Act 1940 and also describes an Interested or Affiliated person.
  3. Professionals

    What You Must Know To Pass The Series 6 Exam

    Learn what you need to know about the creation and components of a mutual funds to pass the Series 6 exam.
  4. Professionals

    B. Investment Company Components

    Investment companies have several different groups that serve specialized functions. Each of these groups plays a key role in the investment company’s operation.
  5. Professionals

    Investment Company Act of 1940

    FINRA/NASAA Series 66 Section 1 - Investment Company Act of 1940. In this section the investment comany act of 1940, interested person, affiliated person, redeemable securities and principal ...
  6. Professionals

    Rules and Reporting Requirements for Mutual Funds

    FINRA Series 6 Exam Study Guide - Rules and Reporting Requirements for Mutual Funds. In this section Rules and Reporting Requirements for Investment (Mutual Fund) Companies. Rule 12b-1 and shareholder ...
  7. Professionals

    Form 144

    This is a notice of the intent to sell restricted stock.
  8. Professionals

    Structure, Management, and Operation of Mutual Funds

    FINRA Series 6: Section 10 Structure, Management, and Operation of Mutual Funds. Board of Directors, Sponsor, Custodian, Investment Advisor, Transfer Agent, Dealer are reponsible the structure, ...
  9. Economics

    What is Regulation W?

    Regulation W sets the terms for transactions between banks and their affiliates.
  10. Professionals

    Investment Company Registration, Regulations and Rules

    FINRA Series 6: Section 10 Investment Company Registration, Regulations and Rules. In this section: The Investment Company Act of 1940 and The Securities Act of 1933.
RELATED TERMS
  1. Affiliated Person

    An individual who is in a position to influence the actions of ...
  2. Form 3

    A document that must be filed with the Securities and Exchange ...
  3. Affiliate Network

    Third parties that provide a link between a publisher and a company ...
  4. Affiliated Companies

    Companies that are less than 50% owned by a parent company; the ...
  5. Form 144

    A form that must be filed with the SEC when an executive officer, ...
  6. SEC Form U-13E-1

    A report that must be filed with the Securities and Exchange ...
RELATED FAQS
  1. How is trading volume regulated by the Securities and Exchange Commission (SEC)?

    Learn about how the SEC uses the trading volume formula as one requirement for an exemption to the ban on the resale of restricted ... Read Answer >>
  2. What information does the SEC require in an investment company's prospectus?

    Understand the lengthy list of required information that investment companies such as mutual funds must include in a prospectus ... Read Answer >>
  3. How do companies like ClickBank help websites make money?

    Find out how sites such as ClickBank help websites make money by offering the opportunity for vendors and affiliates to promote ... Read Answer >>
  4. What are the differences between affiliate, associate and subsidiary companies?

    All three of these terms refer to the degree of ownership that a parent company holds in another company. In most cases, ... Read Answer >>
  5. How often do mutual funds report their holdings?

    Learn how mutual funds are required by the Securities and Exchange Commission to disclose their portfolio holdings on a quarterly ... Read Answer >>
  6. Should mutual funds be subject to more regulation?

    Understand whether mutual funds need stricter regulation. Learn what types of current and future regulations have been put ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center