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

    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.
  2. Investing Basics

    Explaining Affiliate, Associate And Subsidiary

    Affiliate, associate and subsidiary are all terms referring to the degree of ownership a parent company holds in another company.
  3. Financial Advisors

    Fund Boards: What They Do and Why You Should Care

    Fund boards oversee management and operations of the fund on behalf of shareholders. Make sure you've got a board that will look out for you.
  4. Economics

    What is Regulation W?

    Regulation W sets the terms for transactions between banks and their affiliates.
  5. Investing News

    Affiliated Managers Group: Investment Manager Highlight (AMG)

    Read about the multiaffiliate business model employed by Affiliated Managers Group, a global investment manager with $611 billion in assets under management.
  6. Investing

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  7. Mutual Funds & ETFs

    When To Buy A Mutual Fund

    There is money to be made in mutual funds, but investors fall into several pitfalls that keep them from maximizing their profits. Read these tips to take the uncertainty out of investing in mutual ...
  8. Mutual Funds & ETFs

    Digging Deeper: The Mutual Fund Prospectus

    The legal jargon of this document can be daunting. Find out how to get to the important stuff.
  9. Mutual Funds & ETFs

    Side-By-Side Management May Favor Hedge Over Mutual Funds

    Having your firm handle both investments can spell disaster for your returns.
  10. Mutual Funds & ETFs

    Mutual Funds: What Are They?

    The Definition A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money ...
RELATED TERMS
  1. Form 3

    A document that must be filed with the Securities and Exchange ...
  2. Affiliated Companies

    Companies that are less than 50% owned by a parent company; the ...
  3. Regulation W

    A Federal Reserve regulation that established terms for transactions ...
  4. Restricted Stock

    Insider holdings that are under some other kind of sales restriction. ...
  5. Affiliated Group

    Two or more corporations that are related through common ownership, ...
  6. Investment Company Act Of 1940

    Created in 1940 through an act of Congress, this piece of legislation ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What information should I focus on in my mutual fund's prospectus?

    Understand what information investors can find in a mutual fund prospectus and what they should focus on when reviewing the ... Read Answer >>
  5. How do mutual funds work in India?

    Find out how mutual funds work in India, including what types of funds are available, how they are structured and how they ... Read Answer >>
  6. Do mutual fund companies pay taxes?

    Learn how mutual funds are incorporated as regulated investment companies and are exempt from paying taxes under certain ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center