Series 6

AAA

Investment Companies - Investment Company Registration, Regulations and Rules

Note that we have address both of the following acts in Section II.

The Investment Company Act of 1940

The Investment Company Act of 1940 is the legislation that was passed by Congress to protect the investing public's interests in investment companies. The Act dictates the rules of investment company registration and regulation.
If a company is in the business of owning, holding and trading securities and 40% or more of the company's assets are invested in securities, (not including government securities and the securities of majority-owned subsidiaries) the company must register with the Securities and Exchange Commission (SEC) as an investment company. This registration must occur within a 90-day window, and must meet certain minimum requirements:

  • the company must have at least $100,000 in investment capital;
  • it must have 100 or more investors in the company;
  • it must have explicitly defined investment objectives;
  • it can have no more than one class of security.

The Securities Act of 1933
Once the investment company is registered under the Act of 1940, it must register any new securities it intends to sell with the SEC; this registration takes place under the Securities Act of 1933 and consists of two parts:

  1. Prospectus
    The first part is called the prospectus. This is the documentation given to every customer to whom the company's securities are recommended or offered. It contains any information the SEC has determined the company should reveal, including the date of the prospectus, the primary philosophy and objectives of the fund, the management company and the sponsor.

    It also must include the following disclaimer:

"These securities have not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed on the accuracy or adequacy of this prospectus. No state has approved or disapproved this offering. Any representation to the contrary is a criminal offense."

In addition, the prospectus will outline the expenses associated with owning shares of the mutual fund. Since mutual fund shares are continuously offered as new issues, the requirement to provide a prospectus is continuous, as per the 1933 Act.

Moreover, under the 1940 Act, an investment company must update each fund's prospectus every 13 months and send shareholders semiannual updates detailing purchases and sales, as well as providing the most recent balance sheet, income statement, information on all compensation paid to the board of directors and advisory board, and a listing of the amounts and values of the securities held by the fund. One of these reports must be an audited annual report.

Statement of Additional Information
The second part of this registration required under the Securities Act of 1933 is called the statement of additional information. This document is not given to every client, but it must be made available for inspection by the public and can be obtained from the sponsor upon the investor's request.

Exam Tips and Tricks
Although not terribly exciting, these two Acts - the
Investment Company Act of 1940 and the Securities Act of 1933 - contain many, if not most, of the fundamental rules and regulations governing your actions as an investment representative.

Look Out!
The Securities Act of 1933 deals primarily with the issuance of new securities. The Securities Exchange Act of 1934 regulates the secondary markets on which already-issued securities trade.

Structure, Management, and Operation of Mutual Funds
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