Securities Industry Regulations - Investment Company Act of 1940

The Investment Company Act of 1940 was passed by Congress to require the registration and regulation of investment companies. It was legislated to ensure adequate and truthful information for investors and to reduce the abuses in selling investment company securities. One of the most important of provisions was the requirement of all investment companies to register with the SEC. This process includes the submission of a registration statement and a prospectus, both of which must clearly state the fundamental investment objectives of the fund.

Once a company is registered, it must abide by certain rules and regulations. For example, no offers of investment company shares may be made without the prior or concurrent offering of an up-to-date prospectus, which must be revised at least every 13 months. The investment company must have a minimum net worth of $100,000.

Interested Person
Who is an "interested" person? An interested person is any affiliated person, such as:

  • an officer, a director, an investment advisor, a partner, an owner of at least 5% of the company voting stock,
  • an employee of the company
  • any immediate family members of these persons
  • the principal underwriter, or any other investment company that has the same underwriter
  • anyone who has acted as legal counsel or in any other professional capacity for the investment company over the past two years

Affiliated persons are prohibited from doing the following:

  • Borrowing money or any other property from a registered investment company
  • Purchasing any securities or other property from a registered investment company except securities issued by the investment company
  • Selling any security or other property to a registered investment company except for securities issued by the investment company or securities which are part of a public distribution and for which the seller is the issuer

If an affiliated person has been convicted of any felony or misdemeanor involving the purchase or sale of securities within the past 10 years, or has been temporarily or permanently forbidden from acting as an affiliated person, it is unlawful for him or her to act in the capacity of employee, officer, director, investment advisor, advisory board member or underwriter of an investment company.

The SEC may allow exemptions in these cases if the terms of the appeal are "reasonable and fair", and if they are "consistent" with the policy of the investment company in its registration statement and with the general purpose of the Investment Company Act of 1940.

Definition of an Investment Company


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. Insurance

    The Rise Of The Modern Investment Bank

    Get to know a little bit about the institutions whose actions help to guide free markets.
  3. Term

    What's an Investment Advisor?

    An investment or financial advisor makes investment recommendations and analyzes securities.
  4. Investing Basics

    SEC Filings: Forms You Need To Know

    The forms companies are required to file provide a clear view of their histories and progress.
  5. Investing Basics

    Investment Advisor Versus Broker: How They Compare

    What is the difference between an investment advisor and a broker?
  6. Investing Basics

    How A Company Files With The SEC

    Filing with the SEC is not as complicated as you might thing -- just be meticulous about following the steps.
  7. Fundamental Analysis

    FINRA: How It Protects Investors

    Find out the history of FINRA, and how it's organized to monitor the markets and protect investors.
  8. Trading Strategies

    Is Your Broker Legit? 6 Steps to Take

    The Great Recession may have ended, but broker wrongdoing hasn't. Here's how to make sure you don't get stuck with the next Bernie Madoff.
  9. Investing Basics

    Policing The Securities Market: An Overview Of The SEC

    Find out how this regulatory body protects the rights of investors.
  10. Investing Basics

    Defining The 3 Types Of Investments

    The first step to being a successful investor is knowing what is and isn't an investment.
RELATED TERMS
  1. Investment Company Act Of 1940

    Created in 1940 through an act of Congress, this piece of legislation ...
  2. Section 12D-1 Limit

    A rule added to the Investment Company Act in 1964 to provide ...
  3. Registered Investment Advisor - ...

    An advisor or firm engaged in the investment advisory business ...
  4. Management Investment Company

    A formal name for a company that sells and manages a portfolio ...
  5. SEC Form N-5

    A filing with the Securities and Exchange Commission (SEC) required ...
  6. Affiliate

    A type of inter-company relationship in which one of the companies ...
RELATED FAQS
  1. What is an unregistered security scam?

    Each year, millions of Americans lose money to con artists who convince them to invest in companies through "private offerings" ... 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 are investment banks regulated in the United States?

    Read about the extensive regulations placed on investment banks in the United States, beginning with the Glass-Steagall Act ... Read Answer >>
  4. 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 >>
  5. Do financial advisors need to be approved by FINRA?

    Learn about whether a financial advisor may be required to be approved by FINRA, and what exams a financial advisor needs ... Read Answer >>
  6. How is a penny stock created?

    Understand how penny stocks are issued and regulated, and learn how these sometimes rewarding but always risky investments ... Read Answer >>
Hot Definitions
  1. 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 ...
  2. White Squire

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

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. 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, ...
  5. 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.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center