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
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