According to section 3 of the Investment Company Act of 1940, an investment company is any company who is (or proposes to be):

  • primarily in the business of investing, reinvesting or trading in securities;
  • issuing installment-type face-amount certificates.
  • investing, reinvesting, owning, holding, and trading securities; and holds more than 40% of their total value of assets (unconsolidated) in investment securities

Classification of Investment Companies
According to section 4 of the Investment Company Act of 1940, there are three types of investment companies:

  1. Face-Amount Certificate Company- issues installment-type face face-amount certificates.A face amountt certificate as the name implies is designed for the investor to have a set amount of money (face amount) at the maturity date.
     
  2. Unit Investment Trust (UIT) - created through a trust indenture, contract of custodianship or other similar structures. UITs do not have a board of directors like many companies and issue redeemable securities that do not entitle the holder to voting rights. These securities entitle the holder to a portion of a pool of investment securities. A UIT may be fixed or variable UIT. A fixed UIT will invest in bonds and hold the bonds until maturity at which time the the proceeds will be distributed to ithe investors. A variable UIT will invest in mutual fund shares.
     
  3. Management Company - any other companies who fit the investment company definition but are not classified as 1 or 2 above. These companies can be closed or open, diversified or non-diversified.
    • primarily in the business of investing, reinvesting or trading in securities;
    • issuing installment-type face-amount certificates.
    • investing, reinvesting, owning, holding, and trading securities; and holds more than 40% of their total value of assets (unconsolidated) in investment securities

Exemptions
According to section 6 of the Investment Company Act of 1940, companies exempt from the Investment Company rules include:

  • Open end management companies distribute and redeem securities it issues. The most common open-end management companies are mutual fund companies which sell and redeem shares at the net asset value per share.
     
  • Closed end management companies issue a fixed number of shares in an actively managed portfolio of securities. The shares are traded in the market just like common stock.
     
  • Diversified companies hold a portfolio of money market, government and corporate securities with a value greater than 75% of their total assets, with no more than 5% of their total investment in any security from one issuer. Additionally, the 5% invested with a particular issuer cannot contain more than 10% of that issuers voting securities.
     
  • Non-diversified companies, are like the name implies, any management company that is not diversified.
Rules and Reporting Requirements for Mutual Funds

Related Articles
  1. Investing

    What's a Unit Investment Trust?

    A unit investment trust is an unmanaged investment company that offers a fixed portfolio of stocks and bonds.
  2. Investing

    Investing In A Unit Investment Trust

    UITs offer professional portfolio selection and a definitive investment objective. Are they right for you?
  3. Investing

    Top 10 Investments For Baby Boomers

    Find out which investments are most likely to help you achieve your post-work income goals.
  4. Investing

    Unit Investment Trusts Market: 3 Trends in 2016

    Learn more about unit investment trusts (UITs), and discover some of the most common trends in the UIT market to date in the year 2016.
  5. Investing

    Mutual Fund Vs ETF: Which is Right For You?

    Want to invest but don't understand the difference between investment products? Here we explain ETFs vs. Mutual Funds and which is right for you.
  6. Financial Advisor

    Succeeding At The Series 63 Exam

    Your career as a securities agent begins with this test. We'll show you how to score high.
Frequently Asked Questions
  1. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  2. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
  3. What is a Wash Sale?

    The Wash-Sale rule was established to forbid a loss deduction of a security sold.
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center