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

    Investing In Oil And Gas UITs

    Unit investment trusts provide direct exposure to the energy sector, fueling better returns.
  2. Investing

    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.
  3. Investing

    Understanding Short-Term Investments

    These are investments that have a maturity date of less than one year, or will be liquidated within a year.
  4. Investing

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
  5. Investing

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  6. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  7. Taxes

    What's a Holding Company?

    A holding company is a corporation that owns enough voting stock in another company to control its management and policies.
  8. Investing

    Mutual Fund Or ETF: Which Is Right For You?

    Learn the differences between these investment products and how to take full advantage.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center