Securities Industry Regulations - Definition of an Investment Company
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:
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.
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.
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.
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.
- 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.
According to section 6 of the Investment Company Act of 1940, companies exempt from the Investment Company rules include:
Companies with both its principal location and place of business in Puerto Rico, the Virgin Islands. Note that this exemption is terminated should the exempt company offer securities to a resident of the US that is not located in their particular State.
Companies that have been reorganized, and at the close of these proceedings are no longer considered an investment company, all outstanding securities are owned by creditors and other individuals with a claim on company assets, and more than 50% of the company's voting securities (over 50% of the companies net asset value (NAV)) are owned by less than 25 individuals.
Companies with written permission by the Commission by the Federal Savings and Loan Insurance Corporation.
Companies that were and are owned by a face-amount certificate company prior to March 14, 1940. These companies must be operating under State insurance laws and must be examined by the Insurance Commissioner.
Companies with 80% or more of their securities being sold to individuals within or have a large business presence within the same State.
Companies who sell securities only to accredited investors.
- Companies who do not purchase securities from investment companies.
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