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Series 6

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:
  1. Face-Amount Certificate Company- issues installment-type face face-amount certificates.

  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. UITs are essentially mutual fund companies.

  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.

    • 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.
Exemptions
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.

Next: Rules and Reporting Requirements for Mutual Funds »


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