Investment Companies - Investment Company Act of 1940


The Investment Company Act of 1940 is the legislation that was passed by Congress to protect the investing public's interests in investment companies. The act dictates the rules of investment company registration and regulation.

An investment company is a corporation or a trust through which individuals invest in diversified, professionally managed portfolios of securities by pooling their funds with those of other investors. Rather than purchasing combinations of individual stocks and bonds for a portfolio, an investor can purchase securities indirectly through a package product like a mutual fund.

According to the Investment Company Institute, there were 8,107 mutual funds (excluding funds of funds, or mutual funds made up of other mutual funds), 254 closed-end funds, 226 exchange-traded funds and 37 unit investment trusts by the end of 2004. About 91.2 million people owned mutual funds in 2004, with nearly $8.6 trillion invested in these investment vehicles alone. With so many different products to choose from, it is easy to see why the NASD requires that you master the fundamentals of investment company function, management, regulation and operation.

There are three fundamental types of investment companies: unit investment trusts (UITs), face amount certificate companies and managed investment companies. Later in the section, we discuss each investment company type in more detail. Remember that all three types have the following things in common:

  • An undivided interest in the fund proportional to the number of shares held
  • Diversification in a large number of securities
  • Professional management
  • Specific investment objectives

Definitions
Section 2 of the Investment Company Act of 1940 defines a number of the terms used throughout the act. The following definitions are likely to be tested on the exam:

  • Affiliated person - Thisrefers to any officer, director, partner or employee of the investment company. It also includes an investment advisor or member of the investment company's advisory board, as well as any person who owns at least 5% of the voting stock

  • Interested person - Thisrefers to any affiliated person as well as immediate family members of an affiliated person. It also includes any broker-dealer, principal underwriter or anyone who has served as legal counsel for the investment company within the last two years. Finally, another investment company that shares the same principal underwriter is considered to be an interested person.


Look Out!
Note that "affiliated person" and "interested person" have similar, but not identical, definitions. An interested person includes, but is not limited, to an affiliated person.


  • Redeemable securities - Investment company shares (including mutual funds) are issued as redeemable securities. This means that they are not bought and sold in any type of open market and they may be redeemed only by the issuer. Note that closed-end mutual funds are not redeemable securities because they trade like a stock on an exchange.

  • Principal underwriter - Thisrefers to the sponsor or distributor of the mutual fund.This underwriter has an exclusive agreement with the mutual fund to purchase shares at the net asset value (NAV) and resell either to dealers, the public, or both.
Registration of Investment Companies
Related Articles
  1. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  2. Trading Strategies

    The Top Spread-Betting Strategies

    What are the most commonly followed spread-betting strategies (in countries where it's legal)?
  3. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  4. Investing News

    Is Quinoa Unhealthy for Bolivia's Economy?

    Is one of the world’s healthiest superfoods terribly unhealthy for its country's economy?
  5. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  6. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  7. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  8. Entrepreneurship

    World's Top 10 Serial Entrepreneurs

    There are entrepreneurs, and then there are serial entrepreneurs. Investopedia takes a look at who they are and how they keep making it big.
  9. Credit & Loans

    How Long Bankruptcy Will Affect You

    How long will the sad chapter of bankruptcy impact the rest of your life?
  10. Insurance

    Umbrella Insurance: You May Need It, Too

    If you have assets to protect – or just run a business from home – you could be unpleasantly surprised at how much you need umbrella insurance.
RELATED TERMS
  1. Record Date

    The cut-off date established by a company in order to determine ...
  2. Supply

    A fundamental economic concept that describes the total amount ...
  3. Purchasing Power

    The value of a currency expressed in terms of the amount of goods ...
  4. Investment Banker

    Someone working at an institution raising capital for companies, ...
  5. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the ...
RELATED FAQS
  1. Are stocks real assets?

    Stocks are financial assets, not real assets. Financial assets are paper assets that can be easily converted to cash. Real ... Read Full Answer >>
  2. Why would someone change their Social Security number?

    In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, ... Read Full Answer >>
  3. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  4. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  5. How are non-qualified variable annuities taxed?

    Non-qualified variable annuities are tax-deferred investment vehicles with a unique tax structure. After-tax money is deposited ... Read Full Answer >>
  6. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!