Investment Companies - Registration of Investment Companies


Investment Company Act of 1940: Section 8
If a company is in the business of owning, holding and trading securities and 40% or more of the company's assets are invested in securities (not including government securities and the securities of majority-owned subsidiaries), Section 8 of the Investment Company Act of 1940 requires that the company register with the SEC as an investment company. This registration must occur within a 90-day window, and must meet certain minimum requirements:

  • The company must have at least $100,000 in investment capital;
  • It must have 100 or more investors in the company;
  • It must have explicitly defined investment objectives;
  • It can have no more than one class of security.

The Securities Act of 1933
Once the investment company is registered under the Act of 1940, it must register any new securities it intends to sell with the SEC; this registration takes place under the Securities Act of 1933 and consists of two parts:

Prospectus
The first part is called the prospectus. This is the documentation given to every customer to whom the company's securities are recommended or offered. It contains any information the SEC has determined the company should reveal, including the date of the prospectus, the primary philosophy and objectives of the fund, the management company and the sponsor.

It must also include the following disclaimer:


"These securities have not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed on the accuracy or adequacy of this prospectus. No state has approved or disapproved this offering. Any representation to the contrary is a criminal offense."

In addition, the prospectus will outline the expenses associated with owning shares of the mutual fund. Because mutual fund shares are continuously offered as new issues, the requirement to provide a prospectus is continuous, as per the 1933 act.

Moreover, under the 1940 act, an investment company must update each fund's prospectus every year and send shareholders semiannual updates detailing purchases and sales, as well as providing the most recent balance sheet, income statement, information on all compensation paid to the board of directors and advisory board, and a listing of the amounts and values of the securities held by the fund. One of these reports must be an audited annual report.

Statement of Additional Information
The second part of this registration required under the Securities Act of 1933 is called the statement of additional information. This document is not given to every client, but it must be made available for inspection by the public and can be obtained from the sponsor upon the investor's request.



Look Out!
The Securities Act of 1933 deals primarily with the issuance of new securities. The Securities Exchange Act of 1934 regulates the secondary markets on which already-issued securities trade.


WRAP Accounts
Related Articles
  1. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  2. Forex Education

    China's Devaluation of the Yuan

    Just over one week ago the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the yuan, knocking over 3% off its value.
  3. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  4. Investing Basics

    Explaining Rehypothecation

    Rehypothecation occurs when an asset used as collateral for one party is reused in another transaction.
  5. Investing Basics

    What's a Price-Taker?

    Price-taker is an economic term describing a market participant who has no effect on overall market activity.
  6. Economics

    Explaining the Participation Rate

    The participation rate is the percentage of civilians who are either employed or unemployed and looking for a job.
  7. Economics

    Understanding Organic Growth

    Organic growth is the increase in a company’s revenue and value due to internal operations.
  8. Investing Basics

    Explaining Options Contracts

    Options contracts grant the owner the right to buy or sell shares of a security in the future at a given price.
  9. Credit & Loans

    What's a Nonperforming Loan?

    A nonperforming loan is any borrowed sum where the borrower has failed to pay scheduled payments for at least 90 days.
  10. Savings

    6 Ways to Save Money on Back-to-School Stuff

    Those school-supply lists just keep getting longer each year. Here's how to shop smart.
RELATED TERMS
  1. Yield To Maturity (YTM)

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

    A company's total revenue (equivalent to total sales) minus the ...
  3. Interest Coverage Ratio

    A debt ratio and profitability ratio used to determine how easily ...
  4. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  5. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  6. Remittance

    The term most commonly refers to money being sent via mail or ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... 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!