Investment Company Act Of 1940


DEFINITION of 'Investment Company Act Of 1940'

Created in 1940 through an act of Congress, this piece of legislation clearly defines the responsibilities and limitations placed on open-end mutual funds, unit investment trusts and closed-end funds that offer investment products to the public. The Investment Company Act of 1940 grew out of the stock market crash of 1929 as an attempt to stabilize financial markets. It is enforced and regulated by the Securities and Exchange Commission. This act clearly sets out the limits regarding filings, service charges, financial disclosure and the fiduciary duties of fund companies.

BREAKING DOWN 'Investment Company Act Of 1940'

This act applies to companies that primarily invest or trade in securities and/or offer their own securities to the public. Hedge funds sometimes fall under the act's definition of "investment company," but may be able to avoid the act's requirements by requesting an exemption under sections 3(c)(1) or 3(c)7.

The Investment Company Act of 1940 defines and classifies investment companies. It describes their functions, activities, size and structure; provides for exemptions from the act and election to be regulated as a business development company; regulates transactions of certain affiliated persons and underwriters; outlines accounting, recordkeeping and auditing requirements; and describes how securities may be distributed, redeemed and repurchased. It also explains how investment companies must handle changes in their investment policies and what will happen in the event of fraud or breach of fiduciary duty. Further, it sets forth specific guidelines for different types of investment companies, including unit investment trusts, periodic payment plans and face-amount certificate companies.

Specifically, the Investment Company Act requires funds to do the following:

  • Register with the SEC.
  • Have a board of directors , 75% of whom must be independent.
  • Limit their investment strategies, such as the use of leverage.
  • Maintain a certain percentage of their assets in cash for investors who might wish to sell.
  • Disclose their structure, financial condition, investment policies and objectives to investors.

The act's regulations are intended to minimize conflicts of interest and steer funds toward acting in their investors' best interests. The SEC does not directly supervise or judge the investment company's decisions.

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  3. SEC Form N-54C

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  4. 3C7

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  5. Fiduciary

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  6. 3C1

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