Investment Company Act of 1940

The Investment Company Act of 1940 was created through an act of Congress to require investment company registration and regulate the product offerings issued by investment companies in the public market. This piece of legislation clearly defines the responsibilities and requirements of investment companies as well as the requirements for publicly traded investment product offerings including open-end mutual funds, closed-end mutual funds and unit investment trusts. It primarily targets publicly traded retail investment products.

The Investment Company Act of 1940 followed market sentiment invoking interest and the passing of the Securities Act of 1933. Provisions of the Investment Company Act of 1940 were created to establish and integrate a more stable financial market regulatory framework following the stock market crash of 1929. The Securities Act of 1933 focused on greater transparency for investors. The Investment Company Act of 1940 is focused primarily on the regulatory framework for retail investment products.

As a function of its title, the Investment Company Act of 1940 lays out the regulations U.S. investment companies must abide by when offering and maintaining pooled investment funds. The legislation is enforced and regulated by the Securities and Exchange Commission (SEC). It defines an “investment company” and sets forth obligations and regulations that an investment company must abide by in the investment product securities that it offers. It builds on the Securities Act of 1933 which requires registration of securities. The ’40 Act details the required obligations of an investment company’s product offerings. It includes provisions regarding filings, service charges, financial disclosures and the fiduciary duties of investment companies. Companies seeking to avoid the product obligations and requirements of the ’40 Act may be able to receive an exemption. For example, 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.

In accordance with the Investment Company Act of 1940, investment companies must register with the SEC to offer their securities in the public market. The Investment Company Act of 1940 lays out the steps a company should take in the investment company registration process. Investment companies must file and complete the registration process with the Securities and Exchange Commission.

Any company considered to be an “investment company” by the provisions of the Investment Company Act of 1940 must register with the Securities and Exchange Commission. Companies register for different classifications based on the type of product or the range of products that they wish to manage and issue to the investing public.

One example of an investment company classification is a Management Investment Company. A Management Investment Company is the most common type of investment company registered with the SEC. Management Investment Companies can be diversified. Diversified Management Investment Companies can take numerous forms and also may offer a range of market products.

The Investment Company Act of 1940 is the primary legislation governing investment companies and their investment product offerings. It has been impacted by the Dodd-Frank Act of 2010 with numerous revisions. The ’40 Act sets forth requirements for investment companies by classification and product offering.

Its provisions include regulations for transactions of certain affiliated persons and underwriters; accounting methodologies; recordkeeping requirements; auditing requirements; how securities may be distributed, redeemed and repurchased; changes to investment policies; and actions in the event of fraud or breach of fiduciary duty. Further, it sets forth specific guidelines for different types of classified investment companies and includes provisions governing the rules of companies operating products including unit investment trusts, open-end mutual funds, closed-end mutual funds and more.

Other pertinent requirements of the Investment Company Act of 1940 include:

• A board of directors, 75% of whom must be independent.
• Limitations on investment strategies, such as the use of leverage.
• Maintenance of a certain percentage of assets in cash for investors who might wish to sell.
• Disclosure of investment company structure, financial condition, investment policies and objectives to investors.