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Investment Company Act of 1940 – Definition

Investment Company Act of 1940 – Definition

The Investment Company Act of 1940 compels investment company registration and requires monitoring of the product offerings which investment companies issue in the public market. This enactment vividly explains the importance and prerequisites of investment companies and specifications for investment product offerings that are publicly traded. Covered investment companies generally consist of open-end mutual funds, unit investment trusts, and closed-end mutual funds. The 1940 Investment Company Act is fundamentally aimed at openly traded small-scale investment products.

A Little More on What is the Investment Company Act of 1940

Elements of the 1940 Investment Company Act were designed to create an equilibrium in the financial market regulatory structure after the depletion of the stock market in 1929. The 1933 Securities Act centered majorly on more clarity for investors. The 1940 Investment Company Act concentrates on the regulatory scheme for small-scale investment products.

Based on its title, the 1940 Investment Company Act states explicitly the regulations which must be obeyed by U.S. investment companies whenever they offer and maintain pooled investment funds. The Securities and Exchange Commission (SEC) enforces and regulates the legislation. The SEC defines an investment company and also states obligations, as well as, regulations which an investment company must stick to in the investment product securities which it offers. It builds on the 1993 Securities Act which requires securities registration. The ’40 Act explain the necessary obligations of the product offerings of an investment company. This includes provisions in relation service to charges, filings, fiduciary duties, and the financial disclosures of investment companies. Companies trying to avoid the ’40 Act product prerequisites and obligations may be able to get an exemption. For instance, sometimes, hedge funds fall under what the Act defines as “investment company” but may avoid the Act’s prerequisites by asking for an exemption under sections 3(c)7 or 3(c)(1).

Investment Companies

In accordance with the 1940 Investment Company Act, it’s obligatory for investment companies to register with the Securities and Exchange Commission for their securities to be offered in the public market. The 1940 Investment Company Act states the steps a company should follow in the registration process of an investment company. It’s mandatory that investment companies file and complete the whole registration process with the Securities and Exchange Commission.

Classifications of Investment Company

By the provisions of the 1940 Investment Company Act, any company termed to be an “investment company” must register with the SEC. Companies register for various classification depending on the product type or range of products which they are interested in managing and issuing to the investing public.

Management investment Company is one instance of an investment company classification. A Management Investment Company is the commonest investment company type registered with the Securities and Exchange Commission. It’s possible to diversify Management Investment Companies. Diversified Management Investment Companies can assume many forms and may offer a variety of market products.

1940 Act Provisions

The 1940 Investment Company Act is the primary legislation controlling investment companies, as well as, their investment product offerings. The 2010 Dodd-Frank Act has impacted it with many revisions. The ’40 Act states prerequisites for investment companies by product offering and classification.

Its provisions comprise transaction regulations of specific affiliated individuals and underwriters; record-keeping requirements; accounting methodologies; ways of distributing securities; auditing requirements; changes to investment policies; redeemed and repurchased; and actions in the case fiduciary duty fraud or breach. Also, it states specific guidelines for various classified investment company types and includes provisions regulating companies operating products rules including open-end mutual funds, unit investment trusts, closed-end mutual funds and much more.

Other necessary requirements of the 1940 Investment Company Act include:

A board of directors, with 75% of them being independent.

Investment strategy limitation, such as leverage use.

Maintaining a certain asset percentage in cash for the purpose of investors who may want to sell.

Disclosing investment company structure, investment policies, financial condition, and investors’ objectives.

References for Investment Company Act of 1940

Academic Research on Investment Company Act of 1940

The Investment Company Act of 1940, Jaretzki Jr, A. (1940). Wash. ULQ, 26, 303.

Fiduciary Standards of Conduct Under the Investment Company Act of 1940, Greene, L. M. (1959). Geo. Wash. L. Rev., 28, 266.

Investment Company Act of 1940, Thomas, J. W. (1940). Geo. Wash. L. Rev., 9, 918.

Investment Company Act of 1940, Tolins, R. B. (1940). Cornell LQ, 26, 77.

Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, Loomis Jr, P. A. (1959). Geo. Wash. L. Rev., 28, 214.

An Aspect of the Emerging Federal Corporation Law: Directorial Responsibility Under the Investment Company Act of 1940, Eisenberg, M., & Lehr, D. J. (1965). Rutgers L. Rev., 20, 181.

The Uniform Offering Price of Mutual Fund Shares Under the Investment Company Act of 1940, Greene, L. M. (1959). U. Det. LJ, 37, 369.

The Investment Company Act of 1940 and Its Background, Bosland, C. C. (1941). Journal of Political Economy, 49(4), 477-529.

Criminal Prosecutions Under the Investment Company Act of 1940 and the Investment Advisers Act, Mathews, A. F. (1971). BC Indus. & Com. L. Rev., 13, 1257.

The Investment Company Act of 1940: SEC Enforcement and Private Actions, Knickle, H. N. (2004). Ann. Rev. Banking & Fin. L., 23, 777.

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