The Investment Company Act of 1940 (commonly referred to as the '40 Act) is an

act of Congress An Act of Congress is a statute enacted by the United States Congress. Acts may apply only to individual entities (called Public and private bills, private laws), or to the general public (Public and private bills, public laws). For a Bill (law) ...

which regulates

investment fund An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages inc ...

s. It was passed as a

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

Public Law Public law is the part of law that governs relations between legal persons and a government, between different institutions within a state, between different branches of governments, as well as relationships between persons that are of direct ...

() on August 22, 1940, and is codified at . Along with the

Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities (stocks, bonds, and debentures) in the United States of America. A landma ...

, the

Investment Advisers Act of 1940 The Investment Advisers Act of 1940, codified at through , is a United States federal law that was created to monitor and regulate the activities of investment advisers (also spelled "advisors") as defined by the law. It is the primary source of r ...

, and extensive rules issued by the

U.S. Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

; it is central to

financial regulation Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled ...

in the United States. It has been updated by the Dodd-Frank Act of 2010. It is the primary source of regulation for mutual funds and closed-end funds, now a multi-trillion dollar investment industry. The 1940 Act also impacts the operations of hedge funds, private equity funds and even

holding companies A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...

History

Following the founding of the

mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...

in 1924,

investor An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some specie ...

s invested in this new investment vehicle heavily. Five and a half years later, the

Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...

occurred in the

stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...

, followed shortly thereafter by the United States entry into the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

. In response to this crisis, the

United States Congress The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washing ...

wrote into law the

Securities Act of 1933 The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after ...

and the

. In 1935, Congress requested that the SEC report on the industry, and the Investment Trust Study was reported between 1938 and 1940. The law as originally introduced was different from the law which passed; the original draft granted more broad power to the SEC, while the final bill was a compromise between the SEC and industry which was drafted and submitted to Congress by joint members of the SEC and industry, and Congress ultimately passed a similar version. David Schenker, who became the head of the Investment Company Division at the SEC, was one of the original drafters. By 1992, the act had remained largely unchanged aside from amendments in 1970 to provide additional protections particularly around independent boards and limiting fees and expenses.

Scope

The act's purpose, as stated in the bill, is "to mitigate and ... eliminate the conditions ... which adversely affect the national public interest and the interest of investors". Specifically, the act regulated conflicts of interest in investment companies and securities exchanges. It seeks to protect the public primarily by legally requiring disclosure of material details about each investment company. The act also places some restrictions on certain mutual fund activities such as

short selling In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional "long" position, where the investor will profit if the value of the ...

shares. However, the act did not create provisions for the

(SEC) to make specific judgments about or even supervise an investment company's actual investment decisions. The act requires investment companies to publicly disclose information about their own financial health.

Jurisdiction

The Investment Company Act applies to all investment companies, but exempts several types of investment companies from the act's coverage. The most common exemptions are found in Sections 3(c)(1) and 3(c)(7) of the act and include

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...

s. In October 2021, over 60 law firms issued an "extremely unusual joint statement" that

special-purpose acquisition companies The Special Purpose was a jazz/funk fusion band from Seattle, Washington. Formed in the summer of 2004, the group - consisting of John Fawcett (drums), Stephen Fogg (8-string guitar), Christopher Stefanile (guitar) and Tim Symons (keyboards)-- bec ...

(SPACs) are subject to regulation under the Act when the SPAC does not acquire an operational business within one year of offering company shares to the public. The statement followed opposition from

Yale Yale University is a private research university in New Haven, Connecticut. Established in 1701 as the Collegiate School, it is the third-oldest institution of higher education in the United States and among the most prestigious in the wor ...

law professor John Morley and

New York University New York University (NYU) is a private research university in New York City. Chartered in 1831 by the New York State Legislature, NYU was founded by a group of New Yorkers led by then-Secretary of the Treasury Albert Gallatin. In 1832, the ...

law professor Robert Jackson regarding the dismissal of a lawsuit against the blank-check company GO Acquisition Corp. that had been filed on behalf of an investor.

Scale

When Congress wrote the act into

federal law Federal law is the body of law created by the federal government of a country. A federal government is formed when a group of political units, such as states or provinces join in a federation, delegating their individual sovereignty and many po ...

, rather than leaving the matter up to the individual states, it justified its action by including in the text of the bill its rationale for enacting the law:

The activities of such companies, extending over many states, their use of the instrumentalities of
interstate commerce The Commerce Clause describes an enumerated power listed in the United States Constitution ( Article I, Section 8, Clause 3). The clause states that the United States Congress shall have power "to regulate Commerce with foreign Nations, and amo ...
and the wide geographic distribution of their security holders, make difficult, if not impossible, effective state regulation of such companies in the interest of investors.

Type

The act divides the types of investment company to be regulated into three classifications: *

Face-amount certificate company A face-amount certificate company is an investment company which offers an investment certificate as defined by the United States Investment Company Act of 1940. In general, these companies issue fixed income debt securities that obligate the issu ...

: an investment company in the business of issuing face-amount certificates of the installment type. *

Unit investment trust In U.S. financial law, a unit investment trust (UIT) is an investment product offering a fixed (unmanaged) portfolio of securities having a definite life. Unlike open-end and closed-end investment companies, a UIT has no board of directors. A UI ...

: an investment company which is organized under a trust indenture, contract of custodianship or agency, or similar instrument, does not have a

board of directors A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...

, and issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities; but does not include a voting trust. *Management company: any investment company other than a face-amount certificate company or a unit investment trust. The most well-known type of management company is the

*Sec. 1. Findings and Declaration of Policy. *Sec. 2. General Definitions. *Sec. 3. Definition of Investment Company. *Sec. 4. Classification of Investment Companies. *Sec. 5. Subclassification of Management Companies. *Sec. 6. Exemptions. *Sec. 7. Transactions by Unregistered Investment Companies. *Sec. 8. Registration of Investment Companies. *Sec. 9. Ineligibility of Certain Affiliated Persons and Underwriters. *Sec. 10. Affiliations of Directors. *Sec. 11. Offers of Exchange. *Sec. 12. Functions and Activities of Investment Companies. *Sec. 13. Changes in Investment Policy. *Sec. 14. Size of Investment Companies. *Sec. 15. Investment Advisory and Underwriting Contracts. *Sec. 16. Changes in

Board of Directors A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...

; Provisions Relative to Strict Trusts. *Sec. 17. Transactions of Certain Affiliated Persons and Underwriters. *Sec. 18. Capital Structure. *Sec. 19.

Dividends A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...

. *Sec. 20. Proxies;

Voting Trusts A voting trust is an arrangement whereby the shares in a company of one or more shareholders and the voting rights attached thereto are legally transferred to a trustee, usually for a specified period of time (the "trust period"). In some voting ...

;

Circular Ownership Cross ownership is a method of reinforcing business relationships by owning stock in the companies with which a given company does business. Heavy cross ownership is referred to as circular ownership. The Japanese economy is alleged to be heavily ...

. *Sec. 21. Loans. *Sec. 22. Distribution, Redemption, and Repurchase of Redeemable Securities. *Sec. 23. Distribution and Repurchase of Securities: Closed-End Companies. *Sec. 24. Registration of Securities Under

. *Sec. 25. Plans of Reorganization. *Sec. 26. Unit Investment Trusts. *Sec. 27. Periodic Payment Plans. *Sec. 28. Face-Amount Certificate Companies. *Sec. 29. Bankruptcy of Face-Amount Certificate Companies. *Sec. 30. Periodic and Other Reports; Reports of Affiliated Persons. *Sec. 31. Accounts and Records. *Sec. 32.

Accountant An accountant is a practitioner of accounting or accountancy. Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certifi ...

s and

Auditor An auditor is a person or a firm appointed by a company to execute an audit.Practical Auditing, Kul Narsingh Shrestha, 2012, Nabin Prakashan, Nepal To act as an auditor, a person should be certified by the regulatory authority of accounting and au ...

s. *Sec. 33. Filing of Documents With Commission in Civil Actions. *Sec. 34. Destruction and Falsification of Reports and Records. *Sec. 35. Unlawful Representations and Names. *Sec. 36. Breach of

Fiduciary Duty A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...

. *Sec. 37.

Larceny Larceny is a crime involving the unlawful taking or theft of the personal property of another person or business. It was an offence under the common law of England and became an offence in jurisdictions which incorporated the common law of Engla ...

and

Embezzlement Embezzlement is a crime that consists of withholding assets for the purpose of conversion of such assets, by one or more persons to whom the assets were entrusted, either to be held or to be used for specific purposes. Embezzlement is a type ...

. *Sec. 38. Rules, Regulations, and Orders; General Powers of Commission. *Sec. 39. Rules and Regulations; Procedure for Issuance. *Sec. 40. Orders; Procedure for Issuance. *Sec. 41. Hearings by Commission. *Sec. 42. Enforcement of Title. *Sec. 43. Court Review of Orders. *Sec. 44. Jurisdiction of Offenses and Suits. *Sec. 45. Information Filed With Commission. *Sec. 46. Annual Reports of Commission; Employees of the Commission. *Sec. 47. Validity of Contracts. *Sec. 48. Liability of Controlling Persons; Preventing Compliance With Title. *Sec. 49. Penalties. *Sec. 50. Effect on Existing Law. *Sec. 51. Separability of Provisions. *Sec. 52. Short Title. *Sec. 53. Effective Date. *Sec. 54. Election to Be Regulated As A Business Development Company. *Sec. 55. Functions and Activities of Business Development Companies. *Sec. 56. Qualifications of Directors. *Sec. 57. Transactions With Certain Affiliates. *Sec. 58. Changes in Investment Policy. *Sec. 59. Incorporation of Provisions. *Sec. 60. Functions and Activities of Business Development Companies. *Sec. 61. Capital Structure. *Sec. 62. Loans. *Sec. 64. Accounts and Records. *Sec. 65. Liability of Controlling Persons; Preventing Compliance With Title.

Summary of notable provisions

Sections 1 - 5 define terms and classify investment companies. The definition of investment company also includes some exemptions. In addition to exemptions in the definitions, section 6 describes additional exemptions, with 6(c) notably giving the SEC broad discretion to "conditionally or unconditionally exempt any person ... from any provision". One of the original drafters, David Schenker (who became the head of the Investment Company Division at the SEC), explained the provision in 1940 by pointing to the complexities of the industry. This was notably used to exempt venture capital firms in the 1970s, which preceded changes to the statute, ultimately including a section 3(c)(7) which exempts issuers of non-public securities to qualified purchasers. Section 3(c)(11) generally exempts

collective trust fund Collective trust funds or Collective Investment Trusts (CITs) are a legal trust administered by a bank or trust company that combines assets for multiple investors who meet specific requirements set forth in the fund’s declaration of trust. Typ ...

s. Section 7 prohibits investment companies from doing business until registration, including

public offering A public offering is the offering of securities of a company or a similar corporation to the public. Generally, the securities are to be listed on a stock exchange. In most jurisdictions, a public offering requires the issuing company to publish a ...

s; in 2018, the SEC acted against a cryptocurrency hedge fund for allegedly violating section 7. Section 7(d) is notable in that it restricts foreign investment firms from offering securities, and by 1992 no foreign firms had registered since 1973. Section 9 outlines disqualification provisions which restrict people who have committed misconduct from practice in the industry; in practice, the SEC has historically granted waivers to allow such persons to remain involved. Various provisions restrict the powers of investment companies in

corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions th ...

over management particularly in transactions with affiliates, including section 10. These laws were passed as a reaction to

self-dealing Self-dealing is the conduct of a trustee, attorney, corporate officer, or other fiduciary that consists of taking advantage of their position in a transaction and acting in their own interests rather than in the interests of the beneficiaries of ...

excesses in the 1920s and 1930s, where funds would, for example, dump worthless stocks into certain funds, saddling investors with their losses.

Filings

To register, a firm initially files a notification with Form N-8A, followed by a form which depends on the type of fund. Among others, firms with open-end funds must file Form 24F-2.

References

External links

* Full text of th
Investment Company Act of 1940
available from the Securities and Exchange Commission.

* [https://web.archive.org/web/20160917081222/https://investedreviews.com/rules-regulations-promulgated-investment-company-act-1940/ Rules and Regulations promulgated under the Investment Company Act of 1940]. {{DEFAULTSORT:Investment Company Act Of 1940 1940 in American law United States federal securities legislation 76th United States Congress United States federal legislation articles without infoboxes Investment in the United States Financial history of the United States