Investment Company Act of 1940
The Investment Company Act of 1940 (“1940 Act”) regulates companies, that engage primarily in investing in securities of other companies. A mutual fund, one type of investment company, is a corporation (or business trust) that invests in other companies. Investors buy shares in the mutual fund, which in turn, invests in other securities, called “portfolio securities.”. An investment adviser, discussed below, makes day-to-day decisions about which portfolio securities the mutual fund should buy or sell. Congress enacted the 1940 Act to address abuses in the investment company industry and is designed to help minimize conflicts of interest that arise in the operation of these companies.
The 1940 Act seeks to prevent abuses through mandating disclosure regarding the investment company’s structure, operations, financial condition, and investment policies when shares of the investment company are initially offered to the public and, thereafter, on a regular periodic bases. Investment companies register with the SEC under the 1940 Act and typically register their securities under the 1933 Act. The provisions in the 1940 Act govern, among other things:
- Registration of investment companies;
- Transactions between the investment company and an affiliate (e.g., the investment adviser to the investment company”);
- Purchases and sales of investment company shares; and
- Responsibilities of the investment company’s directors or trustees.
Congress, the SEC, the SROs, and state regulators are responding to allegations of recent wrongdoing within the mutual fund industry.
Securities Exchange Act of 1934 Investment Advisers Act of 1940