View source for Investment Company Act of 1940

{{Short description|United States act of Congress which regulates investment funds}}
{{Infobox U.S. legislation
| shorttitle        = Investment Company Act of 1940
| colloquialacronym = '40 Act
| enacted by        =
| public law url    =
| cite public law   = Pub. L. 76–768
| cite statutes at large = 54 Stat. 789
| sections created  = 15 U.S.C. §§ 80a-1–80a-64
| introducedin      =
| introducedbill    =
| introducedby      =
| introduceddate    =
| committees        =
| passedbody1       =
| passeddate1       =
| passedvote1       =
| passedbody2       =
| passeddate2       =
| passedvote2       =
| signedpresident   =
| signeddate        = August 22, 1940
| amendments        = [[Dodd-Frank Act of 2010]]
| SCOTUS cases      = [[Jones v. Harris Associates]]
}}
The '''Investment Company Act of 1940''' (commonly referred to as the '40 Act) is an [[act of Congress]] which regulates [[investment fund]]s. It was passed as a United States [[Act of Congress|Public Law]] ({{USPL|76|768}}) on August 22, 1940, and is codified at {{usc|15|80a-1|80a-64}}. Along with the [[Securities Exchange Act of 1934]], the [[Investment Advisers Act of 1940]], and extensive rules issued by the [[U.S. Securities and Exchange Commission]]; it is central to [[financial regulation]] 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.<ref>Lemke, Lins and Smith, ''Regulation of Investment Companies'' (Matthew Bender, 2013).</ref> The 1940 Act also impacts the operations of hedge funds, private equity funds and even [[holding companies]].

==History==
Following the founding of the [[mutual fund]] in 1924, [[investor]]s invested in this new investment vehicle heavily. Five and a half years later, the [[Wall Street crash of 1929]] occurred in the [[stock market]], followed shortly thereafter by the United States entry into the [[Great Depression]]. In response to this crisis, the [[United States Congress]] wrote into law the [[Securities Act of 1933]] and the [[Securities Exchange Act of 1934]].

In 1935, Congress requested that the SEC report on the industry, and the Investment Trust Study was reported between 1938 and 1940.<ref name=":2">{{Cite web|url=https://www.sec.gov/divisions/investment/guidance/icreg50-92.pdf|title=Protecting Investors: A Half Century of Investment Company Regulation|publisher=U.S. Securities and Exchange Commission |access-date=2020-02-28}}</ref> 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, unanimously.<ref>{{Cite journal|last=Jaretzki|first=Alfred|date=1941-01-01|title=The Investment Company Act of 1940|url=https://openscholarship.wustl.edu/law_lawreview/vol26/iss3/2|journal=Washington University Law Review|volume=26|issue=3|pages=303–347|issn=2166-7993}}</ref><ref>{{cite news |title=2 Investment Bills Signed |url=https://www.newspapers.com/image/259330239 |access-date=9 September 2023 |via=Newspapers.com |work=The Honolulu Advertiser |date=24 Aug 1940 |page=11 |language=en |quote=...the legislation had passed unanimously in both the Senate and the House.}}</ref> David Schenker, who became the head of the Investment Company Division at the SEC,<ref name=":1" /> was one of the original drafters.<ref name=":0" />

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.<ref name=":2" />

==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 (finance)|short selling]] shares.  However, the act did not create provisions for the [[U.S. Securities and Exchange Commission]] (SEC) to make specific judgments about or even supervise{{clarify|date=September 2011}} 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]]s.

In October 2021, over 60 law firms issued an "extremely unusual joint statement" that [[special-purpose acquisition company|special-purpose acquisition companies]] (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 University|Yale]] law professor John Morley and [[New York University]] 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.<ref>[https://www.reuters.com/legal/transactional/law-profs-defend-theory-that-spac-is-illegal-under-investment-company-act-2021-11-01/ "Law profs defend theory that SPAC is illegal under Investment Company Act", by Alison Frankel] Reuters, November 1, 2021. Retrieved November 1, 2021.</ref><ref>[https://www.reuters.com/legal/litigation/49-firms-72-hours-how-spac-bar-united-against-law-profs-splashy-lawsuits-2021-08-30/ "49 firms in 72 hours: How the SPAC bar united against law profs' splashy lawsuits", by Alison Frankel] Reuters, August 30, 2021. Retrieved November 1, 2021.</ref>

===Scale===
When Congress wrote the act into [[federal law]], 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:

<blockquote>The activities of such companies, extending over many states, their use of the instrumentalities of [[interstate commerce]] and the wide geographic distribution of their security holders, make difficult, if not impossible, effective [[state law|state regulation]] of such companies in the interest of investors.</blockquote>

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

*[[Face-amount certificate company]]: an investment company in the business of issuing face-amount certificates of the installment type.
*[[Unit investment trust]]: an investment company which is organized under a [[trust (property)|trust indenture]], contract of custodianship or agency, or similar instrument, does not have a [[board of directors]], and issues only [[Redeemable Securities|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 [[mutual fund]].

==Contents==
{{div col}}
*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]]; Provisions Relative to Strict Trusts.
*Sec. 17. Transactions of Certain Affiliated Persons and Underwriters.
*Sec. 18. Capital Structure.
*Sec. 19. [[Dividends]].
*Sec. 20. [[Proxy voting|Proxies]]; [[Voting Trusts]]; [[Circular Ownership]].
*Sec. 21. Loans.
*Sec. 22. Distribution, Redemption, and Repurchase of [[Redeemable Securities]].
*Sec. 23. Distribution and Repurchase of Securities: [[Closed-end fund|Closed-End Companies]].
*Sec. 24. Registration of Securities Under [[Securities Act of 1933]].
*Sec. 25. Plans of Reorganization.
*Sec. 26. Unit Investment Trusts.
*Sec. 27. Periodic Payment Plans.
*Sec. 28. [[Face-amount certificate company|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]]s and [[Auditor]]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]].
*Sec. 37. [[Larceny]] and [[Embezzlement]].
*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.
{{Div col end}}

== Summary of notable provisions ==
Sections 1 – 5 define terms and classify investment companies. The definition of investment company also includes some exemptions.<ref name=":0" />

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".<ref name=":0">{{Cite web|url=https://www.rand.org/content/dam/rand/www/external/international_programs/capp/pubs/zeng_SEC_English.pdf|title=SEC's Exemptive power in regulating investment companies|last=Zeng|first=Feng|publisher=[[Rand Corporation]]|url-status=live|archive-url=https://web.archive.org/web/20200228015401/https://www.rand.org/content/dam/rand/www/external/international_programs/capp/pubs/zeng_SEC_English.pdf|archive-date=2020-02-28}}</ref> One of the original drafters, David Schenker (who became the head of the Investment Company Division at the SEC<ref name=":1">{{Cite journal|date=1941-01-01|title=The Investment Company Act of 1940|url=https://digitalcommons.law.yale.edu/ylj/vol50/iss3/4|journal=Yale Law Journal|volume=50|issue=3|issn=0044-0094}}</ref>), explained the provision in 1940 by pointing to the complexities of the industry.<ref name=":0" /> 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.<ref name=":0" /> Section 3(c)(11) generally exempts [[collective trust fund]]s.

Section 7 prohibits investment companies from doing business until registration,<ref>{{Cite web|url=https://www.weil.com/~/media/files/pdfs/SCL1309_MontgomeryComm.pdf|title=The Inadvertent Investment Company: Private Litigation Risk Under the Investment Company Act of 1940|last=Montgomery|first=Paige Holden|website=Andrews Securities Litigation and Regulation Reporter|url-status=live|archive-url=https://web.archive.org/web/20200228024036/https://www.weil.com/~/media/files/pdfs/SCL1309_MontgomeryComm.pdf|archive-date=2020-02-28|access-date=2020-02-28}}</ref> including [[public offering]]s; in 2018, the SEC acted against a cryptocurrency hedge fund for allegedly violating section 7.<ref>{{Cite web|url=https://www.omm.com/resources/alerts-and-publications/alerts/crypto-enforcement-sec-announces-first-action-for-investment-company-act-violation/|title=Crypto Enforcement – SEC Announces First Action for Investment Company Act Violation – O'Melveny|website=omm.com|language=en|access-date=2020-02-28}}</ref> 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.<ref name=":2" />{{Rp|xxvi}}

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.<ref>{{Cite web|url=http://www.ropesgray.com/en/newsroom/alerts/2014/December/Ropes-Grays-Investment-Management-Update-October-2014-November-2014|title=Ropes & Gray's Investment Management Update: October 2014 – November 2014|website=ropesgray.com|access-date=2020-02-28}}</ref>

Various provisions restrict the powers of investment companies in [[corporate governance]] over management particularly in transactions with affiliates,<ref name=":2" /> including section 10. These laws were passed as a reaction to [[self-dealing]] excesses in the 1920s and 1930s, where funds would, for example, dump worthless stocks into certain funds, saddling investors with their losses.<ref>{{Cite journal|last=Roe|first=Mark|date=1991-06-01|title=Political Elements in the Creation of a Mutual Fund Industry|url=https://scholarship.law.upenn.edu/penn_law_review/vol139/iss6/1|journal=University of Pennsylvania Law Review|volume=139|issue=6|page=1469|doi=10.2307/3312388 |jstor=3312388 |s2cid=154008914 |url-access=}}</ref>

== Filings ==
To register, a firm initially files a notification with Form N-8A, followed by a form which depends on the type of fund.<ref>{{Cite web|url=https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504htm.html|title=SEC.gov {{!}} Investment Company Registration and Regulation Package|publisher=U.S. Securities and Exchange Commission|access-date=2020-03-27}}</ref>

Among others, firms with open-end funds must file Form 24F-2.<ref>{{Cite web|url=https://www.investopedia.com/terms/s/sec-form-24f-2.asp|title=SEC Form 24F-2|last=Kenton|first=Will|website=Investopedia|language=en|access-date=2020-03-27}}</ref>

==See also== 
{{Div col}} 
* ''[[Jones v. Harris Associates]]''
*[[Alternative Investment Fund Managers Directive]]
* [[Securities regulation in the United States]]
* [[Commodity Futures Trading Commission]]
* [[Securities commission]]
* [[Chicago Stock Exchange]]
* [[Financial regulation]]
* [[NASDAQ]]
* [[New York Stock Exchange]]
* [[Stock exchange]]
* [[Regulation D (SEC)]]
;Related legislation
* 1933 – [[Securities Act of 1933]]
* 1934 – [[Securities Exchange Act of 1934]]
* 1938 – [[Temporary National Economic Committee]] (establishment)
* 1939 – [[Trust Indenture Act of 1939]]
* 1940 – [[Investment Advisers Act of 1940]]
* 1968 – [[Williams Act]] (Securities Disclosure Act)
* 1975 – [[Securities Acts Amendments of 1975]] 
* 1982 – [[Garn–St. Germain Depository Institutions Act]]
* 1999 – [[Gramm-Leach-Bliley Act]] 
* 2000 – [[Commodity Futures Modernization Act of 2000]]
* 2002 – [[Sarbanes–Oxley Act]]
* 2006 – [[Credit Rating Agency Reform Act]] of 2006
* 2010 – [[Dodd–Frank Wall Street Reform and Consumer Protection Act]]
{{Div col end}}

==References==
{{Reflist}}

==External links==
* Full text of the [https://www.sec.gov/about/laws/ica40.pdf Investment Company Act of 1940], available from the Securities and Exchange Commission.
* [https://web.archive.org/web/20100905235835/http://taft.law.uc.edu/CCL/InvCoRls/index.html Rules and Regulations promulgated under the Investment Company Act of 1940]. 
* [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].

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{{DEFAULTSORT:Investment Company Act of 1940}}
[[Category:1940 in American law]]
[[Category:United States federal securities legislation]]
[[Category:76th United States Congress]]
[[Category:United States federal legislation articles needing infoboxes]]
[[Category:Investment in the United States]]
[[Category:Financial history of the United States]]