Investment Company Act of 1940

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The Investment Company Act of 1940 is an Act of Congress. It was passed as a United States Public Law and is also known as 15 U.S.C. 77 et seq. in the United States Code.

Contents

Background and Purpose

After the first mutual fund was created in 1924, the concept took off and investors flocked to the new investment vehicle. Five and a half years later, on October 24, 1929, Black Thursday took the thrill out of the stock market and led to the Great Depression. Learning from the mistakes of the past, Congress wrote into law the Securities Act of 1933 and the Securities Exchange Act of 1934 in order to regulate trade in the interest of the public.

Investment companies were still a new idea in 1940. In order to instill investors' confidence in these companies and to protect the public interest from this unique type of security, Congress passed the Investment Company Act. The new law set separate standards by which investment companies should be regulated.

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."

Jurisdiction

The Investment Company Act does not cover all investment companies. The requirements are limited by the scale and the type of company.

Scale

When the 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 the reasoning behind the decision:
“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 regulation of such companies in the interest of investors.”

Type

The Act divides the type 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 indenture, contract of custodianship or agency, or similar instrument, does not have a board of directors, 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 mutual fund.
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