The Investment Company Act of 1940 (commonly referred to as the '40 Act) is an act of Congress which regulates investment funds . It was passed as a United States Public Law ( Pub. L. 76–768 ) on August 22, 1940, and is codified at 15 U.S.C. §§ 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. The 1940 Act also impacts the operations of hedge funds, private equity funds and even holding companies .
47-827: Following the founding of the mutual fund in 1924, investors 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
94-454: A prospectus detailing the terms and rights attached to the offered security, as well as information on the company itself and its finances. Many other regulatory requirements surround any public offering and they vary according to jurisdiction. The services of an underwriter are often used to conduct a public offering. Initial public offering (IPO) is one type of public offering. Not all public offerings are IPOs. An IPO occurs only when
141-431: A company offers its shares (not other securities) for the first time for public ownership and trading, an act making it a public company . However, public offerings are also made by already-listed companies. The company issues additional securities to the public, adding to those currently being traded. For example, a listed company with 8 million shares outstanding can offer to the public another 2 million shares. This
188-409: A limited life span, established at creation. Investors can redeem shares directly with the fund at any time (similar to an open-end fund) or wait to redeem them upon the trust's termination. Less commonly, they can sell their shares in the open market. Unlike other types of mutual funds, unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at
235-496: A modern mutual fund was the Boston Personal Property Trust that was founded in 1893; however, its original intent was as a workaround to Massachusetts law restricting corporate real estate holdings rather than investing. Early U.S. funds were generally closed-end funds with a fixed number of shares that often traded at prices above the portfolio net asset value . The first open-end mutual fund with redeemable shares
282-644: A mutual recognition regime that allows funds regulated in one country to be sold in all other countries in the European Union, if they comply with certain requirements. The directive establishing this regime is the Undertakings for Collective Investment in Transferable Securities Directive 2009 , and funds that comply with its requirements are known as UCITS funds. Regulation of mutual funds in Canada
329-424: A net asset value based on the value of the securities held in the funds. In the United States, at the end of 2019, assets in money market funds were $ 3.6 trillion, representing 14% of the industry. Bond funds invest in fixed income or debt securities. Bond funds can be sub-classified according to: In the United States, at the end of 2019, assets in bond funds (of all types) were $ 5.7 trillion, representing 22% of
376-399: 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. 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. Mutual fund A mutual fund
423-527: A similar version, unanimously. 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. The act's purpose, as stated in the bill, is "to mitigate and ... eliminate
470-449: A substitute for bank savings accounts , though money market funds are not insured by the government, unlike bank savings accounts. In the United States, money market funds sold to retail investors and those investing in government securities may maintain a stable net asset value of $ 1 per share, when they comply with certain conditions. Money market funds sold to institutional investors that invest in non-government securities must compute
517-522: A trust named Eendragt Maakt Magt ("unity creates strength"). His aim was to provide small investors with an opportunity to diversify. The first investment trust in the UK, the Scottish American Investment Trust formed in 1873, is considered the "most obvious progenitor" to the mutual fund, according to Diana B. Henriques . One of the earliest investment companies in the U.S. similar to
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#1732847471713564-442: Is a public offering but not an IPO. Once the transaction is complete, the company will have 10 million shares outstanding. Non-initial public offering of equity is also called seasoned equity offering . A shelf prospectus is often used by companies in exactly that situation. Instead of drafting one before each public offering, the company can file a single prospectus detailing the terms of many different securities it might offer in
611-745: Is an 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 in Europe ('investment company with variable capital'), and the open-ended investment company (OEIC) in the UK. Mutual funds are often classified by their principal investments: money market funds , bond or fixed income funds , stock or equity funds , or hybrid funds. Funds may also be categorized as index funds , which are passively managed funds that track
658-423: Is an offering of other securities, this entails the creation or expansion of a series (of bonds, warrants, etc.). However, more rarely, public offerings take place in the secondary market . This is called a secondary market offering : existing security holders offer to sell their stake to other, new owners, through the stock exchange. The offerer is different from the issuer (the company). A secondary market offering
705-567: 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 over management particularly in transactions with affiliates, including section 10. These laws were passed as
752-466: Is now called the "Vanguard 500 Index Fund" and is one of the largest mutual funds. Beginning the 1980s, the mutual fund industry began a period of growth. According to Robert Pozen and Theresa Hamacher, growth was the result of three factors: The 2003 mutual fund scandal involved unequal treatment of fund shareholders whereby some fund management companies allowed favored investors to engage in prohibited late trading or market timing . The scandal
799-636: Is primarily governed by National Instrument 81-102 "Mutual Funds", which is implemented separately in each province or territory. The Canadian Securities Administrator works to harmonize regulation across Canada. In the Hong Kong market mutual funds are regulated by two authorities: In Taiwan, mutual funds are regulated by the Financial Supervisory Commission (FSC). Mutual funds in India are regulated by Securities and Exchange Board of India ,
846-507: Is targeted at different investors, with hedge funds being available only to high-net-worth individuals. At the end of 2020, open-end mutual fund assets worldwide were $ 63.1 trillion . The countries with the largest mutual fund industries are: At the end of 2019, 23% of household financial assets were invested in mutual funds. Mutual funds accounted for approximately 50% of the assets in individual retirement accounts, 401(k)s and other similar retirement plans. Luxembourg and Ireland are
893-490: The net asset value (NAV) computed that day based upon the prices of the securities owned by the fund. In the United States, open-end funds must be willing to buy back shares at the end of every business day. In other jurisdictions, open-end funds may only be required to buy back shares at longer intervals. For example, UCITS funds in Europe are only required to accept redemptions twice each month (though most UCITS accept redemptions daily). Most open-end funds also sell shares to
940-441: 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 funds . Section 7 prohibits investment companies from doing business until registration, including public offerings ; in 2018, the SEC acted against a cryptocurrency hedge fund for allegedly violating section 7. Section 7(d)
987-477: 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
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#17328474717131034-429: The United States, the principal laws governing mutual funds are: Mutual funds are overseen by a board of directors if organized as a corporation, or by a board of trustees , if organized as a trust. The Board must ensure that the fund is managed in the interests of the fund's investors. The board hires the fund manager and other service providers to the fund. The sponsor or fund management company often referred to as
1081-419: The act did not create provisions for the U.S. Securities and Exchange Commission (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. The Investment Company Act applies to all investment companies, but exempts several types of investment companies from
1128-547: 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 funds . In October 2021, over 60 law firms issued an "extremely unusual joint statement" that 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
1175-446: 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 shares. However,
1222-488: The creation of the UIT. In the United States, at the end of 2019, there were 4,571 UITs with combined assets of less than $ 0.1 trillion. Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering . Their shares are then publicly listed. Investors who want to sell their shares must sell their shares to another investor in the market; they cannot sell their shares back to
1269-487: 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
1316-463: The development of open-end mutual funds (as opposed to closed-end funds). In 1936, U.S. mutual fund industry was nearly half as large as closed-end investment trusts. But mutual funds had grown to twice as large as closed-end funds by 1947; growth would accelerate to ten times as much by 1959. In terms of dollar amounts, mutual funds in the U.S. totaled $ 2 billion in value in 1950 and about $ 17 billion in 1960. The introduction of money market funds in
1363-431: The fund manager, trades (buys and sells) the fund's investments in accordance with the fund's investment objective. Funds that are managed by the same company under the same brand are known as a fund family or fund complex. A fund manager must be a registered investment adviser . In the European Union, funds are governed by laws and regulations established by their home country. However, the European Union has established
1410-442: The fund's investment objective, investment approach and permitted investments. The investment objective describes the type of income that the fund seeks. For example, a capital appreciation fund generally looks to earn most of its returns from increases in the prices of the securities it holds, rather than from dividend or interest income. The investment approach describes the criteria that the fund manager uses to select investments for
1457-442: The fund. Bond, stock, and hybrid funds may be classified as either index (or passively-managed) funds or actively managed funds. Alternative investments which incorporate advanced techniques such as hedging known as "liquid alternatives". Money market funds invest in money market instruments, which are fixed income securities with a very short time to maturity and high credit quality. Investors often use money market funds as
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1504-427: The fund. The price that investors receive for their shares may be significantly different from NAV; it may be at a "premium" to NAV (i.e., higher than NAV) or, more commonly, at a "discount" to NAV (i.e., lower than NAV). In the United States, at the end of 2019, there were 500 closed-end mutual funds with combined assets of $ 0.28 trillion. Mutual funds may be classified by their principal investments, as described in
1551-570: The high-interest rate environment of the late 1970s boosted industry growth dramatically. The first retail index funds appeared in the early 1970s, aiming to capture average market returns rather than doing detailed company-by-company analysis as earlier funds had done. Rex Sinquefield offered the first S&P 500 index fund to the general public starting in 1973, while employed at American National Bank of Chicago. Sinquefield's fund had $ 12 billion in assets after its first seven years. John "Mac" McQuown also began an index fund in 1973, though it
1598-408: The industry. Stock or equity funds invest in common stocks . Stock funds may focus on a particular area of the stock market, such as 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 publicly listed. In most jurisdictions, a public offering requires the issuing company to publish
1645-958: The issuer at the net asset value of each share as of the close of the trading day in which the order was placed, as long as the order was placed within a specified period before the close of trading. They can be traded directly with the issuer. Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The advantages of mutual funds include economies of scale , diversification, liquidity, and professional management. As with other types of investment, investing in mutual funds involves various fees and expenses . Mutual funds are regulated by governmental bodies and are required to publish information including performance, comparisons of performance to benchmarks, fees charged, and securities held. A single mutual fund may have several share classes, for which larger investors pay lower fees. Hedge funds and exchange-traded funds are not typically referred to as mutual funds, and each
1692-515: The next several years. Shortly before the offering (if any) actually takes place, the company informs the public of material changes in its finances and outlook since the publication of the shelf prospectus. Other types of securities, besides shares, can be offered publicly. Bonds , warrants , capital notes and many other kinds of debt and equity vehicles are offered, issued and traded in public capital markets. A private company , with no shares listed publicly, can still issue other securities to
1739-447: The performance of an index, such as a stock market index or bond market index , or actively managed funds, which seek to outperform stock market indices but generally charge higher fees. The primary structures of mutual funds are open-end funds , closed-end funds , and unit investment trusts . Over long durations passively managed funds consistently overperform actively managed funds. Open-end funds are purchased from or sold to
1786-533: The primary jurisdictions for the registration of UCITS funds. These funds may be sold throughout the European Union and in other countries that have adopted mutual recognition regimes. The first modern investment funds , the precursor of mutual funds, were established in the Dutch Republic . In response to the financial crisis of 1772–1773 , Amsterdam-based businessman Abraham (or Adriaan) van Ketwich formed
1833-422: The prospectus and investment objective. The four main categories of funds are money market funds, bond or fixed-income funds, stock or equity funds, and hybrid funds. Within these categories, funds may be sub-classified by investment objective, investment approach, or specific focus. The types of securities that a particular fund may invest in are set forth in the fund's prospectus , a legal document that describes
1880-437: The public and have them traded on an exchange. A public company may also offer and list other securities alongside its shares. Most public offerings are in the primary market , that is, the issuing company itself is the offerer of securities to the public. The offered securities are then issued (allocated, allotted) to the new owners. If it is an offering of shares, this means that the company's outstanding capital grows. If it
1927-401: The public every business day; these shares are priced at NAV. Open-end funds are often referred to simply as "mutual funds". In the United States at the end of 2019, there were 7,945 open-end mutual funds with combined assets of $ 21.3 trillion, accounting for 83% of the U.S. industry. Unit investment trusts (UITs) are issued to the public only once when they are created. UITs generally have
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1974-424: The public. The statement followed opposition from 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. 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
2021-993: The regulator of the securities and commodity market owned by the Government of India, under the SEBI (Mutual Funds) regulations of 1996. The functional aspect of Mutual Funds industry comes under the purview of AMFI , a trade association of all fund houses. Formed in August 1995, the body undertook the Mutual Funds Sahi hai campaign in March 2017 for promoting investor awareness on mutual funds in India. There are three primary structures of mutual funds: open-end funds , unit investment trusts , and closed-end funds . Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. Open-end mutual funds must be willing to buy back ("redeem") their shares from their investors at
2068-613: 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 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. The act divides the types of investment company to be regulated into three classifications: Sections 1 - 5 define terms and classify investment companies. The definition of investment company also includes some exemptions. In addition to exemptions in
2115-525: Was established on March 21, 1924, as the Massachusetts Investors Trust, which is still in existence today and managed by MFS Investment Management . In the U.S., there were nearly six times as many closed-end funds as mutual funds in 1929. After the Wall Street Crash of 1929 , the United States Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. These new regulations encouraged
2162-517: Was part of a large pension fund managed by Wells Fargo and not open to the general public. Batterymarch Financial, a small Boston firm then employing Jeremy Grantham , also offered index funds beginning in 1973 but it was such a revolutionary concept they did not have paying customers for over a year. John Bogle was another early pioneer of index funds with the First Index Investment Trust, formed in 1976 by The Vanguard Group ; it
2209-645: Was uncovered by former New York Attorney General Eliot Spitzer and led to an increase in regulation. In a 2007 study about German mutual funds, Johannes Gomolka and Ralf Jasny found statistical evidence of illegal time zone arbitrage in trading of German mutual funds. Though reported to regulators, BaFin never commented on these results. Like other types of investment funds, mutual funds have advantages and disadvantages compared to alternative structures or investing directly in individual securities. According to Robert Pozen and Theresa Hamacher, these are: Mutual funds have disadvantages as well, which include: In
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