Considered one of the most important pieces of regulation governing the US stock market, the Investment Company Act of 1940 is a law that Congress passed to define and regulate mutual funds and closed-end funds as well as hedge funds, private equity funds and holding companies. Enforced by the Investment Management division at the Securities and Exchange Commission (SEC), it is intended to “mitigate and … eliminate the conditions … which adversely affect the national public interest and the interest of investors.”
The Investment Company Act of 1940—along with the Investment Advisers Act of 1940—was put in place in response to the Wall Street crash of 1929 and the ensuing Great Depression. The Investment Company Act’s purpose was to build investor confidence in investment companies—which were relatively new at that time—by reducing conflicts of interest. It was also intended to protect the public interest by requiring investment companies disclose key information concerning their financial health, structure, investment policies and objectives using Form N-SAR.
Under this act, investment companies with more than 100 investors are required to register with the SEC. They are also required to have a board of directors, with 75% of board members being independent. Additionally, the Act requires mutual funds to limit the use of leverage and maintain a certain amount of cash that will cover investors who want to sell their shares at any time.
With the advent of the Dodd-Frank Act of 2010, the Investment Company Act of 1940 received various updates including new regulations around mutual and hedge funds. That said, a number of hedge funds are able to exempt themselves from the Investment Company Act based on Sections 3(c)(1) and 3(c)(7).
The SEC does not supervise or make specific judgments on the investments an investment company chooses to make. Certain commodity pools as well as managed future funds do not fall under the Act’s jurisdiction.
With nearly 50 years of global regulatory experience, and as one of the first companies to actively engage with the XBRL filing program, Merrill is uniquely qualified to help filers worldwide successfully navigate ever-changing global compliance requirements. With Merrill, you can manage regulatory disclosures with absolute security, precision and accuracy.