Investment Company Act of 1940

Investment Company Act of 1940
U.S. Government · Public domain · source
Shorttitle	Investment Company Act of 1940
Longtitle	An Act to provide for the registration and regulation of investment companies and investment advisers
Enactedby	76th United States Congress
Citations	Public Law 768
Effective	August 22, 1940
Admincode	17 CFR

Investment Company Act of 1940 is a federal law that regulates the organization and operation of investment companies, including mutual funds, closed-end funds, and unit investment trusts, to protect investors from fraud and mismanagement by SEC-registered investment advisers, such as Fidelity Investments, Vanguard Group, and BlackRock. The Act was enacted by the 76th United States Congress and signed into law by President Franklin D. Roosevelt on August 22, 1940, following the Wall Street Crash of 1929 and the subsequent Great Depression, which led to the establishment of the Securities and Exchange Commission (SEC) and the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Investment Company Act of 1940 has been amended several times, including by the National Securities Markets Improvement Act of 1996, which was signed into law by President Bill Clinton.

Introduction

The Investment Company Act of 1940 was introduced in the United States House of Representatives by Representative John William McCormack and in the United States Senate by Senator Carter Glass, with the support of Federal Reserve Chairman Marriner Eccles and SEC Chairman William O. Douglas. The Act was designed to regulate the investment company industry, which had grown significantly in the 1920s and 1930s, with companies such as Mutual Series and Scudder, Stevens & Clark offering diversified portfolios to investors, including pension funds and endowments, such as the Harvard University endowment and the Yale University endowment. The Act has been influenced by the work of economists such as John Maynard Keynes and Milton Friedman, and has been shaped by the experiences of investors, including Warren Buffett and Peter Lynch, who have invested in Berkshire Hathaway and Fidelity Magellan Fund, respectively.

Legislative History

The Investment Company Act of 1940 was passed by the 76th United States Congress after a series of hearings and debates, involving testimony from experts such as Professor Louis Loss and SEC Commissioner Robert Healy, as well as comments from industry representatives, including Investment Company Institute President Matthew P. Fink. The Act was influenced by the Securities Act of 1933 and the Securities Exchange Act of 1934, which were enacted in response to the Wall Street Crash of 1929 and the subsequent Great Depression, and has been compared to other financial regulations, such as the Glass-Steagall Act of 1933 and the Commodity Exchange Act of 1936. The Investment Company Act of 1940 has been amended several times, including by the Investment Advisers Act of 1940, which was enacted on the same day, and the Sarbanes-Oxley Act of 2002, which was signed into law by President George W. Bush.

Regulatory Framework

The Investment Company Act of 1940 establishes a regulatory framework for investment companies, including mutual funds, closed-end funds, and unit investment trusts, which are registered with the Securities and Exchange Commission (SEC) and subject to its oversight, as well as the Financial Industry Regulatory Authority (FINRA) and the Commodity Futures Trading Commission (CFTC). The Act requires investment companies to register with the SEC and to file periodic reports, including Form N-1A and Form N-CSR, which are reviewed by SEC staff, including Division of Investment Management Director Dalia Blass. The Act also establishes rules and regulations for the operation of investment companies, including requirements for board of directors, independent directors, and auditors, such as Deloitte and PricewaterhouseCoopers.

Key Provisions

The Investment Company Act of 1940 includes several key provisions, including the definition of an investment company, the registration requirements, and the regulatory framework, which have been influenced by the work of lawyers such as Justice Louis Brandeis and SEC Chairman William O. Douglas. The Act also includes prohibitions on certain activities, such as pyramiding and cross-trading, which were identified as abuses by the SEC and the Congress, and have been the subject of enforcement actions, including SEC v. Goldman Sachs and SEC v. JPMorgan Chase. The Act has been amended several times, including by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which was signed into law by President Barack Obama.

Impact and Enforcement

The Investment Company Act of 1940 has had a significant impact on the investment company industry, with companies such as Vanguard Group and BlackRock offering low-cost index funds to investors, including retail investors and institutional investors, such as pension funds and endowments, including the California Public Employees' Retirement System (CalPERS) and the Harvard University endowment. The Act has been enforced by the Securities and Exchange Commission (SEC), which has brought enforcement actions against investment companies and investment advisers, including SEC v. Fidelity Investments and SEC v. Putnam Investments, and has been the subject of litigation, including Jones v. Harris Associates and Northstar Financial Advisors Inc. v. Schwab Investments. The Act has also been influenced by the work of economists such as Joseph Stiglitz and Nouriel Roubini, who have written about the regulation of financial markets.

Amendments and Reforms

The Investment Company Act of 1940 has been amended several times, including by the National Securities Markets Improvement Act of 1996 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which were signed into law by President Bill Clinton and President Barack Obama, respectively. The Act has been the subject of reform efforts, including the SEC's rulemaking process, which has involved comments from industry representatives, including Investment Company Institute President Paul Schott Stevens, and academics, including Professor John C. Coffee Jr. and Professor Jill E. Fisch. The Act continues to play an important role in the regulation of the investment company industry, with companies such as Fidelity Investments and Charles Schwab Corporation offering investment products to investors, including retail investors and institutional investors, such as pension funds and endowments, including the California State Teachers' Retirement System (CalSTRS) and the Yale University endowment. Category:United States federal securities legislation