According to the SEC, “This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.”
The Investment Advisers Act of 1940 was passed to prevent another stock market crash. Passed by President Franklin D. Roosevelt along with the Investment Company Act of 1940, this act gave the Securities and Exchange Commission (SEC) power to regulate investment advisers and trusts.
As the primary legislation governing investment companies and their investment product offerings, it has redefined the responsibilities of investment companies and the requirements for any publicly traded investment product offerings, such as open-end mutual funds, closed-end mutual funds, and unit investment trusts.
What is the Investment Company Act of 1940?
According to the SEC.gov website, “this Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations.”
Companies must disclose their financial condition to investors when stock is initially sold and on a regular basis because of this act. The SEC cannot directly supervise the investment decision or judge the merits of their investments, but it does enforce a certain transparency to minimize fraud.
What did the Acts of 1940 Define?
“Only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission. Other investment advisers typically register with the state in which the investment adviser maintains its principal place of business. “ – SEC.gov
Along with the Investment Company Act, the Investment Advisers Act defines what an “investment company” is. Companies that are seeking to avoid the product obligations and requirements of the Act must thoroughly check through the following definitions.
According to SEC.gov, Section 3(a)(1)(A) of the Investment Company Act defines an investment company as an issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in “securities.” Section 3(a)(1)(C) of the Investment Company Act defines an investment company as an issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire “investment securities” having a value exceeding 40 percent of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis. Investment companies are classified as management companies, unit investment trusts, or face-amount certificate companies.
Well, What is Not Regulated as an Investment Company?
Investment pools ( commodity pools that do not hold or invest in securities) are not investment companies and, therefore, are not regulated as investment companies under the Investment Company Act. The Investment Company Act also specifically excludes certain investment pools from the definition of “investment company.” Such as Section 2(b) of the Investment Company Act that exempts certain governments, government agencies, and instrumentalities from the provisions of the Investment Company Act, and Section 3(b)(1) of the Investment Company Act that excludes some issuers from the definition of investment company if they are primarily engaged in a business other than investing, reinvesting, holding or trading securities. There are other exclusionary definitions as well, but these are just two to name off.
Why is the Investment Act of 1940 so important?
Because of the Investment Advisers Act of 1940. Financial advisers must act primarily on behalf of their clients and must perform the “affirmative duty of ‘utmost good faith’ and full and fair disclosure of material facts” as part of their duty to exercise client loyalty and care. Investment advisors are also required to pass a qualifying exam and register with a regulatory body as part of the Act.
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