Table of Contents

What Is the Investment Company Act of 1940? Key Insights and Impacts

By

James Chen

Updated August 23, 2025

Reviewed by

Chip Stapleton

Fact checked by

Jiwon Ma

Investment Company Act of 1940: An act of Congress that regulates the formation of investment companies and the activities they engage in. — Investopedia / Michela Buttignol

What Is the Investment Company Act of 1940?

The Investment Company Act of 1940 regulates how investment companies are organized and operate. It sets industry standards and aims to protect investors by making them aware of securities risks.

The Act requires investment companies to give investors information about objectives, policies, and financial condition when stock is sold and at regular intervals. Investment companies must also inform investors about investment company structure and operations.

The Act was signed into law by President Franklin D. Roosevelt along with the Investment Advisers Act of 1940. Both give the U.S. Securities and Exchange Commission (SEC) power to regulate investment trusts and investment counselors.

Key Takeaways

The Investment Company Act of 1940 regulates the formation and activities of investment companies to protect investors.
Enforced by the SEC, the Act mandates investment companies to provide investors with detailed disclosures about their operations.
The Act was introduced following the 1929 Stock Market Crash to bring stability to the U.S. financial markets.
Classification under the Act affects requirements; for example, mutual funds and hedge funds have different obligations.
Exemptions are available for certain companies, allowing them to bypass specific regulatory requirements of the Act.

Exploring the Investment Company Act of 1940: Key Regulations and Impacts

The legislation in the Investment Company Act of 1940 is enforced and regulated by the Securities and Exchange Commission (SEC). This legislation defines the responsibilities and requirements 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. The Act primarily targets publicly traded retail investment products.

The Investment Company Act of 1940 was passed in order to establish and integrate a more stable financial market regulatory framework following the Stock Market Crash of 1929. It primarily governs investment companies and their product offerings. The Securities Act of 1933 was also passed in response to the crash, but it focused on greater transparency for investors; the Investment Company Act of 1940 is focused primarily on the regulatory framework for retail investment products.

The Act details rules and regulations that U.S. investment companies must abide by when offering and maintaining investment product securities. The Act covers requirements for filings, charges, financial disclosures, and fiduciary duties.

The Act also provides regulations for transactions of certain affiliated persons and underwriters; accounting methodologies; record-keeping requirements; auditing requirements; how securities may be distributed, redeemed, and repurchased; changes to investment policies; and actions in the event of fraud or breach of fiduciary duty.

Important

The Act protects retirement savings since mutual funds are key parts of plans like 401(k)s.

It also provides guidelines for investment companies, including rules for unit trusts, open-end, and closed-end mutual funds.

What Qualifies as an Investment Company Under the 1940 Act?

The Act defines what qualifies as an "investment company." Companies seeking to avoid the product obligations and requirements of the Act may be eligible for an exemption. For example, hedge funds sometimes fall under the Act's definition of "investment company" but may be able to avoid the Act's requirements by requesting an exemption under sections 3(c)(1) or 3(c)7.

In accordance with the Investment Company Act of 1940, investment companies must register with the SEC before they can offer their securities in the public market. The Act also lays out the steps an investment company is required to take during this registration process.

Companies register for different classifications based on the type of product or the range of products that they wish to manage and issue to the investing public. In the U.S., there are three types of investment companies (categorized according to federal securities laws): mutual funds/open-end management investment companies; unit investment trusts (UITs); and closed-end funds/closed-end management investment companies. Requirements for investment companies are based on their classification and their product offerings.

Dodd-Frank's Influence on the Investment Company Act of 1940

After the Great Recession, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. It is an extremely large piece of legislation that resulted in the creation of new government agencies to oversee different aspects of the act, and hence, the entire financial system in the U.S. The act impacted several areas, including "consumer protection, trading restrictions, credit ratings, financial products, corporate governance, and transparency."

Dodd-Frank impacted the Investment Advisers Act of 1940 more than it did the Investment Company Act of 1940; however, hedge funds have been impacted by Dodd-Frank.

Under the Investment Company Act, hedge funds were not required to register. This gave hedge funds a significant amount of carte blanche in their trading activities. Dodd-Frank established new rules for hedge funds and private equity funds to register with the SEC and abide by certain disclosure requirements based on their size.

Why Was the Investment Company Act of 1940 Passed?

The Investment Company Act of 1940 was established after the 1929 Stock Market Crash and the Great Depression that followed in order to protect investors and bring more stability to the financial markets in the U.S.

What Constitutes an Investment Company Under the 1940 Act?

The 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% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis."

Which Companies Are Qualified for an Exemption?

There are a variety of companies that can qualify for exemptions based on how they are structured, their activities, as well as their size. This includes companies that only give advice about the economy but not on securities, certain subsidiaries, and companies having less than 100 investors.

How Did the Investment Company Act of 1940 Impact Financial Regulation?

The Act impacted the registration and requirements of many investment companies and made financial regulation tighter, giving the SEC more power to oversee the financial markets. It created rules that protected investors and required investment companies to disclose certain information. Financial regulation became more robust under the Act.

The Lasting Legacy of the Investment Company Act of 1940

Passed in response to the Great Depression, the Investment Company Act of 1940 empowers the SEC to regulate investment companies, ensuring they operate within legal boundaries and prioritize investor interests. By setting standards for transparency and fiduciary duty, it aims to safeguard investors and stabilize financial markets. Over the years, the Act has adapted to address the evolving complexities of the financial sector, maintaining its central mission of investor protection.

Article Sources

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The American Presidency Project. "Statement on Signing Two Statutes to Protect Investors."
U.S. Securities and Exchange Commission. "The Laws That Govern the Securities Industry.”
Center for American Progress. “How Exemptions From Securities Laws Put Investors and the Economy at Risk.”
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U.S. Securities and Exchange Commission. "The Laws That Govern the Securities Industry.”
Govinfo. "Investment Company Act of 1940," Page 23.
Govinfo. "Investment Company Act of 1940," Pages 16-23.
U.S. Securities and Exchange Commission. "Laws and Rules.”
U.S. Securities and Exchange Commission. "Publicly Traded Closed-End Funds.”
U.S. Federal Trade Commission. “Dodd-Frank Wall Street Reform and Consumer Protection Act, Titles X and XIV.”
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Govinfo. "Investment Company Act of 1940," Pages 24-26.
U.S. Securities and Exchange Commission. "SEC Adopts Rule Under Dodd-Frank Act Defining “Family Offices”.”

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