4.<<INVESTMENT COMPANY ACT OF 1940>>:
Notes to the Reader
1. This document is extracted from Committee Print 108-B of the
Committee on Financial Services of the U.S. House of Representatives,
and was prepared at the direction of that Committee.
2. Any material contained within brackets ø ¿ is not part of the
text of the law but is inserted as an aid to the reader.
3. Citations have been included to enable the reader to locate the
same material in the United States Code (U.S.C.). These citations
are not a part of the text of the law in which they appear. For
changes after the revision date of this excerpt (September 30, 2004)
to provisions of law in this publication that have citations to the
U.S. Code, see the United States Code Classification Tables published
by the Office of the Law Revision Counsel of the House of
Representatives at
http://uscode.house.gov/uscct.htm.REVISED THROUGH SEPTEMBER 30, 2004
2
INVESTMENT COMPANY ACT OF 1940
(References in brackets ø ¿ are to title 15, United States Code)
AN ACT To provide for the registration and regulation of investment companies and
investment advisers, and for other purposes
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
TITLE I—INVESTMENT COMPANIES
FINDINGS AND DECLARATION OF POLICY
SEC. 1. ø80a–1¿ (a) Upon the basis of facts disclosed by the
record and reports of the Securities and Exchange Commission
made pursuant to section 30 of the Public Utility Holding Company
Act of 1935, and facts otherwise disclosed and ascertained, it is
hereby found that investment companies are affected with a national
public interest in that, among other things—
(1) the securities issued by such companies, which constitute
a substantial part of all securities publicly offered, are
distributed, purchased, paid for, exchanged, transferred, redeemed,
and repurchased by use of the mails and means and
instrumentalities of interstate commerce, and in the case of the
numerous companies which issue redeemable securities this
process of distribution and redemption is continuous;
(2) the principal activities of such companies—investing,
reinvesting, and trading in securities—are conducted by use of
the mails and means and instrumentalities of interstate commerce,
including the facilities of national securities exchanges,
and constitute a substantial part of all transactions effected in
the securities markets of the Nation;
(3) such companies customarily invest and trade in securities
issued by, and may dominate and control or otherwise affect
the policies and management of, companies engaged in
business in interstate commerce;
(4) such companies are media for the investment in the national
economy of a substantial part of the national savings
and may have a vital effect upon the flow of such savings into
the capital markets; and
(5) 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.
(b) Upon the basis of facts disclosed by the record and reports
of the Securities and Exchange Commission made pursuant to section
30 of the Public Utility Holding Company Act of 1935, and
facts otherwise disclosed and ascertained, it is hereby declared that
3 INVESTMENT COMPANY ACT OF 1940 Sec. 2
the national public interest and the interest of investors are adversely
affected—
(1) when investors purchase, pay for, exchange, receive
dividends upon, vote, refrain from voting, sell, or surrender securities
issued by investment companies without adequate, accurate,
and explicit information, fairly presented, concerning
the character of such securities and the circumstances, policies,
and financial responsibility of such companies and their management;
(2) when investment companies are organized, operated,
managed, or their portfolio securities are selected, in the interest
of directors, officers, investment advisers, depositors, or
other affiliated persons thereof, in the interest of underwriters,
brokers, or dealers, in the interest of special classes of their security
holders, or in the interest of other investment companies
or persons engaged in other lines of business, rather than in
the interest of all classes of such companies’ security holders;
(3) when investment companies issue securities containing
inequitable or discriminatory provisions, or fail to protect the
preferences and privileges of the holders of their outstanding
securities;
(4) when the control of investment companies is unduly
concentrated through pyramiding or inequitable methods of
control, or is inequitably distributed, or when investment companies
are managed by irresponsible persons;
(5) when investment companies, in keeping their accounts,
in maintaining reserves, and in computing their earnings and
the asset value of their outstanding securities, employ unsound
or misleading methods, or are not subjected to adequate independent
scrutiny;
(6) when investment companies are reorganized, become
inactive, or change the character of their business, or when the
control or management thereof is transferred, without the consent
of their security holders;
(7) when investment companies by excessive borrowing
and the issuance of excessive amounts of senior securities increase
unduly the speculative character of their junior securities;
or
(8) when investment companies operate without adequate
assets or reserves.
It is hereby declared that the policy and purposes of this title, in
accordance with which the provisions of this title shall be interpreted,
are to mitigate and, so far as is feasible, to eliminate the
conditions enumerated in this section which adversely affect the
national public interest and the interest of investors.
GENERAL DEFINITIONS
SEC. 2. ø80a–2¿ (a) When used in this title, unless the context
otherwise requires—
(1) ‘‘Advisory board’’ means a board, whether elected or appointed,
which is distinct from the board of directors or board
of trustees, of an investment company, and which is composed
solely of persons who do not serve such company in any other
capacity, whether or not the functions of such board are such
Sec. 2 INVESTMENT COMPANY ACT OF 1940 4
as to render its members ‘‘directors’’ within the definition of
that term, which board has advisory functions as to investments
but has no power to determine that any security or
other investment shall be purchased or sold by such company.
(2) ‘‘Affiliated company’’ means a company which is an affiliated
person.
(3) ‘‘Affiliated person’’ of another person means (A) any
person directly or indirectly owning, controlling, or holding
with power to vote, 5 per centum or more of the outstanding
voting securities of such other person; (B) any person 5 per
centum or more of whose outstanding voting securities are directly
or indirectly owned, controlled, or held with power to
vote, by such other person; (C) any person directly or indirectly
controlling, controlled by, or under common control with, such
other person; (D) any officer, director, partner, copartner, or
employee of such other person; (E) if such other person is an
investment company, any investment adviser thereof or any
member of an advisory board thereof; and (F) if such other person
is an unincorporated investment company not having a
board of directors, the depositor thereof.
(4) ‘‘Assignment’’ includes any direct or indirect transfer or
hypothecation of a contract or chose in action by the assignor,
or of a controlling block of the assignor’s outstanding voting securities
by a security holder of the assignor; but does not include
an assignment of partnership interests incidental to the
death or withdrawal of a minority of the members of the partnership
having only a minority interest in the partnership
business or to the admission to the partnership of one or more
members who, after such admission, shall be only a minority
of the members and shall have only a minority interest in the
business.
(5) ‘‘Bank’’ means (A) a depository institution (as defined
in section 3 of the Federal Deposit Insurance Act) or a branch
or agency of a foreign bank (as such terms are defined in section
1(b) of the International Banking Act of 1978), (B) a member
bank of the Federal Reserve System, (C) any other banking
institution or trust company, whether incorporated or not,
doing business under the laws of any State or of the United
States, a substantial portion of the business of which consists
of receiving deposits or exercising fiduciary powers similar to
those permitted to national banks under the authority of the
Comptroller of the Currency, and which is supervised and examined
by State or Federal authority having supervision over
banks, and which is not operated for the purpose of evading
the provisions of this title, and (D) a receiver, conservator, or
other liquidating agent of any institution or firm included in
clause (A), (B), or (C) of this paragraph.
(6) The term ‘‘broker’’ has the same meaning as given in
section 3 of the Securities Exchange Act of 1934, except that
such term does not include any person solely by reason of the
fact that such person is an underwriter for one or more investment
companies.
(7) ‘‘Commission’’ means the Securities and Exchange
Commission.
5 INVESTMENT COMPANY ACT OF 1940 Sec. 2
(8) ‘‘Company’’ means a corporation, a partnership, an
association, a joint-stock company, a trust, a fund, or any organized
group of persons whether incorporated or not; or any receiver,
trustee in a case under title 11 of the United States
Code or similar official or any liquidating agent for any of the
foregoing, in his capacity as such.
(9) ‘‘Control’’ means the power to exercise a controlling influence
over the management or policies of a company, unless
such power is solely the result of an official position with such
company.
Any person who owns beneficially, either directly or
through one or more controlled companies, more than 25 per
centum of the voting securities of a company shall be presumed
to control such company. Any person who does not so own
more than 25 per centum of the voting securities of any company
shall be presumed not to control such company. A natural
person shall be presumed not to be a controlled person within
the meaning of this title. Any such presumption may be rebutted
by evidence, but except as hereinafter provided, shall continue
until a determination to the contrary made by the Commission
by order either on its own motion or on application by
an interested person. If an application filed hereunder is not
granted or denied by the Commission within sixty days after
filing thereof, the determination sought by the application
shall be deemed to have been temporarily granted pending
final determination of the Commission thereon. The Commission,
upon its own motion or upon application, may by order
revoke or modify any order issued under this paragraph whenever
it shall find that the determination embraced in such
original order is no longer consistent with the facts.
(10) ‘‘Convicted’’ includes a verdict, judgment, or plea of
guilty, or a finding of guilt on a plea of nolo contendere, if such
verdict, judgment, plea, or finding has not been reversed, set
aside, or withdrawn, whether or not sentence has been imposed.
(11) The term ‘‘dealer’’ has the same meaning as given in
the Securities Exchange Act of 1934, but does not include an
insurance company or investment company.
(12) ‘‘Director’’ means any director of a corporation or any
person performing similar functions with respect to any organization,
whether incorporated or unincorporated, including any
natural person who is a member of a board of trustees of a
management company created as a common-law trust.
(13) ‘‘Employees’ securities company’’ means any investment
company or similar issuer all of the outstanding securities
of which (other than short-term paper) are beneficially
owned (A) by the employees or persons on retainer of a single
employer or of two or more employers each of which is an
affiliated company of the other, (B) by former employees of
such employer or employers, (C) by members of the immediate
family of such employees, persons on retainer, or former employees,
(D) by any two or more of the foregoing classes of persons,
or (E) by such employer or employers together with any
one or more of the foregoing classes of persons.
Sec. 2 INVESTMENT COMPANY ACT OF 1940 6
(14) ‘‘Exchange’’ means any organization, association, or
group of persons, whether incorporated or unincorporated,
which constitutes, maintains, or provides a market place or
facilities for bringing together purchasers and sellers of securities
or for otherwise performing with respect to securities the
functions commonly performed by a stock exchange as that
term is generally understood, and includes the market place
and the market facilities maintained by such exchange.
(15) ‘‘Face-amount certificate’’ means any certificate,
investment contract, or other security which represents an
obligation on the part of its issuer to pay a stated or determinable
sum or sums at a fixed or determinable date or dates
more than twenty-four months after the date of issuance, in
consideration of the payment of periodic installments of a
stated or determinable amount (which security shall be known
as a face-amount certificate of the ‘‘installment type’’); or any
security which represents a similar obligation on the part of a
face-amount certificate company, the consideration for which is
the payment of a single lump sum (which security shall be
known as a ‘‘fully paid’’ face-amount certificate).
(16) ‘‘Government security’’ means any security issued or
guaranteed as to principal or interest by the United States, or
by a person controlled or supervised by and acting as an
instrumentality of the Government of the United States pursuant
to authority granted by the Congress of the United States;
or any certificate of deposit for any of the foregoing.
(17) ‘‘Insurance company’’ means a company which is organized
as an insurance company, whose primary and predominant
business activity is the writing of insurance or the reinsuring
of risks underwritten by insurance companies, and
which is subject to supervision by the insurance commissioner
or a similar official or agency of a State; or any receiver or
similar official or any liquidating agent for such a company, in
his capacity as such.
(18) ‘‘Interstate commerce’’ means trade, commerce, transportation,
or communication among the several States, or between
any foreign country and any State, or between any State
and any place or ship outside thereof.
(19) ‘‘Interested person’’ of another person means—
(A) when used with respect to an investment
company—
(i) any affiliated person of such company,
(ii) any member of the immediate family of any
natural person who is an affiliated person of such company,
(iii) any interested person of any investment adviser
of or principal underwriter for such company,
(iv) any person or partner or employee of any person
who at any time since the beginning of the last
two completed fiscal years of such company has acted
as legal counsel for such company,
(v) any person or any affiliated person of a person
(other than a registered investment company) that, at
any time during the 6-month period preceding the
7 INVESTMENT COMPANY ACT OF 1940 Sec. 2
date of the determination of whether that person or
affiliated person is an interested person, has executed
any portfolio transactions for, engaged in any principal
transactions with, or distributed shares for—
(I) the investment company;
(II) any other investment company having the
same investment adviser as such investment company
or holding itself out to investors as a related
company for purposes of investment or investor
services; or
(III) any account over which the investment
company’s investment adviser has brokerage
placement discretion,
(vi) any person or any affiliated person of a person
(other than a registered investment company) that, at
any time during the 6-month period preceding the
date of the determination of whether that person or
affiliated person is an interested person, has loaned
money or other property to—
(I) the investment company;
(II) any other investment company having the
same investment adviser as such investment company
or holding itself out to investors as a related
company for purposes of investment or investor
services; or
(III) any account for which the investment
company’s investment adviser has borrowing authority,
(vii) any natural person whom the Commission by
order shall have determined to be an interested person
by reason of having had, at any time since the beginning
of the last two completed fiscal years of such
company, a material business or professional relationship
with such company or with the principal executive
officer of such company or with any other investment
company having the same investment adviser or
principal underwriter or with the principal executive
officer of such other investment company:
Provided, That no person shall be deemed to be an interested
person of an investment company solely by reason of
(aa) his being a member of its board of directors or advisory
board or an owner of its securities, or (bb) his membership
in the immediate family of any person specified in
clause (aa) of this proviso; and
(B) when used with respect to an investment adviser
of or principal underwriter for any investment company—
(i) any affiliated person of such investment adviser
or principal underwriter,
(ii) any member of the immediate family of any
natural person who is an affiliated person of such
investment advisor or principal underwiter,
(iii) any person who knowingly has any direct or
indirect beneficial interest in, or who is designated as
trustee, executor, or guardian of any legal interest in,
Sec. 2 INVESTMENT COMPANY ACT OF 1940 8
any security issued either by such investment adviser
or principal underwriter or by a controlling person of
such investment adviser or principal underwriter,
(iv) any person or partner or employee of any person
who at any time since the beginning of the last
two completed fiscal years of such investment company
has acted as legal counsel for such investment
adviser or principal underwriter,
(v) any person or any affiliated person of a person
(other than a registered investment company) that, at
any time during the 6-month period preceding the
date of the determination of whether that person or
affiliated person is an interested person, has executed
any portfolio transactions for, engaged in any principal
transactions with, or distributed shares for—
(I) any investment company for which the
investment adviser or principal underwriter
serves as such;
(II) any investment company holding itself out
to investors, for purposes of investment or investor
services, as a company related to any investment
company for which the investment adviser
or principal underwriter serves as such; or
(III) any account over which the investment
adviser has brokerage placement discretion,
(vi) any person or any affiliated person of a person
(other than a registered investment company) that, at
any time during the 6-month period preceding the
date of the determination of whether that person or
affiliated person is an interested person, has loaned
money or other property to—
(I) any investment company for which the
investment adviser or principal underwriter
serves as such;
(II) any investment company holding itself out
to investors, for purposes of investment or investor
services, as a company related to any investment
company for which the investment adviser
or principal underwriter serves as such; or
(III) any account for which the investment adviser
has borrowing authority,
(vii) any natural person whom the Commission by
order shall have determined to be an interested person
by reason of having had at any time since the beginning
of the last two completed fiscal years of such
investment company a material business or professional
relationship with such investment adviser or
principal underwriter or with the principal executive
officer or any controlling person of such investment
adviser or principal underwriter.
For the purposes of this paragraph (19), ‘‘member of the
immediate family’’ means any parent, spouse of a parent,
child, spouse of a child, spouse, brother, or sister, and includes
step and adoptive relationships. The Commission
9 INVESTMENT COMPANY ACT OF 1940 Sec. 2
may modify or revoke any order issued under clause (vi)
of subparagaph (A) or (B) of this paragraph whenever it
finds that such order is no longer consistent with the facts.
No order issued pursuant to clause (vi) of subparagraph
(A) or (B) of this paragraph shall become effective until at
least sixty days after the entry thereof, and no such order
shall affect the status of any person for the purposes of
this title or for any other purpose for any period prior to
the effective date of such order.
(20) ‘‘Investment adviser’’ of an investment company
means (A) any person (other than a bona fide officer, director,
trustee, member of an advisory board, or employee of such
company, as such) who pursuant to contract with such company
regularly furnishes advice to such company with respect
to the desirability of investing in, purchasing or selling securities
or other property, or is empowered to determine what
securities or other property shall be purchased or sold by such
company, and (B) any other person who pursuant to contract
with a person described in clause (A) regularly performs substantially
all of the duties undertaken by such person described
in clause (A); but does not include (i) a person whose
advice is furnished solely through uniform publications distributed
to subscribers thereto, (ii) a person who furnishes only
statistical and other factual information, advice regarding economic
factors and trends, or advice as to occasional transactions
in specific securities, but without generally furnishing
advice or making recommendations regarding the purchase or
sale of securities, (iii) a company furnishing such services at
cost to one or more investment companies, insurance companies,
or other financial institutions, (iv) any person the character
and amount of whose compensation for such services
must be approved by a court, or (v) such other persons as the
Commission may by rules and regulations or order determine
not to be within the intent of this definition.
(21) ‘‘Investment banker’’ means any person engaged in
the business of underwriting securities issued by other persons,
but does not include an investment company, any person
who acts as an underwriter in isolated transactions but not as
a part of a regular business, or any person solely by reason of
the fact that such person is an underwriter for one or more
investment companies.
(22) ‘‘Issuer’’ means every person who issues or proposes to
issue any security, or has outstanding any security which it
has issued.
(23) ‘‘Lend’’ includes a purchase coupled with an agreement
by the vendor to repurchase; ‘‘borrow’’ includes a sale
coupled with a similar agreement.
(24) ‘‘Majority-owned subsidiary’’ of a person means a company
50 per centum or more of the outstanding voting securities
of which are owned by such person, or by a company
which, within the meaning of this paragraph, is a majorityowned
subsidiary of such person.
(25) ‘‘Means or instrumentality of interstate commerce’’ includes
any facility of a national securities exchange.
Sec. 2 INVESTMENT COMPANY ACT OF 1940 10
(26) ‘‘National securities exchange’’ means an exchange
registered under section 6 of the Securities Exchange Act of
1934.
(27) ‘‘Periodic payment plan certificate’’ means (A) any certificate,
investment contract, or other security providing for a
series of periodic payments by the holder, and representing an
undivided interest in certain specified securities or in a unit or
fund of securities purchased wholly or partly with the proceeds
of such payments, and (B) any security the issuer of which is
also issuing securities of the character described in clause (A)
and the holder of which has substantially the same rights and
privileges as those which holders of securities of the character
described in clause (A) have upon completing the periodic payments
for which such securities provide.
(28) ‘‘Person’’ means a natural person or a company.
(29) ‘‘Principal underwriter’’ of or for any investment company
other than a closed-end company, or of any security
issued by such a company, means any underwriter who as
principal purchases from such company, or pursuant to contract
has the right (whether absolute or conditional) from time
to time to purchase from such company, any such security for
distribution, or who as agent for such company sells or has the
right to sell any such security to a dealer or to the public or
both, but does not include a dealer who purchases from such
company through a principal underwriter acting as agent for
such company. ‘‘Principal underwriter’’ of or for a closed-end
company or any issuer which is not an investment company, or
of any security issued by such a company or issuer, means any
underwriter who, in connection with a primary distribution of
securities, (A) is in privity of contract with the issuer or an
affiliated person of the issuer; (B) acting alone or in concert
with one or more other persons, initiates or directs the formation
of an underwriting syndicate; or (C) is allowed a rate of
gross commission, spread, or other profit greater than the rate
allowed another underwriter participating in the distribution.
(30) ‘‘Promoter’’ of a company or a proposed company
means a person who, acting alone or in concert with other persons,
is initiating or directing, or has within one year initiated
or directed, the organization of such company.
(31) ‘‘Prospectus’’, as used in section 22, means a written
prospectus intended to meet the requirements of section 10(a)
of the Securities Act of 1933 and currently in use. As used elsewhere,
‘‘prospectus’’ means a prospectus as defined in the Securities
Act of 1933.
(32) ‘‘Redeemable security’’ means any security, other than
short-term paper, under the terms of which the holder, upon
its presentation to the issuer or to a person designated by the
issuer, is entitled (whether absolutely or only out of surplus)
to receive approximately his proportionate share of the issuer’s
current net assets, or the cash equivalent thereof.
(33) ‘‘Reorganization’’ means (A) a reorganization under
the supervision of a court of competent jurisdiction; (B) a
merger or consolidation; (C) a sale of 75 per centum or more
in value of the assets of a company; (D) a restatement of the
