关键词：Securities

21 INVESTMENT COMPANY ACT OF 1940 Sec. 3
(B) Notwithstanding subparagraph (A), an issuer is within
the exception provided by this paragraph if—
(i) in addition to qualified purchasers, outstanding
securities of that issuer are beneficially owned by not more
than 100 persons who are not qualified purchasers, if—
(I) such persons acquired any portion of the securities
of such issuer on or before September 1, 1996;
and
(II) at the time at which such persons initially acquired
the securities of such issuer, the issuer was excepted
by paragraph (1); and
(ii) prior to availing itself of the exception provided by
this paragraph—
(I) such issuer has disclosed to each beneficial
owner, as determined under paragraph (1), that future
investors will be limited to qualified purchasers, and
that ownership in such issuer is no longer limited to
not more than 100 persons; and
(II) concurrently with or after such disclosure,
such issuer has provided each beneficial owner, as
determined under paragraph (1), with a reasonable
opportunity to redeem any part or all of their interests
in the issuer, notwithstanding any agreement to the
contrary between the issuer and such persons, for that
person’s proportionate share of the issuer’s net assets.
(C) Each person that elects to redeem under subparagraph
(B)(ii)(II) shall receive an amount in cash equal to that person’s
proportionate share of the issuer’s net assets, unless the
issuer elects to provide such person with the option of receiving,
and such person agrees to receive, all or a portion of such
person’s share in assets of the issuer. If the issuer elects to
provide such persons with such an opportunity, disclosure concerning
such opportunity shall be made in the disclosure required
by subparagraph (B)(ii)(I).
(D) An issuer that is excepted under this paragraph shall
nonetheless be deemed to be an investment company for purposes
of the limitations set forth in subparagraphs (A)(i) and
(B)(i) of section 12(d)(1) relating to the purchase or other acquisition
by such issuer of any security issued by any registered
investment company and the sale of any security issued by any
registered open-end investment company to any such issuer.
(E) For purposes of determining compliance with this paragraph
and paragraph (1), an issuer that is otherwise
excepted under this paragraph and an issuer that is otherwise
excepted under paragraph (1) shall not be treated by the Commission
as being a single issuer for purposes of determining
whether the outstanding securities of the issuer excepted
under paragraph (1) are beneficially owned by not more than
100 persons or whether the outstanding securities of the issuer
excepted under this paragraph are owned by persons that are
not qualified purchasers. Nothing in this subparagraph shall
be construed to establish that a person is a bona fide qualified
purchaser for purposes of this paragraph or a bona fide beneficial
owner for purposes of paragraph (1).
Sec. 3 INVESTMENT COMPANY ACT OF 1940 22
(8) Any company subject to regulation under the Public
Utility Holding Company Act of 1935.
(9) Any person substantially all of whose business consists
of owning or holding oil, gas, or other mineral royalties or
leases, or fractional interests therein, or certificates of interest
or participation in or investment contracts relative to such royalties,
leases, or fractional interests.
(10)(A) Any company organized and operated exclusively
for religious, educational, benevolent, fraternal, charitable, or
reformatory purposes—
(i) no part of the net earnings of which inures to the
benefit of any private shareholder or individual; or
(ii) which is or maintains a fund described in subparagraph
(B).
(B) For the purposes of subparagraph (A)(ii), a fund is described
in this subparagraph if such fund is a pooled income
fund, collective trust fund, collective investment fund, or similar
fund maintained by a charitable organization exclusively
for the collective investment and reinvestment of one or more
of the following:
(i) assets of the general endowment fund or other
funds of one or more charitable organizations;
(ii) assets of a pooled income fund;
(iii) assets contributed to a charitable organization in
exchange for the issuance of charitable gift annuities;
(iv) assets of a charitable remainder trust or of any
other trust, the remainder interests of which are irrevocably
dedicated to any charitable organization;
(v) assets of a charitable lead trust;
(vi) assets of a trust, the remainder interests of which
are revocably dedicated to or for the benefit of 1 or more
charitable organizations, if the ability to revoke the dedication
is limited to circumstances involving—
(I) an adverse change in the financial circumstances
of a settlor or an income beneficiary of the
trust;
(II) a change in the identity of the charitable organization
or organizations having the remainder interest,
provided that the new beneficiary is also a charitable
organization; or
(III) both the changes described in subclauses (I)
and (II);
(vii) assets of a trust not described in clauses (i)
through (v), the remainder interests of which are revocably
dedicated to a charitable organization, subject to subparagraph
(C); or
(viii) such assets as the Commission may prescribe by
rule, regulation, or order in accordance with section 6(c).
(C) A fund that contains assets described in clause (vii) of
subparagraph (B) shall be excluded from the definition of an
investment company for a period of 3 years after the date of
enactment of this subparagraph, but only if—
23 INVESTMENT COMPANY ACT OF 1940 Sec. 3
1 26 U.S.C. 401.
2 26 U.S.C. 404(a)(2).
(i) such assets were contributed before the date which
is 60 days after the date of enactment of this subparagraph;
and
(ii) such assets are commingled in the fund with assets
described in one or more of clauses (i) through (vi) and
(viii) of subparagraph (B).
(D) For purposes of this paragraph—
(i) a trust or fund is ‘‘maintained’’ by a charitable
organization if the organization serves as a trustee or
administrator of the trust or fund or has the power to remove
the trustees or administrators of the trust or fund
and to designate new trustees or administrators;
(ii) the term ‘‘pooled income fund’’ has the same meaning
as in section 642(c)(5) of the Internal Revenue Code of
1986;
(iii) the term ‘‘charitable organization’’ means an organization
described in paragraphs (1) through (5) of section
170(c) or section 501(c)(3) of the Internal Revenue Code of
1986;
(iv) the term ‘‘charitable lead trust’’ means a trust described
in section 170(f)(2)(B), 2055(e)(2)(B), or
2522(c)(2)(B) of the Internal Revenue Code of 1986;
(v) the term ‘‘charitable remainder trust’’ means a
charitable remainder annuity trust or a charitable remainder
unitrust, as those terms are defined in section 664(d)
of the Internal Revenue Code of 1986; and
(vi) the term ‘‘charitable gift annuity’’ means an annuity
issued by a charitable organization that is described in
section 501(m)(5) of the Internal Revenue Code of 1986.
(11) Any employee’s stock bonus, pension, or profit-sharing
trust which meets the requirements for qualification under section
401 of the Internal Revenue Code of 1986; or any governmental
plan described in section 3(a)(2)(C) of the Securities Act
of 1933; or any collective trust fund maintained by a bank consisting
solely of assets of such trusts or governmental plans, or
both; or any separate account the assets of which are derived
solely from (A) contributions under pension or profit-sharing
plans which meet the requirements of section 401 of the Internal
Revenue Code of 1986 1 or the requirements for deduction
of the employer’s contribution under section 404(a)(2) of such
Code, 2 (B) contributions under governmental plans in connection
with which interests, participations, or securities are
exempted from the registration provisions of section 5 of the
Securities Act of 1933 by section 3(a)(2)(C) of such Act, and (C)
advances made by an insurance company in connection with
the operation of such separate account.
(12) Any voting trust the assets of which consist exclusively
of securities of a single issuer which is not an investment
company.
Sec. 4 INVESTMENT COMPANY ACT OF 1940 24
(13) Any security holders’ protective committee or similar
issuer having outstanding and issuing no securities other than
certificates of deposit and short-term paper.
(14) Any church plan described in section 414(e) of the Internal
Revenue Code of 1986, if, under any such plan, no part
of the assets may be used for, or diverted to, purposes other
than the exclusive benefit of plan participants or beneficiaries,
or any company or account that is—
(A) established by a person that is eligible to establish
and maintain such a plan under section 414(e) of the Internal
Revenue Code of 1986; and
(B) substantially all of the activities of which
consist of—
(i) managing or holding assets contributed to such
church plans or other assets which are permitted to be
commingled with the assets of church plans under the
Internal Revenue Code of 1986; or
(ii) administering or providing benefits pursuant
to church plans.
CLASSIFICATION OF INVESTMENT COMPANIES
SEC. 4. ø80a–4¿ For the purposes of this title, investment companies
are divided into three principal classes, defined as follows:
(1) ‘‘Face-amount certificate company’’ means an investment
company which is engaged or proposes to engage in the
business of issuing face-amount certificates of the installment
type, or which has been engaged in such business and has any
such certificate outstanding.
(2) ‘‘Unit investment trust’’ means an investment company
which (A) is organized under a trust indenture, contract of custodianship
or agency, or similar instrument, (B) does not have
a board of directors, and (C) issues only redeemable securities,
each of which represents an undivided interest in a unit of
specified securities; but does not include a voting trust.
(3) ‘‘Management company’’ means any investment company
other than a face-amount certificate company or a unit
investment trust.
SUBCLASSIFICATION OF MANAGEMENT COMPANIES
SEC. 5. ø80a–5¿ (a) For the purposes of this title, management
companies are divided into open-end and closed-end companies, defined
as follows:
(1) ‘‘Open-end company’’ means a management company
which is offering for sale or has outstanding any redeemable
security of which it is the issuer.
(2) ‘‘Closed-end company’’ means any management company
other than an open-end company.
(b) Management companies are further divided into diversified
companies and non-diversified companies, defined as follows:
(1) ‘‘Diversified company’’ means a management company
which meets the following requirements: At least 75 per centum
of the value of its total assets is represented by cash and
cash items (including receivables), Government securities,
25 INVESTMENT COMPANY ACT OF 1940 Sec. 6
1 For additional exemptions, see 15 U.S.C. 77c note; 43 U.S.C. 1625. [Only 43 U.S.C. 1625
printed in appendix to this volume.]
2 The words ‘‘Philippine Islands’’ have been deleted under the authority of Presidential Proclamation
No. 2695 (60 Stat. 1352), which granted independence to the Philippine Islands.
securities of other investment companies, and other securities
for the purposes of this calculation limited in respect of any
one issuer to an amount not greater in value than 5 per centum
of the value of the total assets of such management company
and to not more than 10 per centum of the outstanding
voting securities of such issuer.
(2) ‘‘Non-diversified company’’ means any management
company other than a diversified company.
(c) A registered diversified company which at the time of its
qualification as such meets the requirements of paragraph (1) of
subsection (b) shall not lose its status as a diversified company because
of any subsequent discrepancy between the value of its various
investments and the requirements of said paragraph, so long
as any such discrepancy existing immediately after its acquisition
of any security or other property is neither wholly nor partly the
result of such acquisition.
EXEMPTIONS 1
SEC. 6. ø80a–6¿ (a) The following investment companies are
exempt from the provisions of this title:
(1) Any company organized or otherwise created under the
laws of and having its principal office and place of business in
Puerto Rico,2 the Virgin Islands, or any other possession of the
United States; but such exemption shall terminate if any security
of which such company is the issuer is offered for sale or
sold after the effective date of this title, by such company or
an underwriter therefor, to a resident of any State other than
the State in which such company is organized.
(2) Any company which since the effective date of this title
or within five years prior to such date has been reorganized
under the supervision of a court of competent jurisdiction, if
(A) such company was not an investment company at the commencement
of such reorganization proceedings, (B) at the conclusion
of such proceedings all outstanding securities of such
company were owned by creditors of such company or by persons
to whom such securities were issued on account of creditors’
claims, and (C) more than 50 per centum of the voting
securities of such company, and securities representing more
than 50 per centum of the net asset value of such company, are
currently owned beneficially by not more than twenty-five persons;
but such exemption shall terminate if any security of
which such company is the issuer is offered for sale or sold to
the public after the conclusion of such proceedings by the
issuer or by or through any underwriter. For the purposes of
this paragraph, any new company organized as part of the reorganization
shall be deemed the same company as its predecessor;
and beneficial ownership shall be determined in the
manner provided in section 3(c)(1).
(3) Any issuer as to which there is outstanding a writing
filed with the Commission by the Federal Savings and Loan
Sec. 6 INVESTMENT COMPANY ACT OF 1940 26
Insurance Corporation stating that exemption of such issuer
from the provisions of this title is consistent with the public interest
and the protection of investors and is necessary or
appropriate by reason of the fact that such issuer holds or proposes
to acquire any assets or any product of any assets which
have been segregated (A) from assets of any company which at
the filing of such writing is an insured institution within the
meaning of section 401(a) of the National Housing Act, as heretofore
or hereafter amended, or (B) as a part of or in connection
with any plan for or condition to the insurance of accounts
of any company by said corporation or the conversion of any
company into a Federal savings and loan association. Any such
writing shall expire when canceled by a writing similarly filed
or at the expiration of two years after the date of its filing,
whichever first occurs; but said corporation may, nevertheless,
before, at, or after the expiration of any such writing file another
writing or writings with respect to such issuer.
(4) Any company which prior to March 15, 1940, was and
now is a wholly-owned subsidiary of a registered face-amount
certificate company and was prior to said date and now is organized
and operating under the insurance laws of any State and
subject to supervision and examination by the insurance commissioner
thereof, and which prior to March 15, 1940, was and
now is engaged, subject to such laws, in business substantially
all of which consists of issuing and selling only to residents of
such State and investing the proceeds from, securities providing
for or representing participations or interests in intangible
assets consisting of mortgages or other liens on real estate
or notes or bonds secured thereby or in a fund or deposit
of mortgages or other liens on real estate or notes or bonds secured
thereby or having outstanding such securities so issued
and sold.
(5)(A) Any company that is not engaged in the business of
issuing redeemable securities, the operations of which are subject
to regulation by the State in which the company is organized
under a statute governing entities that provide financial
or managerial assistance to enterprises doing business, or proposing
to do business, in that State if—
(i) the organizational documents of the company state
that the activities of the company are limited to the promotion
of economic, business, or industrial development in
the State through the provision of financial or managerial
assistance to enterprises doing business, or proposing to do
business, in that State, and such other activities that are
incidental or necessary to carry out that purpose;
(ii) immediately following each sale of the securities of
the company by the company or any underwriter for the
company, not less than 80 percent of the securities of the
company being offered in such sale, on a class-by-class
basis, are held by persons who reside or who have a substantial
business presence in that State;
(iii) the securities of the company are sold, or proposed
to be sold, by the company or by any underwriter for the
company, solely to accredited investors, as that term is de27
INVESTMENT COMPANY ACT OF 1940 Sec. 6
fined in section 2(a)(15) of the Securities Act of 1933, or to
such other persons that the Commission, as necessary or
appropriate in the public interest and consistent with the
protection of investors, may permit by rule, regulation, or
order; and
(iv) the company does not purchase any security
issued by an investment company or by any company that
would be an investment company except for the exclusions
from the definition of the term ‘‘investment company’’
under paragraph (1) or (7) of section 3(c), other than—
(I) any debt security that is rated investment
grade by not less than 1 nationally recognized statistical
rating organization; or
(II) any security issued by a registered open-end
investment company that is required by its investment
policies to invest not less than 65 percent of its total
assets in securities described in subclause (I) or securities
that are determined by such registered open-end
investment company to be comparable in quality to
securities described in subclause (I).
(B) Notwithstanding the exemption provided by this paragraph,
section 9 (and, to the extent necessary to enforce section
9, sections 38 through 51) shall apply to a company described
in this paragraph as if the company were an investment company
registered under this title.
(C) Any company proposing to rely on the exemption provided
by this paragraph shall file with the Commission a notification
stating that the company intends to do so, in such form
and manner as the Commission may prescribe by rule.
(D) Any company meeting the requirements of this paragraph
may rely on the exemption provided by this paragraph
upon filing with the Commission the notification required by
subparagraph (C), until such time as the Commission determines
by order that such reliance is not in the public interest
or is not consistent with the protection of investors.
(E) The exemption provided by this paragraph may be subject
to such additional terms and conditions as the Commission
may by rule, regulation, or order determine are necessary or
appropriate in the public interest or for the protection of investors.
(b) Upon application by any employees’ security company, the
Commission shall by order exempt such company from the provisions
of this title and of the rules and regulations hereunder, if and
to the extent that such exemption is consistent with the protection
of investors. In determining the provisions to which such an order
of exemption shall apply, the Commission shall give due weight,
among other things, to the form of organization and the capital
structure of such company, the persons by whom its voting securities,
evidences of indebtedness, and other securities are owned and
controlled, the prices at which securities issued by such company
are sold and the sales load thereon, the disposition of the proceeds
of such sales, the character of the securities in which such proceeds
are invested, and any relationship between such company and the
issuer of any such security.
Sec. 7 INVESTMENT COMPANY ACT OF 1940 28
(c) The Commission, by rules and regulations upon its own motion,
or by order upon application, may conditionally or unconditionally
exempt any person, security, or transaction, or any class
or classes of persons, securities, or transactions, from any provision
or provisions of this title or of any rule or regulation thereunder,
if and to the extent that such exemption is necessary or appropriate
in the public interest and consistent with the protection of
investors and the purposes fairly intended by the policy and provisions
of this title.
(d) The Commission, by rules and regulations or order, shall
exempt a closed-end investment company from any or all provisions
of this title, but subject to such terms and conditions as may be
necessary or appropriate in the public interest or for the protection
of investors, if—
(1) the aggregate sums received by such company from the
sale of all its outstanding securities, plus the aggregate offering
price of all securities of which such company is the issuer
and which it proposes to offer for sale, do not exceed
$10,000,000, or such other amount as the Commission may set
by rule, regulation, or order;
(2) no security of which such company is the issuer has
been or is proposed to be sold by such company or any underwriter
therefor, in connection with a public offering, to any person
who is not a resident of the State under the laws of which
such company is organized or otherwise created; and
(3) such exemption is not contrary to the public interest or
inconsistent with the protection of investors.
(e) If, in connection with any rule, regulation, or order under
this section exempting any investment company from any provision
of section 7, the Commission deems it necessary or appropriate in
the public interest or for the protection of investors that certain
specified provisions of this title pertaining to registered investment
companies shall be applicable in respect of such company, the provisions
so specified shall apply to such company, and to other persons
in their transactions and relations with such company, as
though such company were a registered investment company.
(f) Any closed-end company which—
(1) elects to be treated as a business development company
pursuant to section 54; or
(2) would be excluded from the definition of an investment
company by section 3(c)(1), except that it presently proposes to
make a public offering of its securities as a business development
company, and has notified the Commission, in a form
and manner which the Commission may, by rule, prescribe,
that it intends in good faith to file, within 90 days, a notification
of election to become subject to the provisions of sections
55 through 65,
shall be exempt from sections 1 through 53, except to the extent
provided in sections 59 through 65.
TRANSACTIONS BY UNREGISTERED INVESTMENT COMPANIES
SEC. 7. ø80a–7¿ (a) No investment company organized or otherwise
created under the laws of the United States or of a State
29 INVESTMENT COMPANY ACT OF 1940 Sec. 7
and having a board of directors, unless registered under section 8,
shall directly or indirectly—
(1) offer for sale, sell, or deliver after sale, by the use of
the mails or any means or instrumentality of interstate commerce,
any security or any interest in a security, whether the
issuer of such security is such investment company or another
person; or offer for sale, sell, or deliver after sale any such
security or interest, having reason to believe that such security
or interest will be made the subject of a public offering by use
of the mails or any means or instrumentality of interstate commerce;
(2) purchase, redeem, retire, or otherwise acquire or attempt
to acquire, by use of the mails or any means or instrumentality
of interstate commerce, any security or any interest
in a security, whether the issuer of such security is such
investment company or another person;
(3) control any investment company which does any of the
acts enumerated in paragraphs (1) and (2);
(4) engage in any business in interstate commerce; or
(5) control any company which is engaged in any business
in interstate commerce.
The provisions of this subsection (a) shall not apply to transactions
of an investment company which are merely incidental to its dissolution.
(b) No depositor or trustee of or underwriter for any investment
company, organized or otherwise created under the laws of
the United States or of a State and not having a board of directors,
unless such company is registered under section 8 or exempt under
section 6, shall directly or indirectly—
(1) offer for sale, sell, or deliver after sale, by use of the
mails or any means or instrumentality of interstate commerce,
any security or any interest in a security of which such company
is the issuer; or offer for sale, sell, or deliver after sale
any such security or interest, having reason to believe that
such security or interest will be made the subject of a public
offering by use of the mails or any means or instrumentality
of interstate commerce;
(2) purchase, redeem, or otherwise acquire or attempt to
acquire, by use of the mails or any means or instrumentality
of interstate commerce, any security or any interest in a security
of which such company is the issuer; or
(3) sell or purchase for the account of such company, by
use of the mails or any means or instrumentality of interstate
commerce, any security or interest in a security, by whomever
issued.
The provisions of this subsection (b) shall not apply to transactions
which are merely incidental to the dissolution of an investment
company.
(c) No promoter of a proposed investment company, and no
underwriter for such a promoter, shall make use of the mails or
any means or instrumentality of interstate commerce, directly or
indirectly, to offer for sale, sell, or deliver after sale, in connection
with a public offering, any preorganization certificate or subscription
for such a company.
Sec. 8 INVESTMENT COMPANY ACT OF 1940 30
(d) No investment company, unless organized or otherwise created
under the laws of the United States or of a State, and no depositor
or trustee of or underwriter for such a company not so organized
or created, shall make use of the mails or any means or
instrumentality of interstate commerce, directly or indirectly, to
offer for sale, sell, or deliver after sale, in connection with a public
offering, any security of which such company is the issuer. Notwithstanding
the provisions of this subsection and of section 8(a),
the Commission is authorized, upon application by an investment
company organized or otherwise created under the laws of a foreign
country, to issue a conditional or unconditional order permitting
such company to register under this title and to make a public offering
of its securities by use of the mails and means or instrumentalities
of interstate commerce, if the Commission finds that, by
reason of special circumstances or arrangements, it is both legally
and practically feasible effectively to enforce the provisions of this
title against such company and that the issuance of such order is
otherwise consistent with the public interest and the protection of
investors.
(e) DISCLOSURE BY EXEMPT CHARITABLE ORGANIZATIONS.—
Each fund that is excluded from the definition of an investment
company under section 3(c)(10)(B) of this Act shall provide, to each
donor to such fund, at the time of the donation or within 90 days
after the date of enactment of this subsection, whichever is later,
written information describing the material terms of the operation
of such fund.
REGISTRATION OF INVESTMENT COMPANIES
SEC. 8. ø80a–8¿ (a) Any investment company organized or otherwise
created under the laws of the United States or of a State
may register for the purposes of this title by filing with the Commission
a notification of registration, in such form as the Commission
shall by rules and regulations prescribe as necessary or appropriate
in the public interest or for the protection of investors. An
investment company shall be deemed to be registered upon receipt
by the Commission of such notification of registration.
(b) Every registered investment company shall file with the
Commission, within such reasonable time after registration as the
Commission shall fix by rules and regulations, an original and such
copies of a registration statement, in such form and containing
such of the following information and documents as the Commission
shall by rules and regulations prescribe as necessary or appropriate
in the public interest or for the protection of investors:
(1) a recital of the policy of the registrant in respect of
each of the following types of activities, such recital consisting
in each case of a statement whether the registrant reserves
freedom of action to engage in activities of such type, and if
such freedom of action is reserved, a statement briefly indicating,
insofar as is practicable, the extent to which the registrant
intends to engage therein: (A) the classification and
subclassifications, as defined in sections 4 and 5, within which
the registrant proposes to operate; (B) borrowing money; (C)
the issuance of senior securities; (D) engaging in the business
of underwriting securities issued by other persons; (E) concen

31 INVESTMENT COMPANY ACT OF 1940 Sec. 8
trating investments in a particular industry or group of industries;
(F) the purchase and sale of real estate and commodities,
or either of them; (G) making loans to other persons; and (H)
portfolio turn-over (including a statement showing the aggregate
dollar amount of purchases and sales of portfolio securities,
other than Government securities, in each of the last
three full fiscal years preceding the filing of such registration
statement);
(2) a recital of all investment policies of the registrant, not
enumerated in paragraph (1), which are changeable only if
authorized by shareholder vote;
(3) a recital of all policies of the registrant, not enumerated
in paragraphs (1) and (2), in respect of matters which the
registrant deems matters of fundamental policy;
(4) the name and address of each affiliated person of the
registrant; the name and principal address of every company,
other than the registrant, of which each such person is an officer,
director, or partner; a brief statement of the business experience
for the preceding five years of each officer and director
of the registrant; and
(5) the information and documents which would be required
to be filed in order to register under the Securities Act
of 1933 and the Securities Exchange Act of 1934 all securities
(other than short-term paper) which the registrant has outstanding
or proposes to issue.
(c) The Commission shall make provision, by permissive rules
and regulations or order, for the filing of the following, or so much
of the following as the Commission may designate, in lieu of the
information and documents required pursuant to subsection (b):
(1) copies of the most recent registration statement filed by
the registrant under the Securities Act of 1933 and currently
effective under such Act, or if the registrant has not filed such
a statement, copies of a registration statement filed by the registrant
under the Securities Exchange Act of 1934 and currently
effective under such Act;
(2) copies of any reports filed by the registrant pursuant
to section 13 or 15(d) of the Securities Exchange Act of 1934;
and
(3) a report containing reasonably current information regarding
the matters included in copies filed pursuant to paragraphs
(1) and (2), and such further information regarding
matters not included in such copies as the Commission is
authorized to require under subsection (b).
(d) If the registrant is a unit investment trust substantially all
of the assets of which are securities issued by another registered
investment company, the Commission is authorized to prescribe for
the registrant, by rules and regulations or order, a registration
statement which eliminates inappropriate duplication of information
contained in the registration statement filed under this section
by such other investment company.
(e) If it appears to the Commission that a registered investment
company has failed to file the registration statement required
by this section or a report required pursuant to section 30 (a) or
(b), or has filed such a registration statement or report but omitted
Sec. 9 INVESTMENT COMPANY ACT OF 1940 32
therefrom material facts required to be stated therein, or has filed
such a registration statement or report in violation of section 34(b),
the Commission shall notify such company by registered mail or by
certified mail of the failure to file such registration statement or
report, or of the respects in which such registration statement or
report appears to be materially incomplete or misleading, as the
case may be, and shall fix a date (in no event earlier than thirty
days after the mailing of such notice) prior to which such company
may file such registration statement or report or correct the same.
If such registration statement or report is not filed or corrected
within the time so fixed by the Commission or any extension
thereof, the Commission, after appropriate notice and opportunity
for hearing, and upon such conditions and with such exemptions as
it deems appropriate for the protection of investors, may by order
suspend the registration of such company until such statement or
report is filed or corrected, or may by order revoke such registration,
if the evidence establishes—
(1) that such company has failed to file a registration
statement required by this section or a report required pursuant
to section 30 (a) or (b), or has filed such a registration
statement or report but omitted therefrom material facts required
to be stated therein, or has filed such a registration
statement or report in violation of section 34(b); and
(2) that such suspension or revocation is in the public interest.
(f) Whenever the Commission, on its own motion or upon application,
finds that a registered investment company has ceased to
be an investment company, it shall so declare by order and upon
the taking effect of such order the registration of such company
shall cease to be in effect. If necessary for the protection of investors,
an order under this subsection may be made upon appropriate
conditions. The Commission’s denial of any application under this
subsection shall be by order.
INELIGIBILITY OF CERTAIN AFFILIATED PERSONS AND UNDERWRITERS
SEC. 9. ø80a–9¿ (a) It shall be unlawful for any of the following
persons to serve or act in the capacity of employee, officer, director,
member of an advisory board, investment adviser, or depositor of
any registered investment company, or principal underwriter for
any registered open-end company, registered unit investment trust,
or registered face-amount certificate company:
(1) any person who within 10 years has been convicted of
any felony or misdemeanor involving the purchase or sale of
any security or arising out of such person’s conduct as an
underwriter, broker, dealer, investment adviser, municipal
securities dealer, government securities broker, government
securities dealer, bank, transfer agent, or entity or person required
to be registered under the Commodity Exchange Act, or
as an affiliated person, salesman, or employee of any investment
company, bank, insurance company, or entity or person
required to be registered under the Commodity Exchange Act;
(2) any person who, by reason of any misconduct, is permanently
or temporarily enjoined by order, judgment, or decree of
any court of competent jurisdiction from acting as an under33
INVESTMENT COMPANY ACT OF 1940 Sec. 9
writer, broker, dealer, investment adviser, municipal securities
dealer, government securities broker, government securities
dealer, bank, transfer agent, or entity or person required to be
registered under the Commodity Exchange Act, or as an affiliated
person, salesman, or employee of any investment company,
bank, insurance company, or entity or person required to
be registered under the Commodity Exchange Act, or from engaging
in or continuing any conduct or practice in connection
with any such activity or in connection with the purchase or
sale of any security; or
(3) a company any affiliated person of which is ineligible,
by reason of paragraph (1) or (2), to serve or act in the foregoing
capacities.
For the purposes of paragraphs (1), (2), and (3) of this subsection,
the term ‘‘investment adviser’’ shall include an investment adviser
as defined in title II of this Act.
(b) The Commission may, after notice and opportunity for hearing,
by order prohibit, conditionally or unconditionally, either permanently
or for such period of time as it in its discretion shall
deem appropriate in the public interest, any person from serving
or acting as an employee, officer, director, member of an advisory
board, investment adviser or depositor of, or principal underwriter
for, a registered investment company or affiliated person of such
investment adviser, depositor, or principal underwriter, if such
person—
(1) has willfully made or caused to be made in any registration
statement, application or report filed with the Commission
under this title any statement which was at the time
and in the light of the circumstances under which it was made
false or misleading with respect to any material fact, or has
omitted to state in any such registration statement, application,
or report any material fact which was required to be
stated therein;
(2) has willfully violated any provision of the Securities Act
of 1933, or of the Securities Exchange Act of 1934, or of title
II of this Act, or of this title, or of the Commodity Exchange
Act, or of any rule or regulation under any of such statutes;
(3) has willfully aided, abetted, counseled, commanded, induced,
or procured the violation by any other person of the
Securities Act of 1933, or of the Securities Exchange Act of
1934, or of title II of this Act, or of this title, or of the Commodity
Exchange Act, or of any rule or regulation under any
of such statutes;
(4) has been found by a foreign financial regulatory authority
to have—
(A) made or caused to be made in any application for
registration or report required to be filed with a foreign
securities authority, or in any proceeding before a foreign
securities authority with respect to registration, any statement
that was at the time and in light of the circumstances
under which it was made false or misleading
with respect to any material fact, or has omitted to state
in any application or report to a foreign securities authority
any material fact that is required to be stated therein;
Sec. 9 INVESTMENT COMPANY ACT OF 1940 34
1 So in law. Probably should included ‘‘or’’ after the semicolon at the end.
(B) violated any foreign statute or regulation regarding
transactions in securities or contracts of sale of a commodity
for future delivery traded on or subject to the rules
of a contract market or any board of trade; 1
(C) aided, abetted, counseled, commanded, induced, or
procured the violation by any other person of any foreign
statute or regulation regarding transactions in securities
or contracts of sale of a commodity for future delivery
traded on or subject to the rules of a contract market or
any board of trade;
(5) within 10 years has been convicted by a foreign court
of competent jurisdiction of a crime, however denominated by
the laws of the relevant foreign government, that is substantially
equivalent to an offense set forth in paragraph (1) of subsection
(a); or
(6) by reason of any misconduct, is temporarily or permanently
enjoined by any foreign court of competent jurisdiction
from acting in any of the capacities, set forth in paragraph (2)
of subsection (a), or a substantially equivalent foreign capacity,
or from engaging in or continuing any conduct or practice in
connection with any such activity or in connection with the
purchase or sale of any security.
(c) Any person who is ineligible, by reason of subsection (a), to
serve or act in the capacities enumerated in that subsection, may
file with the Commission an application for an exemption from the
provisions of that subsection. The Commission shall by order grant
such application, either unconditionally or on an appropriate temporary
or other conditional basis, if it is established that the prohibitions
of subsection (a), as applied to such person, are unduly or
disproportionately severe or that the conduct of such person has
been such as not to make it against the public interest or protection
of investors to grant such application.
(d) MONEY PENALTIES IN ADMINISTRATIVE PROCEEDINGS.—
(1) AUTHORITY OF COMMISSION.—In any proceeding instituted
pursuant to subsection (b) against any person, the Commission
may impose a civil penalty if it finds, on the record
after notice and opportunity for hearing, that such person—
(A) has willfully violated any provision of the Securities
Act of 1933, the Securities Exchange Act of 1934, the
Investment Advisers Act of 1940, or this title, or the rules
or regulations thereunder;
(B) has willfully aided, abetted, counseled, commanded,
induced, or procured such a violation by any
other person; or
(C) has willfully made or caused to be made in any
registration statement, application, or report required to
be filed with the Commission under this title, any statement
which was, at the time and in the light of the circumstances
under which it was made, false or misleading
with respect to any material fact, or has omitted to state
in any such registration statement, application, or report
any material fact which was required to be stated therein;
35 INVESTMENT COMPANY ACT OF 1940 Sec. 9
and that such penalty is in the public interest.
(2) MAXIMUM AMOUNT OF PENALTY.—
(A) FIRST TIER.—The maximum amount of penalty for
each act or omission described in paragraph (1) shall be
$5,000 for a natural person or $50,000 for any other person.
(B) SECOND TIER.—Notwithstanding subparagraph (A),
the maximum amount of penalty for each such act or omission
shall be $50,000 for a natural person or $250,000 for
any other person if the act or omission described in paragraph
(1) involved fraud, deceit, manipulation, or deliberate
or reckless disregard of a regulatory requirement.
(C) THIRD TIER.—Notwithstanding subparagraphs (A)
and (B), the maximum amount of penalty for each such act
or omission shall be $100,000 for a natural person or
$500,000 for any other person if—
(i) the act or omission described in paragraph (1)
involved fraud, deceit, manipulation, or deliberate or
reckless disregard of a regulatory requirement; and
(ii) such act or omission directly or indirectly resulted
in substantial losses or created a significant
risk of substantial losses to other persons or resulted
in substantial pecuniary gain to the person who committed
the act or omission.
(3) DETERMINATION OF PUBLIC INTEREST.—In considering
under this section whether a penalty is in the public interest,
the Commission may consider—
(A) whether the act or omission for which such penalty
is assessed involved fraud, deceit, manipulation, or deliberate
or reckless disregard of a regulatory requirement;
(B) the harm to other persons resulting either directly
or indirectly from such act or omission;
(C) the extent to which any person was unjustly enriched,
taking into account any restitution made to persons
injured by such behavior;
(D) whether such person previously has been found by
the Commission, another appropriate regulatory agency, or
a self-regulatory organization to have violated the Federal
securities laws, State securities laws, or the rules of a selfregulatory
organization, has been enjoined by a court of
competent jurisdiction from violations of such laws or
rules, or has been convicted by a court of competent jurisdiction
of violations of such laws or of any felony or misdemeanor
described in section 203(e)(2) of the Investment
Advisers Act of 1940;
(E) the need to deter such person and other persons
from committing such acts or omissions; and
(F) such other matters as justice may require.
(4) EVIDENCE CONCERNING ABILITY TO PAY.—In any proceeding
in which the Commission may impose a penalty under
this section, a respondent may present evidence of the respondent’s
ability to pay such penalty. The Commission may, in its
discretion, consider such evidence in determining whether such
penalty is in the public interest. Such evidence may relate to
Sec. 9 INVESTMENT COMPANY ACT OF 1940 36
the extent of such person’s ability to continue in business and
the collectability of a penalty, taking into account any other
claims of the United States or third parties upon such person’s
assets and the amount of such person’s assets.
(e) AUTHORITY TO ENTER AN ORDER REQUIRING AN ACCOUNTING
AND DISGORGEMENT.—In any proceeding in which the Commission
may impose a penalty under this section, the Commission may
enter an order requiring accounting and disgorgement, including
reasonable interest. The Commission is authorized to adopt rules,
regulations, and orders concerning payments to investors, rates of
interest, periods of accrual, and such other matters as it deems
appropriate to implement this subsection.
(f) CEASE-AND-DESIST PROCEEDINGS.—
(1) AUTHORITY OF THE COMMISSION.—If the Commission
finds, after notice and opportunity for hearing, that any person
is violating, has violated, or is about to violate any provision
of this title, or any rule or regulation thereunder, the Commission
may publish its findings and enter an order requiring
such person, and any other person that is, was, or would be a
cause of the violation, due to an act or omission the person
knew or should have known would contribute to such violation,
to cease and desist from committing or causing such violation
and any future violation of the same provision, rule, or regulation.
Such order may, in addition to requiring a person to cease
and desist from committing or causing a violation, require such
person to comply, or to take steps to effect compliance, with
such provision, rule, or regulation, upon such terms and conditions
and within such time as the Commission may specify in
such order. Any such order may, as the Commission deems
appropriate, require future compliance or steps to effect future
compliance, either permanently or for such period of time as
the Commission may specify, with such provision, rule, or regulation
with respect to any security, any issuer, or any other
person.
(2) HEARING.—The notice instituting proceedings pursuant
to paragraph (1) shall fix a hearing date not earlier than 30
days nor later than 60 days after service of the notice unless
an earlier or a later date is set by the Commission with the
consent of any respondent so served.
(3) TEMPORARY ORDER.—
(A) IN GENERAL.—Whenever the Commission determines
that the alleged violation or threatened violation
specified in the notice instituting proceedings pursuant to
paragraph (1), or the continuation thereof, is likely to result
in significant dissipation or conversion of assets, significant
harm to investors, or substantial harm to the public
interest, including, but not limited to, losses to the
Securities Investor Protection Corporation, prior to the
completion of the proceeding, the Commission may enter a
temporary order requiring the respondent to cease and desist
from the violation or threatened violation and to take
such action to prevent the violation or threatened violation
and to prevent dissipation or conversion of assets, significant
harm to investors, or substantial harm to the public
37 INVESTMENT COMPANY ACT OF 1940 Sec. 9
interest as the Commission deems appropriate pending
completion of such proceedings. Such an order shall be entered
only after notice and opportunity for a hearing, unless
the Commission, notwithstanding section 40(a) of this
title, determines that notice and hearing prior to entry
would be impracticable or contrary to the public interest.
A temporary order shall become effective upon service
upon the respondent and, unless set aside, limited, or suspended
by the Commission or a court of competent jurisdiction,
shall remain effective and enforceable pending the
completion of the proceedings.
(B) APPLICABILITY.—This paragraph shall apply only
to a respondent that acts, or, at the time of the alleged
misconduct acted, as a broker, dealer, investment adviser,
investment company, municipal securities dealer, government
securities broker, government securities dealer, or
transfer agent, or is, or was at the time of the alleged misconduct,
an associated person of, or a person seeking to become
associated with, any of the foregoing.
(4) REVIEW OF TEMPORARY ORDERS.—
(A) COMMISSION REVIEW.—At any time after the respondent
has been served with a temporary cease-and-desist
order pursuant to paragraph (3), the respondent may
apply to the Commission to have the order set aside, limited,
or suspended. If the respondent has been served with
a temporary cease-and-desist order entered without a prior
Commission hearing, the respondent may, within 10 days
after the date on which the order was served, request a
hearing on such application and the Commission shall hold
a hearing and render a decision on such application at the
earliest possible time.
(B) JUDICIAL REVIEW.—Within—
(i) 10 days after the date the respondent was
served with a temporary cease-and-desist order entered
with a prior Commission hearing, or
(ii) 10 days after the Commission renders a decision
on an application and hearing under subparagraph
(A), with respect to any temporary cease-anddesist
order entered without a prior Commission hearing,
the respondent may apply to the United States district
court for the district in which the respondent resides or
has its principal place of business, or for the District of Columbia,
for an order setting aside, limiting, or suspending
the effectiveness or enforcement of the order, and the court
shall have jurisdiction to enter such an order. A respondent
served with a temporary cease-and-desist order entered
without a prior Commission hearing may not apply
to the court except after hearing and decision by the Commission
on the respondent’s application under subparagraph
(A) of this paragraph.
(C) NO AUTOMATIC STAY OF TEMPORARY ORDER.—The
commencement of proceedings under subparagraph (B) of
Sec. 10 INVESTMENT COMPANY ACT OF 1940 38
this paragraph shall not, unless specifically ordered by the
court, operate as a stay of the Commission’s order.
(D) EXCLUSIVE REVIEW.—Section 43 of this title shall
not apply to a temporary order entered pursuant to this
section.
(5) AUTHORITY TO ENTER AN ORDER REQUIRING AN ACCOUNTING
AND DISGORGEMENT.—In any cease-and-desist proceeding
under subsection (f)(1), the Commission may enter an
order requiring accounting and disgorgement, including reasonable
interest. The Commission is authorized to adopt rules,
regulations, and orders concerning payments to investors, rates
of interest, periods of accrual, and such other matters as it
deems appropriate to implement this subsection.
(g) For the purposes of this section, the term ‘‘investment adviser’’
includes a corporate or other trustee performing the functions
of an investment adviser.
AFFILIATIONS OF DIRECTORS
SEC. 10. ø80a–10¿ (a) No registered investment company shall
have a board of directors more than 60 per centum of the members
of which are persons who are interested persons of such registered
company.
(b) No registered investment company shall—
(1) employ as regular broker any director, officer, or employee
of such registered company, or any person of which any
such director, officer, or employee is an affiliated person, unless
a majority of the board of directors of such registered company
shall be persons who are not such brokers or affiliated
persons of any of such brokers;
(2) use as a principal underwriter of securities issued by
it any director, officer, or employee of such registered company
or any person of which any such director, officer, or employee
is an interested person, unless a majority of the board of directors
of such registered company shall be persons who are not
such principal underwriters or interested persons of any of
such principal underwriters; or
(3) have as director, officer, or employee any investment
banker, or any affiliated person of any investment banker, unless
a majority of the board of directors of such registered company
shall be persons who are not investment bankers or affiliated
persons of any investment banker. For the purposes of
this paragraph, a person shall not be deemed an affiliated person
of an investment banker solely by reason of the fact that
he is an affiliated person of a company of the character described
in section 12(d)(3) (A) and (B).
(c) No registered investment company shall have a majority of
its board of directors consisting of persons who are officers, directors,
or employees of any one bank (together with its affiliates and
subsidiaries) or any one bank holding company (together with its
affiliates and subsidiaries) (as such terms are defined in section 2
of the Bank Holding Company Act of 1956), except that, if on
March 15, 1940, any registered investment company had a majority
of its directors consisting of persons who are directors, officers, or
employees of any one bank, such company may continue to have
39 INVESTMENT COMPANY ACT OF 1940 Sec. 10
the same percentage of its board of directors consisting of persons
who are directors, officers, or employees of such bank.
(d) Notwithstanding subsections (a) and (b)(2) of this section,
a registered investment company may have a board of directors all
the members of which, except one, are interested persons of the
investment adviser of such company, or are officers or employees
of such company, if—
(1) such investment company is an open-end company;
(2) such investment adviser is registered under title II of
this Act and is engaged principally in the business of rendering
investment supervisory services as defined in title II;
(3) no sales load is charged on securities issued by such
investment company;
(4) any premium over net asset value charged by such
company upon the issuance of any such security, plus any discount
from net asset value charged on redemption thereof,
shall not in the aggregate exceed 2 per centum;
(5) no sales or promotion expenses are incurred by such
registered company; but expenses incurred in complying with
laws regulating the issue or sale of securities shall not be
deemed sales or promotion expenses;
(6) such investment adviser is the only investment adviser
to such investment company, and such investment adviser does
not receive a management fee exceeding 1 per centum per
annum of the value of such company’s net assets averaged over
the year or taken as of a definite date or dates within the year;
(7) all executive salaries and executive expenses and office
rent of such investment company are paid by such investment
adviser; and
(8) such investment company has only one class of securities
outstanding, each unit of which has equal voting rights
with every other unit.
(e) If by reason of the death, disqualification, or bona fide resignation
of any director or directors, the requirements of the foregoing
provisions of this section or of section 15(f)(1) in respect of
directors shall not be met by a registered investment company, the
operation of such provision shall be suspended as to such registered
company—
(1) for a period of thirty days if the vacancy or vacancies
may be filled by action of the board of directors;
(2) for a period of sixty days if a vote of stockholders is required
to fill the vacancy or vacancies; or
(3) for such longer period as the Commission may prescribe,
by rules and regulations upon its own motion or by
order upon application, as not inconsistent with the protection
of investors.
(f) No registered investment company shall knowingly purchase
or otherwise acquire, during the existence of any underwriting
or selling syndicate, any security (except a security of
which such company is the issuer) a principal underwriter of which
is an officer, director, member of an advisory board, investment adviser,
or employee of such registered company, or is a person (other
than a company of the character described in section 12(d)(3) (A)
and (B)) of which any such officer, director, member of an advisory
Sec. 11 INVESTMENT COMPANY ACT OF 1940 40
board, investment adviser, or employee is an affiliated person, unless
in acquiring such security such registered company is itself
acting as a principal underwriter for the issuer. The Commission,
by rules and regulations upon its own motion or by order upon application,
may conditionally or unconditionally exempt any transaction
or classes of transactions from any of the provisions of this
subsection, if and to the extent that such exemption is consistent
with the protection of investors.
(g) In the case of a registered investment company which has
an advisory board, such board, as a distinct entity, shall be subject
to the same restrictions as to its membership as are imposed upon
a board of directors by this section.
(h) In the case of a registered management company which is
an unincorporated company not having a board of directors, the
provisions of this section shall apply as follows:
(1) the provisions of subsection (a), as modified by subsection
(e), shall apply to the board of directors of the depositor
of such company;
(2) the provisions of subsections (b) and (c), as modified by
subsection (e), shall apply to the board of directors of the depositor
and of every investment adviser of such company; and
(3) the provisions of subsection (f) shall apply to purchases
and other acquisitions for the account of such company of securities
a principal underwriter of which is the depositor or an
investment adviser of such company, or an affiliated person of
such depositor or investment adviser.
OFFERS OF EXCHANGE
SEC. 11. ø80a–11¿ (a) It shall be unlawful for any registered
open-end company or any principal underwriter for such a company
to make or cause to be made an offer to the holder of a security
of such company or of any other open-end investment company to
exchange his security for a security in the same or another such
company on any basis other than the relative net asset values of
the respective securities to be exchanged, unless the terms of the
offer have first been submitted to and approved by the Commission
or are in accordance with such rules and regulations as the Commission
may have prescribed in respect of such offers which are in
effect at the time such offer is made. For the purposes of this section,
(A) an offer by a principal underwriter means an offer communicated
to holders of securities of a class or series but does not include
an offer made by such principal underwriter to an individual
investor in the course of a retail business conducted by such principal
underwriter, and (B) the net asset value means the net asset
value which is in effect for the purpose of determining the price at
which the securities, or class or series of securities involved, are offered
for sale to the public either (1) at the time of the receipt by
the offeror of the acceptance of the offer or (2) at such later times
as is specified in the offer.
(b) The provisions of this section shall not apply to any offer
made pursuant to any plan of reorganization, which is submitted
to and requires the approval of the holders of at least a majority
of the outstanding shares of the class or series to which the security
owned by the offeree belongs.

41 INVESTMENT COMPANY ACT OF 1940 Sec. 12
(c) The provisions of subsection (a) shall be applicable, irrespective
of the basis of exchange, (1) to any offer of exchange of any
security of a registered open-end company for a security of a registered
unit investment trust or registered face-amount certificate
company; and (2) to any type of offer of exchange of the securities
of registered unit investment trusts or registered face-amount certificate
companies for the securities of any other investment company.
FUNCTIONS AND ACTIVITIES OF INVESTMENT COMPANIES
SEC. 12. ø80a–12¿ (a) It shall be unlawful for any registered
investment company, in contravention of such rules and regulations
or orders as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of
investors—
(1) to purchase any security on margin, except such shortterm
credits as are necessary for the clearance of transactions;
(2) to participate on a joint or a joint and several basis in
any trading account in securities, except in connection with an
underwriting in which such registered company is a participant;
or
(3) to effect a short sale of any security, except in connection
with an underwriting in which such registered company is
a participant.
(b) It shall be unlawful for any registered open-end company
(other than a company complying with the provisions of section 10
(d)) to act as a distributor of securities of which it is the issuer, except
through an underwriter, in contravention of such rules and
regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors.
(c) It shall be unlawful for any registered diversified company
to make any commitment as underwriter, if immediately thereafter
the amount of its outstanding underwriting commitments, plus the
value of its investments in securities of issuers (other than investment
companies) of which it owns more than 10 per centum of the
outstanding voting securities, exceeds 25 per centum of the value
of its total assets.
(d)(1)(A) It shall be unlawful for any registered investment
company (the ‘‘acquiring company’’) and any company or companies
controlled by such acquiring company to purchase or otherwise acquire
any security issued by any other investment company (the
‘‘acquired company’’), and for any investment company (the ‘‘acquiring
company’’) and any company or companies controlled by such
acquiring company to purchase or otherwise acquire any security
issued by any registered investment company (the ‘‘acquired company’’),
if the acquiring company and any company or companies
controlled by it immediately after such purchase or acquisition own
in the aggregate—
(i) more than 3 per centum of the total outstanding voting
stock of the acquired company;
(ii) securities issued by the acquired company having an
aggregate value in excess of 5 per centum of the value of the
total assets of the acquiring company; or
Sec. 12 INVESTMENT COMPANY ACT OF 1940 42
(iii) securities issued by the acquired company and all
other investment companies (other than treasury stock of the
acquiring company) having an aggregate value in excess of 10
per centum of the value of the total assets of the acquiring
company.
(B) It shall be unlawful for any registered open-end investment
company (the ‘‘acquired company’’), any principal underwriter
therefor, or any broker or dealer registered under the Securities
Exchange Act of 1934, knowingly to sell or otherwise dispose of any
security issued by the acquired company to any other investment
company (the ‘‘acquiring company’’) or any company or companies
controlled by the acquiring company, if immediately after such sale
or disposition—
(i) more than 3 per centum of the total outstanding voting
stock of the acquired company is owned by the acquiring company
and any company or companies controlled by it; or
(ii) more than 10 per centum of the total outstanding voting
stock of the acquired company is owned by the acquiring
company and other investment companies and companies controlled
by them.
(C) It shall be unlawful for any investment company (the ‘‘acquiring
company’’) and any company or companies controlled by the
acquiring company to purchase or otherwise acquire any security
issued by a registered closed-end investment company, if immediately
after such purchase or acquisition the acquiring company,
other investment companies having the same investment adviser,
and companies controlled by such investment companies, own more
than 10 per centum of the total outstanding voting stock of such
closed-end company.
(D) The provisions of this paragraph shall not apply to a security
received as a dividend or as a result of an offer of exchange
approved pursuant to section 11 or of a plan of reorganization of
any company (other than a plan devised for the purpose of evading
the foregoing provisions).
(E) The provisions of this paragraph shall not apply to a security
(or securities) purchased or acquired by an investment company
if—
(i) the depositor of, or principal underwriter for, such
investment company is a broker or dealer registered under the
Securities Exchange Act of 1934, or a person controlled by such
a broker or dealer;
(ii) such security is the only investment security held by
such investment company (or such securities are the only
investment securities held by such investment company, if
such investment company is a registered unit investment trust
that issues two or more classes or series of securities, each of
which provides for the accumulation of shares of a different
investment company); and
(iii) the purchase or acquisition is made pursuant to an
arrangement with the issuer of, or principal underwriter for
the issuer of, the security whereby such investment company
is obligated—
(aa) either to seek instructions from its security holders
with regard to the voting of all proxies with respect to
43 INVESTMENT COMPANY ACT OF 1940 Sec. 12
such security and to vote such proxies only in accordance
with such instructions, or to vote the shares held by it in
the same proportion as the vote of all other holders of such
security, and
(bb) in the event that such investment company is not
a registered investment company, to refrain from substituting
such security unless the Commission shall have
approved such substitution in the manner provided in section
26 of this Act.
(F) The provisions of this paragraph shall not apply to securities
purchased or otherwise acquired by a registered investment
company if—
(i) immediately after such purchase or acquisition not more
than 3 per centum of the total outstanding stock of such issuer
is owned by such registered investment company and all affiliated
persons of such registered investment company; and
(ii) such registered investment company has not offered or
sold after January 1, 1971, and is not proposing to offer or sell
any security issued by it through a principal underwriter or
otherwise at a public offering price which includes a sales load
of more than 11⁄2 per centum.
No issuer of any security purchased or acquired by a registered
investment company pursuant to this subparagraph shall be obligated
to redeem such security in an amount exceeding 1 per centum
of such issuer’s total outstanding securities during any period
of less than thirty days. Such investment company shall exercise
voting rights by proxy or otherwise with respect to any security
purchased or acquired pursuant to this subparagraph in the manner
prescribed by subparagraph (E) of this subsection.
(G)(i) This paragraph does not apply to securities of a registered
open-end investment company or a registered unit investment
trust (hereafter in this subparagraph referred to as the ‘‘acquired
company’’) purchased or otherwise acquired by a registered
open-end investment company or a registered unit investment trust
(hereafter in this subparagraph referred to as the ‘‘acquiring company’’)
if—
(I) the acquired company and the acquiring company are
part of the same group of investment companies;
(II) the securities of the acquired company, securities of
other registered open-end investment companies and registered
unit investment trusts that are part of the same group of
investment companies, Government securities, and short-term
paper are the only investments held by the acquiring company;
(III) with respect to—
(aa) securities of the acquired company, the acquiring
company does not pay and is not assessed any charges or
fees for distribution-related activities, unless the acquiring
company does not charge a sales load or other fees or
charges for distribution-related activities; or
(bb) securities of the acquiring company, any sales
loads and other distribution-related fees charged, when
aggregated with any sales load and distribution-related
fees paid by the acquiring company with respect to
securities of the acquired company, are not excessive
Sec. 12 INVESTMENT COMPANY ACT OF 1940 44
under rules adopted pursuant to section 22(b) or section
22(c) by a securities association registered under section
15A of the Securities Exchange Act of 1934, or the Commission;
(IV) the acquired company has a policy that prohibits it
from acquiring any securities of registered open-end investment
companies or registered unit investment trusts in reliance
on this subparagraph or subparagraph (F); and
(V) such acquisition is not in contravention of such rules
and regulations as the Commission may from time to time prescribe
with respect to acquisitions in accordance with this subparagraph,
as necessary and appropriate for the protection of
investors.
(ii) For purposes of this subparagraph, the term ‘‘group of
investment companies’’ means any 2 or more registered investment
companies that hold themselves out to investors as related
companies for purposes of investment and investor services.
(H) For the purposes of this paragraph, the value of an investment
company’s total assets shall be computed as of the time of a
purchase or acquisition or as closely thereto as is reasonably possible.
(I) In any action brought to enforce the provisions of this paragraph,
the Commission may join as a party the issuer of any security
purchased or otherwise acquired in violation of this paragraph,
and the court may issue any order with respect to such issuer as
may be necessary or appropriate for the enforcement of the provisions
of this paragraph.
(J) The Commission, by rule or regulation, upon its own motion
or by order upon application, may conditionally or unconditionally
exempt any person, security, or transaction, or any class or classes
of persons, securities, or transactions from any provision of this
subsection, if and to the extent that such exemption is consistent
with the public interest and the protection of investors.
(2) It shall be unlawful for any registered investment company
and any company or companies controlled by such registered
investment company to purchase or otherwise acquire any security
(except a security received as a dividend or as a result of a plan
of reorganization of any company, other than a plan devised for the
purpose of evading the provisions of this paragraph) issued by any
insurance company of which such registered investment company
and any company or companies controlled by such registered company
do not, at the time of such purchase or acquisition, own in
the aggregate at least 25 per centum of the total outstanding voting
stock, if such registered company and any company or companies
controlled by it own in the aggregate, or as a result of such
purchase or acquisition will own in the aggregate, more than 10
per centum of the total outstanding voting stock of such insurance
company.
(3) It shall be unlawful for any registered investment company
and any company or companies controlled by such registered
investment company to purchase or otherwise acquire any security
issued by or any other interest in the business of any person who
is a broker, a dealer, is engaged in the business of underwriting,
or is either an investment adviser of an investment company or an
45 INVESTMENT COMPANY ACT OF 1940 Sec. 12
investment adviser registered under title II of this Act, unless (A)
such person is a corporation all the outstanding securities of which
(other than short-term paper, securities representing bank loans,
and directors’ qualifying shares) are, or after such acquisition will
be, owned by one or more registered investment companies; and (B)
such person is primarily engaged in the business of underwriting
and distributing securities issued by other persons, selling securities
to customers, or any one or more of such or related activities,
and the gross income of such person normally is derived principally
from such business or related activities.
(e) Notwithstanding any provisions of this title, any registered
investment company may hereafter purchase or otherwise acquire
any security issued by any one corporation engaged or proposing to
engage in the business of underwriting, furnishing capital to industry,
financing promotional enterprises, purchasing securities of
issuers for which no ready market is in existence, and reorganizing
companies or similar activities; provided—
(1) That the securities issued by such corporation (other
than short-term paper and securities representing bank loans)
shall consist solely of one class of common stock and shall have
been originally issued or sold for investment to registered
investment companies only;
(2) That the aggregate cost of the securities of such corporation
purchased by such registered investment company
does not exceed 5 per centum of the value of the total assets
of such registered company at the time of any purchase or acquisition
of such securities; and
(3) That the aggregate paid-in capital and surplus of such
corporation does not exceed $100,000,000.
For the purpose of paragraph (1) of section 5(b) any investment in
any such corporation shall be deemed to be an investment in an
investment company.
(f) Notwithstanding any provisions of this Act, any registered
face-amount certificate company may organize not more than two
face-amount certificate companies and acquire and own all or any
part of the capital stock thereof only if such stock is acquired and
held for investment: Provided, That the aggregate cost to such registered
company of all such stock so acquired shall not exceed six
times the amount of the minimum capital stock requirement provided
in subdivision (1) of subsection (a) of section 28 for a faceamount
company organized on or after March 15, 1940: And provided
further, That the aggregate cost to such registered company
of all such capital stock issued by face-amount certificate companies
organized or otherwise created under laws other than the laws
of the United States or any State thereof shall not exceed twice the
amount of the minimum capital stock requirement provided in subdivision
(1) of subsection (a) of section 28 for a company organized
on or after March 15, 1940. Nothing contained in this subsection
shall be deemed to prevent the sale of any such stock to any other
person if the original purchase was made by such registered faceamount
certificate company in good faith for investment and not
for resale.
(g) Notwithstanding the provisions of this section any registered
investment company and any company or companies conSec.
13 INVESTMENT COMPANY ACT OF 1940 46
1 So in law. Probably should include ‘‘or’’ after the semicolon at the end.
trolled by such registered company may purchase or otherwise acquire
from another investment company or any company or companies
controlled by such registered company more than 10 per centum
of the total outstanding voting stock of any insurance company
owned by any such company or companies, or may acquire the
securities of any insurance company if the Commission by order
determines that such acquisition is in the public interest because
the financial condition of such insurance company will be improved
as a result of such acquisition or any plan contemplated as a result
thereof. This section shall not be deemed to prohibit the promotion
of a new insurance company or the acquisition of the securities of
any newly created insurance company by a registered investment
company, alone or with other persons. Nothing contained in this
section shall in any way affect or derogate from the powers of any
insurance commissioner or similar official or agency of the United
States or any State, or to affect the right under State law of any
insurance company to acquire securities of any other insurance
company or insurance companies.
CHANGES IN INVESTMENT POLICY
SEC. 13. ø80a–13¿ (a) No registered investment company shall,
unless authorized by the vote of a majority of its outstanding voting
securities—
(1) change its subclassification as defined in section 5(a)
(1) and (2) of this title or its subclassification from a diversified
to a non-diversified company;
(2) borrow money, issue senior securities, underwrite securities
issued by other persons, purchase or sell real estate or
commodities or make loans to other persons, except in each
case in accordance with the recitals of policy contained in its
registration statement in respect thereto;
(3) deviate from its policy in respect of concentration of
investments in any particular industry or group of industries
as recited in its registration statement, deviate from any
investment policy which is changeable only if authorized by
shareholder vote, or deviate from any policy recited in its registration
statement pursuant to section 8(b)(3); 1
(4) change the nature of its business so as to cease to be
an investment company.
(b) In the case of a common-law trust of the character described
in section 16(c), either written approval by holders of a majority
of the outstanding shares of beneficial interest or the vote of
a majority of such outstanding shares cast in person or by proxy
at a meeting called for the purpose shall for the purposes of subsection
(a) be deemed the equivalent of the vote of a majority of the
outstanding voting securities, and the provisions of paragraph (42)
of section 2(a) as to a majority shall be applicable to the vote cast
at such a meeting.
SIZE OF INVESTMENT COMPANIES
SEC. 14. ø80a–14¿ (a) No registered investment company organized
after the date of enactment of this title, and no principal
47 INVESTMENT COMPANY ACT OF 1940 Sec. 15
underwriter for such a company, shall make a public offering of
securities of which such company is the issuer, unless—
(1) such company has a net worth of at least $100,000;
(2) such company has previously made a public offering of
its securities, and at the time of such offering had a net worth
of at least $100,000; or
(3) provision is made in connection with and as a condition
of the registration of such securities under the Securities Act
of 1933 which in the opinion of the Commission adequately insures
(A) that after the effective date of such registration statement
such company will not issue any security or receive any
proceeds of any subscription for any security until firm agreements
have been made with such company by not more than
twenty-five responsible persons to purchase from it securities
to be issued by it for an aggregate net amount which plus the
then net worth of the company, if any, will equal at least
$100,000; (B) that said aggregate net amount will be paid in
to such company before any subscriptions for such securities
will be accepted from any persons in excess of twenty-five; (C)
that arrangements will be made whereby any proceeds so paid
in, as well as any sales load, will be refunded to any subscriber
on demand without any deduction, in the event that the net
proceeds so received by the company do not result in the company
having a net worth of at least $100,000 within ninety
days after such registration statement becomes effective.
At any time after occurrence of the event specified in clause (C) of
paragraph (3) of this subsection the Commission may issue a stop
order suspending the effectiveness of the registration statement of
such securities under the Securities Act of 1933 and may suspend
or revoke the registration of such company under this title.
(b) The Commission is authorized, at such times as it deems
that any substantial further increase in size of investment companies
creates any problem involving the protection of investors or
the public interest, to make a study and investigation of the effects
of size on the investment policy of investment companies and on
security markets, on concentration of control of wealth and industry,
and on companies in which investment companies are interested,
and from time to time to report the results of its studies and
investigations and its recommendations to the Congress.
INVESTMENT ADVISORY AND UNDERWRITING CONTRACTS
SEC. 15. ø80a–15¿ (a) It shall be unlawful for any person to
serve or act as investment adviser of a registered investment company,
except pursuant to a written contract, which contract,
whether with such registered company or with an investment adviser
of such registered company, has been approved by the vote of
a majority of the outstanding voting securities of such registered
company, and—
(1) precisely describes all compensation to be paid thereunder;
(2) shall continue in effect for a period more than two
years from the date of its execution, only so long as such continuance
is specifically approved at least annually by the board
Sec. 15 INVESTMENT COMPANY ACT OF 1940 48
of directors or by vote of a majority of the outstanding voting
securities of such company;
(3) provides, in substance, that it may be terminated at
any time, without the payment of any penalty, by the board of
directors of such registered company or by vote of a majority
of the outstanding voting securities of such company on not
more than sixty days’ written notice to the investment adviser;
and
(4) provides, in substance, for its automatic termination in
the event of its assignment.
(b) It shall be unlawful for any principal underwriter for a registered
open-end company to offer for sale, sell, or deliver after sale
any security of which such company is the issuer, except pursuant
to a written contract with such company, which contract—
(1) shall continue in effect for a period more than two
years from the date of its execution, only so long as such continuance
is specifically approved at least annually by the board
of directors or by vote of a majority of the outstanding voting
securities of such company; and
(2) provides, in substance, for its automatic termination in
the event of its assignment.
(c) In addition to the requirements of subsections (a) and (b)
of this section, it shall be unlawful for any registered investment
company having a board of directors to enter into, renew, or perform
any contract or agreement, written or oral, whereby a person
undertakes regularly to serve or act as investment adviser of or
principal underwriter for such company, unless the terms of such
contract or agreement and any renewal thereof have been approved
by the vote of a majority of directors, who are not parties to such
contract or agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval.
It shall be the duty of the directors of a registered investment
company to request and evaluate, and the duty of an investment
adviser to such company to furnish, such information as may
reasonably be necessary to evaluate the terms of any contract
whereby a person undertakes regularly to serve or act as investment
adviser of such company. It shall be unlawful for the directors
of a registered investment company, in connection with their
evaluation of the terms of any contract whereby a person undertakes
regularly to serve or act as investment adviser of such company,
to take into account the purchase price or other consideration
any person may have paid in connection with a transaction of the
type referred to in paragraph (1), (3), or (4) of subsection (f).
(d) In the case of a common-law trust of the character described
in section 16(c), either written approval by holders of a majority
of the outstanding shares of beneficial interest or the vote of
a majority of such outstanding shares cast in person or by proxy
at a meeting called for the purpose shall for the purposes of this
section be deemed the equivalent of the vote of a majority of the
outstanding voting securities, and the provisions of paragraph (42)
of section 2(a) as to a majority shall be applicable to the vote cast
at such a meeting.
49 INVESTMENT COMPANY ACT OF 1940 Sec. 15
(e) Nothing contained in this section shall be deemed to require
or contemplate any action by an advisory board of any registered
company or by any of the members of such a board.
(f)(1) An investment adviser, or a corporate trustee performing
the functions of an investment adviser, of a registered investment
company or an affiliated person of such investment adviser or corporate
trustee may receive any amount or benefit in connection
with a sale of securities of, or a sale of any other interest in, such
investment adviser or corporate trustee which results in an assignment
of an investment advisory contract with such company or the
change in control of or identity of such corporate trustee, if—
(A) for a period of three years after the time of such action,
at least 75 per centum of the members of the board of directors
of such registered company or such corporate trustee (or successor
thereto, by reorganization or otherwise) are not (i) interested
persons of the investment adviser of such company or
such corporate trustee, or (ii) interested persons of the predecessor
investment adviser or such corporate trustee; and
(B) there is not imposed an unfair burden on such company
as a result of such transaction or any express or implied
terms, conditions, or understandings applicable thereto.
(2)(A) For the purpose of paragraph (1)(A) of this subsection,
interested persons of a corporate trustee shall be determined in
accordance with section 2(a)(19)(B): Provided, That no person shall
be deemed to be an interested person of a corporate trustee solely
by reason of (i) his being a member of its board of directors or advisory
board or (ii) his membership in the immediate family of any
person specified in clause (i) of this subparagraph.
(B) For the purpose of paragraph (1)(B) of this subsection, an
unfair burden on a registered investment company includes any
arrangement, during the two-year period after the date on which
any such transaction occurs, whereby the investment adviser or
corporate trustee or predecessor or successor investment advisers
or corporate trustee or any interested person of any such adviser
or any such corporate trustee receives or is entitled to receive any
compensation directly or indirectly (i) from any person in connection
with the purchase or sale of securities or other property to,
from, or on behalf of such company, other than bona fide ordinary
compensation as principal underwriter for such company, or (ii)
from such company or its security holders for other than bona fide
investment advisory or other services.
(3) If—
(A) an assignment of an investment advisory contract with
a registered investment company results in a successor investment
adviser to such company, or if there is a change in control
of or identity of a corporate trustee of a registered investment
company, and such adviser or trustee is then an investment
adviser or corporate trustee with respect to other assets
substantially greater in amount than the amount of assets of
such company, or
(B) as a result of a merger of, or a sale of substantially all
the assets by, a registered investment company with or to another
registered investment company with assets substantially
Sec. 16 INVESTMENT COMPANY ACT OF 1940 50
greater in amount, a transaction occurs which would be subject
to paragraph (1)(A) of this subsection,
such discrepancy in size of assets shall be considered by the Commission
in determining whether or to what extent an application
under section 6(c) for exemption from the provisions of paragraph
(1)(A) should be granted.
(4) Paragraph (1)(A) of this subsection shall not apply to a
transaction in which a controlling block of outstanding voting securities
of an investment adviser to a registered investment company
or of a corporate trustee performing the functions of an investment
adviser to a registered investment company is—
(A) distributed to the public and in which there is, in fact,
no change in the identity of the persons who control such
investment adviser or corporate trustee, or
(B) transferred to the investment adviser or the corporate
trustee, or an affiliated person or persons of such investment
adviser or corporate trustee, or is transferred from the investment
adviser or corporate trustee to an affiliated person or persons
of the investment adviser, or corporate trustee: Provided,
That (i) each transferee (other than such adviser or trustee) is
a natural person and (ii) the transferees (other than such adviser
or trustee) owned in the aggregate more than 25 per centum
of such voting securities for a period of at least six months
prior to such transfer.
CHANGES IN BOARD OF DIRECTORS; PROVISIONS RELATIVE TO STRICT
TRUSTS
SEC. 16. ø80a–16¿ (a) No person shall serve as a director of a
registered investment company unless elected to that office by the
holders of the outstanding voting securities of such company, at an
annual or a special meeting duly called for that purpose; except
that vacancies occurring between such meetings may be filled in
any otherwise legal manner if immediately after filling any such
vacancy at least two-thirds of the directors then holding office shall
have been elected to such office by the holders of the outstanding
voting securities of the company at such an annual or special meeting.
In the event that at any time less than a majority of the directors
of such company holding office at that time were so elected by
the holders of the outstanding voting securities, the board of directors
or proper officer of such company shall forthwith cause to be
held as promptly as possible and in any event within sixty days a
meeting of such holders for the purpose of electing directors to fill
any existing vacancies in the board of directors unless the Commission
shall by order extend such period. The foregoing provisions of
this subsection shall not apply to members of an advisory board.
Nothing herein shall, however, preclude a registered investment
company from dividing its directors into classes if its charter,
certificate of incorporation, articles of association, by-laws, trust
indenture, or other instrument or the law under which it is organized,
so provides and prescribes the tenure of office of the several
classes: Provided, That no class shall be elected for a shorter period
than one year or for a longer period than five years and the term
of office of at least one class shall expire each year.

51 INVESTMENT COMPANY ACT OF 1940 Sec. 16
(b) Any vacancy on the board of directors of a registered investment
company which occurs in connection with compliance with
section 15(f)(1)(A) and which must be filled by a person who is not
an interested person of either party to a transaction subject to section
15(f)(1)(A) shall be filled only by a person (1) who has been selected
and proposed for election by a majority of the directors of
such company who are not such interested persons, and (2) who
has been elected by the holders of the outstanding voting securities
of such company, except that in the case of the death, disqualification,
or bona fide resignation of a director selected and elected pursuant
to clauses (1) and (2) of this subsection (b), the vacancy created
thereby may be filled as provided in subsection (a).
(c) The foregoing provisions of this section shall not apply to
a common-law trust existing on the date of enactment of this title
under an indenture of trust which does not provide for the election
of trustees by the shareholders. No natural person shall serve as
trustee of such a trust, which is registered as an investment company,
after the holders of record of not less than two-thirds of the
outstanding shares of beneficial interest in such trust have declared
that he be removed from that office either by declaration in
writing filed with the custodian of the securities of the trust or by
votes cast in person or by proxy at a meeting called for the purpose.
Solicitation of such a declaration shall be deemed a solicitation
of a proxy within the meaning of section 20(a).
The trustees of such a trust shall promptly call a meeting of
shareholders for the purpose of voting upon the question of removal
of any such trustee or trustees when requested in writing so to do
by the record holders of not less than 10 per centum of the outstanding
shares.
Whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and
who hold in the aggregate either shares having a net asset value
of at least $25,000 or at least 1 per centum of the outstanding
shares, whichever is less, shall apply to the trustees in writing,
stating that they wish to communicate with other shareholders
with a view to obtaining signatures to a request for a meeting pursuant
to this subsection (c) and accompanied by a form of communication
and request which they wish to transmit, the trustees
shall within five business days after receipt of such application
either—
(1) afford to such applicants access to a list of the names
and addresses of all shareholders as recorded on the books of
the trust; or
(2) inform such applicants as to the approximate number
of shareholders of record, and the approximate cost of mailing
to them the proposed communication and form of request.
If the trustees elect to follow the course specified in paragraph
(2) of this subsection (c) the trustees, upon the written request of
such applicants, accompanied by a tender of the material to be
mailed and of the reasonable expenses of mailing, shall, with reasonable
promptness, mail such material to all shareholders of
record at their addresses as recorded on the books, unless within
five business days after such tender the trustees shall mail to such
applicants and file with the Commission, together with a copy of
Sec. 17 INVESTMENT COMPANY ACT OF 1940 52
the material to be mailed, a written statement signed by at least
a majority of the trustees to the effect that in their opinion either
such material contains untrue statement of fact or omits to state
facts necessary to make the statements contained therein not misleading,
or would be in violation of applicable law, and specifying
the basis of such opinion.
After opportunity for hearing upon the objections specified in
the written statement so filed, the Commission may, and if demanded
by the trustees or by such applicants shall, enter an order
either sustaining one or more of such objections or refusing to sustain
any of them. If the Commission shall enter an order refusing
to sustain any of such objections, or if, after the entry of an order
sustaining one or more of such objections, the Commission shall
find, after notice and opportunity for hearing, that all objections so
sustained have been met, and shall enter an order so declaring, the
trustees shall mail copies of such material to all shareholders with
reasonable promptness after the entry of such order and the renewal
of such tender.
TRANSACTIONS OF CERTAIN AFFILIATED PERSONS AND UNDERWRITERS
SEC. 17. ø80a–17¿ (a) It shall be unlawful for any affiliated
person or promoter of or principal underwriter for a registered
investment company (other than a company of the character described
in section 12(d)(3) (A) and (B)), or any affiliated person of
such a person, promoter, or principal underwriter, acting as
principal—
(1) knowingly to sell any security or other property to such
registered company or to any company controlled by such registered
company, unless such sale involves solely (A) securities
of which the buyer is the issuer, (B) securities of which the
seller is the issuer and which are part of a general offering to
the holders of a class of its securities, or (C) securities deposited
with the trustee of a unit investment trust or periodic payment
plan by the depositor thereof;
(2) knowingly to purchase from such registered company,
or from any company controlled by such registered company,
any security or other property (except securities of which the
seller is the issuer);
(3) to borrow money or other property from such registered
company or from any company controlled by such registered
company (unless the borrower is controlled by the lender) except
as permitted in section 21(b); or
(4) to loan money or other property to such registered company,
or to any company controlled by such registered company,
in contravention of such rules, regulations, or orders as
the Commission may, after consultation with and taking into
consideration the views of the Federal banking agencies (as defined
in section 3 of the Federal Deposit Insurance Act), prescribe
or issue consistent with the protection of investors.
(b) Notwithstanding subsection (a), any person may file with
the Commission an application for an order exempting a proposed
transaction of the applicant from one or more provisions of that
subsection. The Commission shall grant such application and issue
such order of exemption if evidence establishes that—
53 INVESTMENT COMPANY ACT OF 1940 Sec. 17
(1) the terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair
and do not involve overreaching on the part of any person concerned;
(2) the proposed transaction is consistent with the policy
of each registered investment company concerned, as recited in
its registration statement and reports filed under this title;
and
(3) the proposed transaction is consistent with the general
purposes of this title.
(c) Notwithstanding subsection (a), a person may, in the ordinary
course of business, sell to or purchase from any company merchandise
or may enter into a lessor-lessee relationship with any
person and furnish the services incident thereto.
(d) It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company (other than a
company of the character described in section 12(d)(3) (A) and (B)),
or any affiliated person of such a person or principal underwriter,
acting as principal to effect any transaction in which such registered
company, or a company controlled by such registered company,
is a joint or a joint and several participant with such person,
principal underwriter, or affiliated person, in contravention of such
rules and regulations as the Commission may prescribe for the purpose
of limiting or preventing participation by such registered or
controlled company on a basis different from or less advantageous
than that of such other participant. Nothing contained in this subsection
shall be deemed to preclude any affiliated person from acting
as manager of any underwriting syndicate or other group in
which such registered or controlled company is a participant and
receiving compensation therefor.
(e) It shall be unlawful for any affiliated person of a registered
investment company, or any affiliated person of such person—
(1) acting as agent, to accept from any source any compensation
(other than a regular salary or wages from such registered
company) for the purchase or sale of any property to or
for such registered company or any controlled company thereof,
except in the course of such person’s business as an underwriter
or broker; or
(2) acting as broker, in connection with the sale of securities
to or by such registered company or any controlled company
thereof, to receive from any source a commission, fee, or
other remuneration for effecting such transaction which exceeds
(A) the usual and customary broker’s commission if the
sale is effected on a securities exchange, or (B) 2 per centum
of the sales price if the sale is effected in connection with a secondary
distribution of such securities, or (C) 1 per centum of
the purchase or sale price of such securities if the sale is otherwise
effected unless the Commission shall, by rules and regulations
or order in the public interest and consistent with the
protection of investors, permit a larger commission.
(f) CUSTODY OF SECURITIES.—
(1) Every registered management company shall place and
maintain its securities and similar investments in the custody
of (A) a bank or banks having the qualifications prescribed in
Sec. 17 INVESTMENT COMPANY ACT OF 1940 54
paragraph (1) of section 26(a) of this title for the trustees of
unit investment trusts; or (B) a company which is a member
of a national securities exchange as defined in the Securities
Exchange Act of 1934, subject to such rules and regulations as
the Commission may from time to time prescribe for the protection
of investors; or (C) such registered company, but only
in accordance with such rules and regulations or orders as the
Commission may from time to time prescribe for the protection
of investors.
(2) Subject to such rules, regulations, and orders as the
Commission may adopt as necessary or appropriate for the protection
of investors, a registered management company or any
such custodian, with the consent of the registered management
company for which it acts as custodian, may deposit all or any
part of the securities owned by such registered management
company in a system for the central handling of securities
established by a national securities exchange or national securities
association registered with the Commission under the
Securities Exchange Act of 1934, or such other person as may
be permitted by the Commission, pursuant to which system all
securities of any particular class or series of any issuer deposited
within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical
delivery of such securities.
(3) Rules, regulations, and orders of the Commission under
this subsection, among other things, may make appropriate
provision with respect to such matters as the earmarking, segregation,
and hypothecation of such securities and investments,
and may provide for or require periodic or other inspections
by any or all of the following: Independent public
accountants, employees and agents of the Commission, and
such other persons as the Commission may designate.
(4) No such member which trades in securities for its own
account may act as custodian except in accordance with rules
and regulations prescribed by the Commission for the protection
of investors.
(5) If a registered company maintains its securities and
similar investments in the custody of a qualified bank or
banks, the cash proceeds from the sale of such securities and
similar investments and other cash assets of the company shall
likewise be kept in the custody of such a bank or banks, or in
accordance with such rules and regulations or orders as the
Commission may from time to time prescribe for the protection
of investors, except that such a registered company may maintain
a checking account in a bank or banks having the qualifications
prescribed in paragraph (1) of section 26(a) of this
title for the trustees of unit investment trusts with the balance
of such account or the aggregate balances of such accounts at
no time in excess of the amount of the fidelity bond, maintained
pursuant to section 17(g) of this title, covering the officers
or employees authorized to draw on such account or accounts.
(6) The Commission may, after consultation with and taking
into consideration the views of the Federal banking agen55
INVESTMENT COMPANY ACT OF 1940 Sec. 17
cies (as defined in section 3 of the Federal Deposit Insurance
Act), adopt rules and regulations, and issue orders, consistent
with the protection of investors, prescribing the conditions
under which a bank, or an affiliated person of a bank, either
of which is an affiliated person, promoter, organizer, or sponsor
of, or principal underwriter for, a registered management company
may serve as custodian of that registered management
company.
(g) The Commission is authorized to require by rules and regulations
or orders for the protection of investors that any officer or
employee of a registered management investment company who
may singly, or jointly with others, have access to securities or funds
of any registered company, either directly or through authority to
draw upon such funds or to direct generally the disposition of such
securities (unless the officer or employee has such access solely
through his position as an officer or employee of a bank) be bonded
by a reputable fidelity insurance company against larceny and
embezzlement in such reasonable minimum amounts as the Commission
may prescribe.
(h) After one year from the effective date of this title, neither
the charter, certificate of incorporation, articles of association,
indenture of trust, nor the by-laws of any registered investment
company, nor any other instrument pursuant to which such a company
is organized or administered, shall contain any provision
which protects or purports to protect any director or officer of such
company against any liability to the company or to its security
holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
(i) After one year from the effective date of this title no contract
or agreement under which any person undertakes to act as
investment adviser of, or principal underwriter for, a registered
investment company shall contain any provision which protects or
purports to protect such person against any liability to such company
or its security holders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence, in
the performance of his duties, or by reason of his reckless disregard
of his obligations and duties under such contract or agreement.
(j) It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company or any affiliated
person of an investment adviser of or principal underwriter for a
registered investment company, to engage in any act, practice, or
course of business in connection with the purchase or sale, directly
or indirectly, by such person of any security held or to be acquired
by such registered investment company in contravention of such
rules and regulations as the Commission may adopt to define, and
prescribe means reasonably necessary to prevent, such acts, practices,
or courses of business as are fraudulent, deceptive or manipulative.
Such rules and regulations may include requirements for
the adoption of codes of ethics by registered investment companies
and investment advisers of, and principal underwriters for, such
investment companies establishing such standards as are reasonably
necessary to prevent such acts, practices, or courses of business.
Sec. 18 INVESTMENT COMPANY ACT OF 1940 56
CAPITAL STRUCTURE
SEC. 18. ø80a–18¿ (a) It shall be unlawful for any registered
closed-end company to issue any class of senior security, or to sell
any such security of which it is the issuer, unless—
(1) if such class of senior security represents an
indebtedness—
(A) immediately after such issuance or sale, it will
have an asset coverage of at least 300 per centum;
(B) provision is made to prohibit the declaration of any
dividend (except a dividend payable in stock of the issuer),
or the declaration of any other distribution, upon any class
of the capital stock of such investment company, or the
purchase of any such capital stock, unless, in every such
case, such class of senior securities has at the time of the
declaration of any such dividend or distribution or at the
time of any such purchase an asset coverage of at least
300 per centum after deducting the amount of such dividend,
distribution, or purchase price, as the case may be,
except that dividends may be declared upon any preferred
stock if such senior security representing indebtedness has
an asset coverage of at least 200 per centum at the time
of declaration thereof after deducting the amount of such
dividend; and
(C) provision is made either—
(i) that, if on the last business day of each of
twelve consecutive calendar months such class of senior
securities shall have an asset coverage of less than
100 per centum, the holders of such securities voting
as a class shall be entitled to elect at least a majority
of the members of the board of directors of such registered
company, such voting right to continue until
such class of senior security shall have an asset coverage
of 110 per centum or more on the last business
day of each of three consecutive calendar months, or
(ii) that, if on the last business day of each of
twenty-four consecutive calendar months such class of
senior securities shall have an asset coverage of less
than 100 per centum, an event of default shall be
deemed to have occurred;
(2) if such class of senior security is a stock—
(A) immediately after such issuance or sale it will
have an asset coverage of at least 200 per centum;
(B) provision is made to prohibit the declaration of any
dividend (except a dividend payable in common stock of
the issuer), or the declaration of any other distribution,
upon the common stock of such investment company, or
the purchase of any such common stock, unless in every
such case such class of senior security has at the time of
the declaration of any such dividend or distribution or at
the time of any such purchase an asset coverage of at least
200 per centum after deducting the amount of such dividend,
distribution or purchase price, as the case may be;
57 INVESTMENT COMPANY ACT OF 1940 Sec. 18
(C) provision is made to entitle the holders of such
senior securities, voting as a class, to elect at least two
directors at all times, and, subject to the prior rights, if
any, of the holders of any other class of senior securities
outstanding, to elect a majority of the directors if at any
time dividends on such class of securities shall be unpaid
in an amount equal to two full years’ dividends on such
securities, and to continue to be so represented until all
dividends in arrears shall have been paid or otherwise provided
for;
(D) provision is made requiring approval by the vote
of a majority of such securities, voting as a class, of any
plan of reorganization adversely affecting such securities
or of any action requiring a vote of security holders as in
section 13(a) provided; and
(E) such class of stock shall have complete priority
over any other class as to distribution of assets and payment
of dividends, which dividends shall be cumulative.
(b) The asset coverage in respect of a senior security provided
for in subsection (a) may be determined on the basis of values calculated
as of a time within forty-eight hours (not including Sundays
or holidays) next preceding the time of such determination.
The time of issue or sale shall, in the case of an offering of such
securities to existing stockholders of the issuer, be deemed to be
the first date on which such offering is made, and in all other cases
shall be deemed to be the time as of which a firm commitment to
issue or sell and to take or purchase such securities shall be made.
(c) Notwithstanding the provisions of subsection (a) it shall be
unlawful for any registered closed-end investment company to issue
or sell any senior security representing indebtedness if immediately
thereafter such company will have outstanding more than one class
of senior security representing indebtedness, or to issue or sell any
senior security which is a stock if immediately thereafter such company
will have outstanding more than one class of senior security
which is a stock, except that (1) any such class of indebtedness or
stock may be issued in one or more series: Provided, That no such
series shall have a preference or priority over any other series upon
the distribution of the assets of such registered closed-end company
or in respect of the payment of interest or dividends, and (2) promissory
notes or other evidences of indebtedness issued in consideration
of any loan, extension, or renewal thereof, made by a bank
or other person and privately arranged, and not intended to be
publicly distributed, shall not be deemed to be a separate class of
senior securities representing indebtedness within the meaning of
this subsection (c).
(d) It shall be unlawful for any registered management company
to issue any warrant or right to subscribe to or purchase a
security of which such company is the issuer, except in the form
of warrants or rights to subscribe expiring not later than one hundred
and twenty days after their issuance and issued exclusively
and ratably to a class or classes of such company’s security holders;
except that any warrant may be issued in exchange for outstanding
warrants in connection with a plan of reorganization.
Sec. 18 INVESTMENT COMPANY ACT OF 1940 58
(e) The provisions of this section 18 shall not apply to any senior
securities issued or sold by any registered closed-end company—
(1) for the purpose of refunding through payment, purchase,
redemption, retirement, or exchange, any senior security
of such registered investment company except that no senior
security representing indebtedness shall be so issued or sold
for the purpose of refunding any senior security which is a
stock; or
(2) pursuant to any plan of reorganization (other than for
refunding as referred to in paragraph (1) of this subsection,
provided—
(A) that such senior securities are issued or sold for
the purpose of substituting or exchanging such senior securities
for outstanding senior securities, and if such senior
securities represent indebtedness they are issued or sold
for the purpose of substituting or exchanging such senior
securities for outstanding senior securities representing
indebtedness, of any registered investment company which
is a party to such plan of reorganization; or
(B) that the total amount of such senior securities so
issued or sold pursuant to such plan does not exceed the
total amount of senior securities of all the companies
which are parties to such plan, and the total amount of
senior securities representing indebtedness so issued or
sold pursuant to such plan does not exceed the total
amount of senior securities representing indebtedness of
all such companies, or, alternatively, the total amount of
such senior securities so issued or sold pursuant to such
plan does not have the effect of increasing the ratio of senior
securities representing indebtedness to the securities
representing stock or the ratio of senior securities representing
stock to securities junior thereto when compared
with such ratios as they existed before such reorganization.
(f)(1) It shall be unlawful for any registered open-end company
to issue any class of senior security or to sell any senior security
of which it is the issuer, except that any such registered company
shall be permitted to borrow from any bank: Provided, That immediately
after any such borrowing there is an asset coverage of at
least 300 per centum for all borrowings of such registered company:
And provided further, That in the event that such asset coverage
shall at any time fall below 300 per centum such registered company
shall, within three days thereafter (not including Sundays
and holidays) or such longer period as the Commission may prescribe
by rules and regulations, reduce the amount of its borrowings
to an extent that the asset coverage of such borrowings
shall be at least 300 per centum.
(2) ‘‘Senior security’’ shall not, in the case of a registered openend
company, include a class or classes or a number of series of
preferred or special stock each of which is preferred over all other
classes or series in respect of assets specifically allocated to that
class or series: Provided, That (A) such company has outstanding
no class or series of stock which is not so preferred over all other
classes or series, or (B) the only other outstanding class of the
59 INVESTMENT COMPANY ACT OF 1940 Sec. 18
issuer’s stock consists of a common stock upon which no dividend
(other than a liquidating dividend) is permitted to be paid and
which in the aggregate represents not more than one-half of 1 per
centum of the issuer’s outstanding voting securities. For the purpose
of insuring fair and equitable treatment of the holders of the
outstanding voting securities of each class or series of stock of such
company, the Commission may by rule, regulation, or order direct
that any matter required to be submitted to the holders of the outstanding
voting securities of such company shall not be deemed to
have been effectively acted upon unless approved by the holders of
such percentage (not exceeding a majority) of the outstanding voting
securities of each class or series of stock affected by such matter
as shall be prescribed in such rule, regulation, or order.
(g) Unless otherwise provided: ‘‘Senior security’’ means any
bond, debenture, note, or similar obligation or instrument constituting
a security and evidencing indebtedness, and any stock of a
class having priority over any other class as to distribution of assets
or payment of dividends; and ‘‘senior security representing
indebtedness’’ means any senior security other than stock.
The term ‘‘senior security’’, when used in subparagraphs (B)
and (C) of paragraph (1) of subsection (a), shall not include any
promissory note or other evidence of indebtedness issued in consideration
of any loan, extension, or renewal thereof, made by a bank
or other person and privately arranged, and not intended to be
publicly distributed; nor shall such term, when used in this section
18, include any such promissory note or other evidence of indebtedness
in any case where such a loan is for temporary purposes only
and in an amount not exceeding 5 per centum of the value of the
total assets of the issuer at the time when the loan is made. A loan
shall be presumed to be for temporary purposes if it is repaid
within sixty days and is not extended or renewed; otherwise it
shall be presumed not to be for temporary purposes. Any such presumption
may be rebutted by evidence.
(h) ‘‘Asset coverage’’ of a class of senior security representing
an indebtedness of an issuer means the ratio which the value of
the total assets of such issuer, less all liabilities and indebtedness
not represented by senior securities, bears to the aggregate amount
of senior securities representing indebtedness of such issuer. ‘‘Asset
coverage’’ of a class of senior security of an issuer which is a stock
means the ratio which the value of the total assets of such issuer,
less all liabilities and indebtedness not represented by senior securities,
bears to the aggregate amount of senior securities representing
indebtedness of such issuer plus the aggregate of the
involuntary liquidation preference of such class of senior security
which is a stock. The involuntary liquidation preference of a class
of senior security which is a stock shall be deemed to mean the
amount to which such class of senior security would be entitled on
involuntary liquidation of the issuer in preference to a security junior
to it.
(i) Except as provided in subsection (a) of this section, or as
otherwise required by law, every share of stock hereafter issued by
a registered management company (except a common-law trust of
the character described in section 16(c)) shall be a voting stock and
have equal voting rights with every other outstanding voting stock:
Sec. 19 INVESTMENT COMPANY ACT OF 1940 60
Provided, That this subsection shall not apply to shares issued pursuant
to the terms of any warrant or subscription right outstanding
on March 15, 1940, or any firm contract entered into before March
15, 1940, to purchase such securities from such company nor to
shares issued in accordance with any rules, regulations, or orders
which the Commission may make permitting such issue.
(j) Notwithstanding any provision of this title, it shall be unlawful,
after the date of enactment of this title, for any registered
face-amount certificate company—
(1) to issue, except in accordance with such rules, regulations,
or orders as the Commission may prescribe in the public
interest or as necessary or appropriate for the protection of
investors, any security other than (A) a face-amount certificate;
(B) a common stock having a par value and being without preference
as to dividends or distributions and having at least
equal voting rights with any outstanding security of such company;
or (C) short-term payment or promissory notes or other
indebtedness issued in consideration of any loan, extension, or
renewal thereof, made by a bank or other person and privately
arranged and not intended to be publicly offered;
(2) if such company has outstanding any security, other
than such face-amount certificates, common stock, promissory
notes, or other evidence of indebtedness, to make any distribution
or declare or pay any dividend on any capital security in
contravention of such rules and regulations or orders as the
Commission may prescribe in the public interest or as necessary
or appropriate for the protection of investors or to insure
the financial integrity of such company, to prevent the
impairment of the company’s ability to meet its obligations
upon its face-amount certificates; or
(3) to issue any of its securities except for cash or securities
including securities of which such company is the issuer.
(k) The provisions of subparagraphs (A) and (B) of paragraph
(1) of subsection (a) of this section shall not apply to investment
companies operating under the Small Business Investment Act of
1958, and the provisions of paragraph (2) of said subsection shall
not apply to such companies so long as such class of senior security
shall be held or guaranteed by the Small Business Administration.
DIVIDENDS
SEC. 19. ø80a–19¿ (a) It shall be unlawful for any registered
investment company to pay any dividend, or to make any distribution
in the nature of a dividend payment, wholly or partly from any
source other than—
(1) such company’s accumulated undistributed net income,
determined in accordance with good accounting practice and
not including profits or losses realized upon the sale of securities
or other properties; or
(2) such company’s net income so determined for the current
or preceding fiscal year;
unless such payment is accompanied by a written statement which
adequately discloses the source or sources of such payment. The
Commission may prescribe the form of such statement by rules and

61 INVESTMENT COMPANY ACT OF 1940 Sec. 21
regulations in the public interest and for the protection of investors.
(b) It shall be unlawful in contravention of such rules, regulations,
or orders as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors
for any registered investment company to distribute long-term capital
gains, as defined in the Internal Revenue Code of 1954, more
often than once every twelve months.
PROXIES; VOTING TRUSTS; CIRCULAR OWNERSHIP
SEC. 20. ø80a–20¿ (a) It shall be unlawful for any person, by
use of the mails or any means or instrumentality of interstate commerce
or otherwise, to solicit or to permit the use of his name to
solicit any proxy or consent or authorization in respect of any security
of which a registered investment company is the issuer in contravention
of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for
the protection of investors.
(b) It shall be unlawful for any registered investment company
or affiliated person thereof, any issuer of a voting-trust certificate
relating to any security of a registered investment company, or any
underwriter of such a certificate, by use of the mails or any means
or instrumentality of interstate commerce, or otherwise, to offer for
sale, sell, or deliver after sale, in connection with a public offering,
any such voting-trust certificate.
(c) No registered investment company shall purchase any voting
security if, to the knowledge of such registered company, crossownership
or circular ownership exists, or after such acquisition
will exist, between such registered company and the issuer of such
security. Cross-ownership shall be deemed to exist between two
companies when each of such companies beneficially owns more
than 3 per centum of the outstanding voting securities of the other
company. Circular ownership shall be deemed to exist between two
companies if such companies are included within a group of three
or more companies, each of which—
(1) beneficially owns more than 3 per centum of the outstanding
voting securities of one or more other companies of
the group; and
(2) has more than 3 per centum of its own outstanding voting
securities benficially owned by another company, or by
each of two or more other companies, of the group.
(d) If cross-ownership or circular ownership between a registered
investment company and any other company or companies
comes into existence upon the purchase by a registered investment
company of the securities of another company, it shall be the duty
of such registered company, within one year after it first knows of
the existence of such cross-ownership or circular ownership, to
eliminate the same.
LOANS
SEC. 21. ø80a–21¿ It shall be unlawful for any registered management
company to lend money or property to any person, directly
or indirectly, if—
Sec. 22 INVESTMENT COMPANY ACT OF 1940 62
(a) the investment policies of such registered company, as
recited in its registration statement and reports filed under
this title, do not permit such a loan; or
(b) such person controls or is under common control with
such registered company; except that the provisions of this
paragraph shall not apply to any loan from a registered company
to a company which owns all of the outstanding securities
of such registered company, except directors’ qualifying shares.
DISTRIBUTION, REDEMPTION, AND REPURCHASE OF REDEEMABLE
SECURITIES
SEC. 22. ø80a–22¿ (a) A securities association registered under
section 15A of the Securities Exchange Act of 1934 may prescribe,
by rules adopted and in effect in accordance with said section and
subject to all provisions of said section applicable to the rules of
such an association—
(1) a method or methods for computing the minimum price
at which a member thereof may purchase from any investment
company, any redeemable security issued by such company and
the maximum price at which a member may sell to such company
any redeemable security issued by it or which he may receive
for such security upon redemption, so that the price in
each case will bear such relation to the current net asset value
of such security computed as of such time as the rules may
prescribe; and
(2) a minimum period of time which must elapse after the
sale or issue of such security before any resale to such company
by a member or its redemption upon surrender by a
member;
in each case for the purpose of eliminating or reducing so far as
reasonably practicable any dilution of the value of other outstanding
securities of such company or any other result of such
purchase, redemption, or sale which is unfair to holders of such
other outstanding securities; and said rules may prohibit the members
of the association from purchasing, selling, or surrendering for
redemption any such redeemable securities in contravention of said
rules.
(b)(1) Such a securities association may also, by rules adopted
and in effect in accordance with said section 15A, and notwithstanding
the provisions of subsection (b)(6) thereof but subject to
all other provisions of said section applicable to the rules of such
an association, prohibit its members from purchasing, in connection
with a primary distribution of redeemable securities of which any
registered investment company is the issuer, any such security
from the issuer or from any principal underwriter except at a price
equal to the price at which such security is then offered to the public
less a commission, discount, or spread which is computed in conformity
with a method or methods, and within such limitations as
to the relation thereof to said public offering price, as such rules
may prescribe in order that the price at which such security is offered
or sold to the public shall not include an excessive sales load
but shall allow for reasonable compensation for sales personnel,
broker-dealers, and underwriters, and for reasonable sales loads to
investors. The Commission shall on application or otherwise, if it
63 INVESTMENT COMPANY ACT OF 1940 Sec. 22
appears that smaller companies are subject to relatively higher
operating costs, make due allowance therefor by granting any such
company or class of companies appropriate qualified exemptions
from the provisions of this section.
(2) At any time after the expiration of eighteen months from
the date of enactment of the Investment Company Amendments
Act of 1970 (or, if earlier, after a securities association has adopted
for purposes of paragraph (1) any rule respecting excessive sales
loads), the Commission may alter or supplement the rules of any
securities association as may be necessary to effectuate the purposes
of this subsection in the manner provided by section 19(c) of
the Securities Exchange Act of 1934.
(3) If any provision of this subsection is in conflict with any
provision of any law of the United States in effect on the date this
subsection takes effect, the provisions of this subsection shall prevail.
(c) The Commission may make rules and regulations applicable
to registered investment companies and to principal underwriters
of, and dealers in, the redeemable securities of any registered
investment company, whether or not members of any securities
association, to the same extent, covering the same subject matter,
and for the accomplishment of the same ends as are prescribed in
subsection (a) of this section in respect of the rules which may be
made by a registered securities association governing its members.
Any rules and regulations so made by the Commission, to the extent
that they may be inconsistent with the rules of any such association,
shall so long as they remain in force supersede the rules
of the association and be binding upon its members as well as all
other underwriters and dealers to whom they may be applicable.
(d) No registered investment company shall sell any redeemable
security issued by it to any person except either to or through
a principal underwriter for distribution or at a current public offering
price described in the prospectus, and, if such class of security
is being currently offered to the public by or through an underwriter,
no principal underwriter of such security and no dealer
shall sell any such security to any person except a dealer, a principal
underwriter, or the issuer, except at a current public offering
price described in the prospectus. Nothing in this subsection shall
prevent a sale made (i) pursuant to an offer of exchange permitted
by section 11 including any offer made pursuant to section 11(b);
(ii) pursuant to an offer made solely to all registered holders of the
securities, or of a particular class or series of securities issued by
the company proportionate to their holdings or proportionate to any
cash distribution made to them by the company (subject to appropriate
qualifications designed solely to avoid issuance of fractional
securities); or (iii) in accordance with rules and regulations of the
Commission made pursuant to subsection (b) of section 12.
(e) No registered investment company shall suspend the right
of redemption, or postpone the date of payment or satisfaction upon
redemption of any redeemable security in accordance with its terms
for more than seven days after the tender of such security to the
company or its agent designated for that purpose for redemption,
except—
Sec. 23 INVESTMENT COMPANY ACT OF 1940 64
(1) for any period (A) during which the New York Stock
Exchange is closed other than customary week-end and holiday
closings or (B) during which trading on the New York Stock
Exchange is restricted;
(2) for any period during which an emergency exists as a
result of which (A) disposal by the company of securities owned
by it is not reasonably practicable or (B) it is not reasonably
practicable for such company fairly to determine the value of
its net assets; or
(3) for such other periods as the Commission may by order
permit for the protection of security holders of the company.
The Commission shall by rules and regulations determine the conditions
under which (i) trading shall be deemed to be restricted and
(ii) an emergency shall be deemed to exist within the meaning of
this subsection.
(f) No registered open-end company shall restrict the transferability
or negotiability of any security of which it is the issuer except
in conformity with the statements with respect thereto contained
in its registration statement nor in contravention of such
rules and regulations as the Commission may prescribe in the interests
of the holders of all of the outstanding securities of such
investment company.
(g) No registered open-end company shall issue any of its securities
(1) for services; or (2) for property other than cash or securities
(including securities of which such registered company is the
issuer), except as a dividend or distribution to its security holders
or in connection with a reorganization.
DISTRIBUTION AND REPURCHASE OF SECURITIES: CLOSED-END
COMPANIES
SEC. 23. ø80a–23¿ (a) No registered closed-end company shall
issue any of its securities (1) for services; or (2) for property other
than cash or securities (including securities of which such registered
company is the issuer), except as a dividend or distribution
to its security holders or in connection with a reorganization.
(b) No registered closed-end company shall sell any common
stock of which it is the issuer at a price below the current net asset
value of such stock, exclusive of any distributing commission or discount
(which net asset value shall be determined as of a time
within forty-eight hours, excluding Sundays and holidays, next preceding
the time of such determination), except (1) in connection
with an offering to the holders of one or more classes of its capital
stock; (2) with the consent of a majority of its common stockholders;
(3) upon conversion of a convertible security in accordance
with its terms; (4) upon the exercise of any warrant outstanding on
the date of enactment of this Act or issued in accordance with the
provisions of section 18(d); or (5) under such other circumstances
as the Commission may permit by rules and regulations or orders
for the protection of investors.
(c) No registered closed-end company shall purchase any securities
of any class of which it is the issuer except—
(1) on a securities exchange or such other open market as
the Commission may designate by rules and regulations or orders:
Provided, That if such securities are stock, such reg65
INVESTMENT COMPANY ACT OF 1940 Sec. 24
istered company shall, within the preceding six months, have
informed stockholders of its intention to purchase stock of such
class by letter or report addressed to stockholders of such class;
or
(2) pursuant to tenders, after reasonable opportunity to
submit tenders given to all holders of securities of the class to
be purchased; or
(3) under such other circumstances as the Commission
may permit by rules and regulations or orders for the protection
of investors in order to insure that such purchases are
made in a manner or on a basis which does not unfairly discriminate
against any holders of the class or classes of securities
to be purchased.
REGISTRATION OF SECURITIES UNDER SECURITIES ACT OF 1933
SEC. 24. ø80a–24¿ (a) In registering under the Securities Act
of 1933 any security of which it is the issuer, a registered investment
company, in lieu of furnishing a registration statement containing
the information and documents specified in schedule A of
said Act, may file a registration statement containing the following
information and documents:
(1) such copies of the registration statement filed by such
company under this title, and of such reports filed by such
company pursuant to section 30 or such copies of portions of
such registration statement and reports, as the Commission
shall designate by rules and regulations; and
(2) such additional information and documents (including
a prospectus) as the Commission shall prescribe by rules and
regulations as necessary or appropriate in the public interest
or for the protection of investors.
(b) It shall be unlawful for any of the following companies, or
for any underwriter for such a company, in connection with a public
offering of any security of which such company is the issuer, to
make use of the mails or any means or instrumentalities of interstate
commerce, to transmit any advertisement, pamphlet, circular,
form letter, or other sales literature addressed to or intended for
distribution to prospective investors unless three copies of the full
text thereof have been filed with the Commission or are filed with
the Commission within ten days thereafter:
(1) any registered open-end company;
(2) any registered unit investment trust; or
(3) any registered face-amount certificate company.
(c) In addition to the powers relative to prospectuses granted
the Commission by section 10 of the Securities Act of 1933, the
Commission is authorized to require, by rules and regulations or
order, that the information contained in any prospectus relating to
any periodic payment plan certificate or face-amount certificate
registered under the Securities Act of 1933 on or after the effective
date of this title be presented in such form and order of items, and
such prospectus contain such summaries of any portion of such
information, as are necessary or appropriate in the public interest
or for the protection of investors.
(d) The exemption provided by paragraph (8) of section 3(a) of
the Securities Act of 1933 shall not apply to any security of which
Sec. 24 INVESTMENT COMPANY ACT OF 1940 66
an investment company is the issuer. The exemption provided by
paragraph (11) of said section 3(a) shall not apply to any security
of which a registered investment company is the issuer. The
exemption provided by section 4(3) of the Securities Act of 1933
shall not apply to any transaction in a security issued by a faceamount
certificate company or in a redeemable security issued by
an open-end management company or unit investment trust if any
other security of the same class is currently being offered or sold
by the issuer or by or through an underwriter in a distribution
which is not exempted from section 5 of said Act, except to such
extent and subject to such terms and conditions as the Commission,
having due regard for the public interest and the protection
of investors, may prescribe by rules or regulations with respect to
any class of persons, securities, or transactions.
(e) For the purposes of section 11 of the Securities Act of 1933,
as amended, the effective date of the latest amendment filed shall
be deemed the effective date of the registration statement with respect
to securities sold after such amendment shall have become
effective. For the purposes of section 13 of the Securities Act of
1933, as amended, no such security shall be deemed to have been
bona fide offered to the public prior to the effective date of the latest
amendment filed pursuant to this subsection. Except to the extent
the Commission otherwise provides by rules or regulations as
appropriate in the public interest or for the protection of investors,
no prospectus relating to a security issued by a face-amount certificate
company or a redeemable security issued by an open-end management
company or unit investment trust which varies for the
purposes of subsection (a)(3) of section 10 of the Securities Act of
1933 from the latest prospectus filed as a part of the registration
statement shall be deemed to meet the requirements of said section
10 unless filed as part of an amendment to the registration statement
under said Act and such amendment has become effective.
(f) REGISTRATION OF INDEFINITE AMOUNT OF SECURITIES.—
(1) REGISTRATION OF SECURITIES.—Upon the effective date
of its registration statement, as provided by section 8 of the
Securities Act of 1933, a face-amount certificate company,
open-end management company, or unit investment trust,
shall be deemed to have registered an indefinite amount of
securities.
(2) PAYMENT OF REGISTRATION FEES.—Not later than 90
days after the end of the fiscal year of a company or trust referred
to in paragraph (1), the company or trust, as applicable,
shall pay a registration fee to the Commission, calculated in
the manner specified in section 6(b) of the Securities Act of
1933, based on the aggregate sales price for which its securities
(including, for purposes of this paragraph, all securities
issued pursuant to a dividend reinvestment plan) were sold
pursuant to a registration of an indefinite amount of securities
under this subsection during the previous fiscal year of the
company or trust, reduced by—
(A) the aggregate redemption or repurchase price of
the securities of the company or trust during that year;
and
67 INVESTMENT COMPANY ACT OF 1940 Sec. 25
(B) the aggregate redemption or repurchase price of
the securities of the company or trust during any prior fiscal
year ending not more than 1 year before the date of
enactment of the Investment Company Act Amendments of
1996, that were not used previously by the company or
trust to reduce fees payable under this section.
(3) INTEREST DUE ON LATE PAYMENT.—A company or trust
paying the fee required by this subsection or any portion
thereof more than 90 days after the end of the fiscal year of
the company or trust shall pay to the Commission interest on
unpaid amounts, at the average investment rate for Treasury
tax and loan accounts published by the Secretary of the
Treasury pursuant to section 3717(a) of title 31, United States
Code. The payment of interest pursuant to this paragraph
shall not preclude the Commission from bringing an action to
enforce the requirements of paragraph (2).
(4) RULEMAKING AUTHORITY.—The Commission may adopt
rules and regulations to implement this subsection.
(g) ADDITIONAL PROSPECTUSES.—In addition to any prospectus
permitted or required by section 10(a) of the Securities Act of 1933,
the Commission shall permit, by rules or regulations deemed necessary
or appropriate in the public interest or for the protection of
investors, the use of a prospectus for purposes of section 5(b)(1) of
that Act with respect to securities issued by a registered investment
company. Such a prospectus, which may include information
the substance of which is not included in the prospectus specified
in section 10(a) of the Securities Act of 1933, shall be deemed to
be permitted by section 10(b) of that Act.
PLANS OF REORGANIZATION
SEC. 25. ø80a–25¿ (a) Any person who, by use of the mails or
any means or instrumentality of interstate commerce or otherwise,
solicits or permits the use of his name to solicit any proxy, consent,
authorization, power of attorney, ratification, deposit, or dissent in
respect of any plan of reorganization of any registered investment
company shall file with, or mail to, the Commission for its information,
within twenty-four hours after the commencement of any such
solicitation, a copy of such plan and any deposit agreement relating
thereto and of any proxy, consent, authorization, power of attorney,
ratification, instrument of deposit, or instrument of dissent in respect
thereto, if or to the extent that such documents shall not already
have been filed with the Commission.
(b) The Commission is authorized, if so requested, prior to any
solicitation of security holders with respect to any plan of reorganization,
by any registered investment company which is, or any of
the securities of which are, the subject of or is a participant in any
such plan, or if so requested by the holders of 25 per centum of any
class of its outstanding securities, to render an advisory report in
respect of the fairness of any such plan and its effect upon any
class or classes of security holders. In such event any registered
investment company, in respect of which the Commission shall
have rendered any such advisory report, shall mail promptly a copy
of such advisory report to all its security holders affected by any
such plan: Provided, That such advisory report shall have been reSec.
26 INVESTMENT COMPANY ACT OF 1940 68
ceived by it at least forty-eight hours (not including Sundays and
holidays) before final action is taken in relation to such plan at any
meeting of security holders called to act in relation thereto, or any
adjournment of any such meeting, or if no meeting be called, then
prior to the final date of acceptance of such plan by security holders.
In respect of securities not registered as to ownership, in lieu
of mailing a copy of such advisory report, such registered company
shall publish promptly a statement of the existence of such advisory
report in a newspaper of general circulation in its principal
place of business and shall make available copies of such advisory
report upon request. Notwithstanding the provision of this section
the Commission shall not render such advisory report although so
requested by any such investment company or such security holders
if the fairness or feasibility of said plan is in issue in any proceeding
pending in any court of competent jurisdiction unless such
plan is submitted to the Commission for that purpose by such
court.
(c) Any district court of the United States in the State of incorporation
of a registered investment company, or any such court for
the district in which such company maintains its principal place of
business, is authorized to enjoin the consummation of any plan of
reorganization of such registered investment company upon proceedings
instituted by the Commission (which is authorized so to
proceed upon behalf of security holders of such registered company,
or any class thereof), if such court shall determine that any such
plan is not fair and equitable to all security holders.
(d) Nothing contained in this section shall in any way affect or
derogate from the powers of the courts of the United States and the
Commission with reference to reorganizations contained in title 11
of the United States Code.
UNIT INVESTMENT TRUSTS
SEC. 26. ø80a–26¿ (a) No principal underwriter for or depositor
of a registered unit investment trust shall sell, except by surrender
to the trustee for redemption, any security of which such trust is
the issuer (other than short-term paper), unless the trust indenture,
agreement of custodianship, or other instrument pursuant to
which such security is issued—
(1) designates one or more trustees or custodians, each of
which is a bank, and provides that each such trustee or custodian
shall have at all times an aggregate capital, surplus, and
undivided profits of a specified minimum amount, which shall
not be less than $500,000 (but may also provide, if such trustee
or custodian publishes reports of condition at least annually,
pursuant to law or to the requirements of its supervising or
examining authority, that for the purposes of this paragraph
the aggregate capital, surplus, and undivided profits of such
trustee or custodian shall be deemed to be its aggregate capital,
surplus, and undivided profits as set forth in its most recent
report of condition so published);
(2) provides, in substance, (A) that during the life of the
trust the trustee or custodian, if not otherwise remunerated,
may charge against and collect from the income of the trust,
and from the corpus thereof if no income is available, such fees
69 INVESTMENT COMPANY ACT OF 1940 Sec. 26
for its services and such reimbursement for its expenses as are
provided for in such instrument; (B) that no such charge or collection
shall be made except for services theretofore performed
or expenses theretofore incurred; (C) that no payment to the
depositor of or a principal underwriter for such trust, or to any
affiliated person or agent of such depositor or underwriter,
shall be allowed the trustee or custodian as an expense (except
that provision may be made for the payment to any such person
of a fee, not exceeding such reasonable amount as the
Commission may prescribe as compensation for performing
bookkeeping and other administrative services, of a character
normally performed by the trustee or custodian itself); and (D)
that the trustee or custodian shall have possession of all securities
and other property in which the funds of the trust are
invested, all funds held for such investment, all equalization,
redemption, and other special funds of the trust, and all income
upon, accretions to, and proceeds of such property and
funds, and shall segregate and hold the same in trust (subject
only to the charges and collections allowed under clauses (A),
(B), and (C)) until distribution thereof to the security holders
of the trust;
(3) provides, in substance, that the trustee or custodian
shall not resign until either (A) the trust has been completely
liquidated and the proceeds of the liquidation distributed to
the security holders of the trust, or (B) a successor trustee or
custodian, having the qualifications prescribed in paragraph
(1), has been designated and has accepted such trusteeship or
custodianship; and
(4) provides, in substance, (A) that a record will be kept by
the depositor or an agent of the depositor of the name and address
of, and the shares issued by the trust and held by, every
holder of any security issued pursuant to such instrument,
insofar as such information is known to the depositor or agent;
and (B) that whenever a security is deposited with the trustee
in substitution for any security in which such security holder
has an undivided interest, the depositor or the agent of the depositor
will, within five days after such substitution, either deliver
or mail to such security holder a notice of substitution, including
an identification of the securities eliminated and the
securities substituted, and a specification of the shares of such
security holder affected by the substitution.
(b) The Commission may, after consultation with and taking
into consideration the views of the Federal banking agencies (as defined
in section 3 of the Federal Deposit Insurance Act), adopt
rules and regulations, and issue orders, consistent with the protection
of investors, prescribing the conditions under which a bank, or
an affiliated person of a bank, either of which is an affiliated person
of a principal underwriter for, or depositor of, a registered unit
investment trust, may serve as trustee or custodian under subsection
(a)(1).
(c) It shall be unlawful for any depositor or trustee of a registered
unit investment trust holding the security of a single issuer
to substitute another security for such security unless the Commission
shall have approved such substitution. The Commission shall
Sec. 26 INVESTMENT COMPANY ACT OF 1940 70
issue an order approving such substitution if the evidence establishes
that it is consistent with the protection of investors and the
purposes fairly intended by the policy and provisions of this title.
(d) In the event that a trust indenture, agreement of custodianship,
or other instrument pursuant to which securities of a registered
unit investment trust are issued does not comply with the
requirements of subsection (a) of this section, such instrument will
be deemed to meet such requirements if a written contract or
agreement binding on the parties and embodying such requirements
has been executed by the depositor on the one part and the
trustee or custodian on the other part, and three copies of such contract
or agreement have been filed with the Commission.
(e) Whenever the Commission has reason to believe that a unit
investment trust is inactive and that its liquidation is in the interest
of the security holders of such trust, the Commission may file
a complaint seeking the liquidation of such trust in the district
court of the United States in any district wherein any trustee of
such trust resides or has its principal place of business. A copy of
such complaint shall be served on every trustee of such trust, and
notice of the proceeding shall be given such other interested persons
in such manner and at such times as the court may direct.
If the court determines that such liquidation is in the interest of
the security holders of such trust, the court shall order such liquidation
and, after payment of necessary expenses, the distribution
of the proceeds to the security holders of the trust in such manner
and on such terms as may to the court appear equitable.
(f) EXEMPTION.—
(1) IN GENERAL.—Subsection (a) does not apply to any registered
separate account funding variable insurance
contracts, or to the sponsoring insurance company and principal
underwriter of such account.
(2) LIMITATION ON SALES.—It shall be unlawful for any registered
separate account funding variable insurance
contracts, or for the sponsoring insurance company of such account,
to sell any such contract—
(A) unless the fees and charges deducted under the
contract, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred,
and the risks assumed by the insurance company, and,
beginning on the earlier of August 1, 1997, or the earliest
effective date of any registration statement or amendment
thereto for such contract following the date of enactment
of this subsection, the insurance company so represents in
the registration statement for the contract; and
(B) unless the insurance company—
(i) complies with all other applicable provisions of
this section, as if it were a trustee or custodian of the
registered separate account;
(ii) files with the insurance regulatory authority of
the State which is the domiciliary State of the
insurance company, an annual statement of its financial
condition, which most recent statement indicates
that the insurance company has a combined capital
and surplus, if a stock company, or an unassigned sur

71 INVESTMENT COMPANY ACT OF 1940 Sec. 27
plus, if a mutual company, of not less than $1,000,000,
or such other amount as the Commission may from
time to time prescribe by rule, as necessary or appropriate
in the public interest or for the protection of
investors; and
(iii) together with its registered separate accounts,
is supervised and examined periodically by the
insurance authority of such State.
(3) FEES AND CHARGES.—For purposes of paragraph (2),
the fees and charges deducted under the contract shall include
all fees and charges imposed for any purpose and in any
manner.
(4) REGULATORY AUTHORITY.—The Commission may issue
such rules and regulations to carry out paragraph (2)(A) as it
determines are necessary or appropriate in the public interest
or for the protection of investors.
PERIODIC PAYMENT PLANS
SEC. 27. ø80a–27¿ (a) It shall be unlawful for any registered
investment company issuing periodic payment plan certificates, or
for any depositor of or underwriter for such company, to sell any
such certificate, if—
(1) the sales load on such certificate exceeds 9 per centum
of the total payments to be made thereon;
(2) more than one-half of any of the first twelve monthly
payments thereon, or their equivalent, is deducted for sales
load;
(3) the amount of sales load deducted from any one of such
first payments exceeds proportionately the amount deducted
from any other such payment, or the amount deducted from
any subsequent payment exceeds proportionately the amount
deducted from any other subsequent payment;
(4) the first payment on such certificate is less than $20,
or any subsequent payment is less than $10;
(5) if such registered company is a management company,
the proceeds of such certificate or the securities in which such
proceeds are invested are subject to management fees (other
than fees for administrative services of the character described
in clause (C), paragraph (2), of section 26(a)) exceeding such
reasonable amount as the Commission may prescribe, whether
such fees are payable to such company or to investment advisers
thereof; or
(6) if such registered company is a unit investment trust
the assets of which are securities issued by a management
company, the depositor of or principal underwriter for such
trust, or any affiliated person of such depositor or underwriter,
is to receive from such management company or any affiliated
person thereof any fee or payment on account of payments on
such certificate exceeding such reasonable amount as the Commission
may prescribe.
(b) If it appears to the Commission, upon application or otherwise,
that smaller companies are subjected to relatively higher
operating costs and that in order to make due allowance therefor
it is necessary or appropriate in the public interest and consistent
Sec. 27 INVESTMENT COMPANY ACT OF 1940 72
with the protection of investors that a provision or provisions of
paragraph (1), (2), or (3) of subsection (a) relative to sales load be
relaxed in the case of certain registered investment companies
issuing periodic payment plan certificates, or certain specified
classes of such companies, the Commission is authorized by rules
and regulations or order to grant any such company or class of
companies appropriate qualified exemptions from the provisions of
said paragraphs.
(c) It shall be unlawful for any registered investment company
issuing periodic payment plan certificates, or for any depositor of
or underwriter for such company, to sell any such certificate,
unless—
(1) such certificate is a redeemable security; and
(2) the proceeds of all payments on such certificate (except
such amounts as are deducted for sales load) are deposited
with a trustee or custodian having the qualifications prescribed
in paragraph (1) of section 26(a) for the trustees of unit investment
trusts, and are held by such trustee or custodian under
an indenture or agreement containing, in substance, the provisions
required by paragraphs (2) and (3) of section 26(a) for the
trust indentures of unit investment trusts.
(d) Notwithstanding subsection (a) of this section, it shall be
unlawful for any registered investment company issuing periodic
payment plan certificates, or for any depositor of or underwriter for
such company, to sell any such certificate unless the certificate provides
that the holder thereof may surrender the certificate at any
time within the first eighteen months after the issuance of the certificate
and receive in payment thereof, in cash, the sum of (1) the
value of his account, and (2) an amount, from such underwriter or
depositor, equal to that part of the excess paid for sales loading
which is over 15 per centum of the gross payments made by the
certificate holder. The Commission may make rules and regulations
applicable to such underwriters and depositors specifying such reserve
requirements as it deems necessary or appropriate in order
for such underwriters and depositors to carry out the obligations to
refund sales charges required by this subsection.
(e) With respect to any periodic payment plan certificate sold
subject to the provisions of subsection (d) of this section, the registered
investment company issuing such periodic payment plan
certificate, or any depositor of or underwriter for such company,
shall in writing (1) inform each certificate holder who has missed
three payments or more, within thirty days following the expiration
of fifteen months after the issuance of the certificate, or, if any
such holder has missed one payment or more after such period of
fifteen months but prior to the expiration of eighteen months after
the issuance of the certificate, at any time prior to the expiration
of such eighteen-month period, of his right to surrender his certificate
as specified in subsection (d) of this section, and (2) inform the
certificate holder of (A) the value of the holder’s account as of the
time the written notice was given to such holder, and (B) the
amount to which he is entitled as specified in subsection (d) of this
section. The Commission may make rules specifying the method,
form, and contents of the notice required by this subsection.
73 INVESTMENT COMPANY ACT OF 1940 Sec. 27
(f) With respect to any periodic payment plan (other than a
plan under which the amount of sales load deducted from any payment
thereon does not exceed 9 per centum of such payment), the
custodian bank for such plan shall mail to each certificate holder,
within sixty days after the issuance of the certificate, a statement
of charges to be deducted from the projected payments on the certificate
and a notice of his right of withdrawal as specified in this
section. The Commission may make rules specifying the method,
form, and contents of the notice required by this subsection. The
certificate holder may within forty-five days of the mailing of the
notice specified in this subsection surrender his certificate and receive
in payment thereof, in cash, the sum of (1) the value of his
account, and (2) an amount, from the underwriter or depositor,
equal to the difference between the gross payments made and the
net amount invested. The Commission may make rules and regulations
applicable to underwriters and depositors of companies
issuing any such certificate specifying such reserve requirements as
it deems necessary or appropriate in order for such underwriters
and depositors to carry out the obligations to refund sales charges
required by this subsection.
(g) Notwithstanding the provisions of subsections (a) and (d),
a registered investment company issuing periodic payment plan
certificates may elect, by written notice to the Commission, to be
governed by the provisions of subsection (h) rather than the provisions
of subsections (a) and (d) of this section.
(h) Upon making the election specified in subsection (g), it
shall be unlawful for any such electing registered investment company
issuing periodic payment plan certificates, or for any depositor
of or underwriter for such company, to sell any such certificate,
if—
(1) the sales load on such certificate exceeds 9 per centum
of the total payments to be made thereon;
(2) more than 20 per centum of any payment thereon is deducted
for sales load, or an average of more than 16 per centum
is deducted for sales load from the first forty-eight
monthly payments thereon, or their equivalent;
(3) the amount of sales load deducted from any one of the
first twelve monthly payments, the thirteenth through twentyfourth
monthly payments, the twenty-fifth through thirty-sixth
monthly payments, or the thirty-seventh through forty-eighth
monthly payments, or their equivalents, respectively, exceeds
proportionately the amount deducted from any other such payment,
or the amount deducted from any subsequent payment
exceeds proportionately the amount deducted from any other
subsequent payment;
(4) the deduction for sales load on the excess of the payment
or payments in any month over the minimum monthly
payment, or its equivalent, to be made on the certificate exceeds
the sales load applicable to payments subsequent to the
first forty-eight monthly payments or their equivalent;
(5) the first payment on such certificate is less than $20,
or any subsequent payment is less than $10;
(6) if such registered company is a management company,
the proceeds of such certificate or the securities in which such
Sec. 28 INVESTMENT COMPANY ACT OF 1940 74
proceeds are invested are subject to management fees (other
than fees for administrative services of the character described
in clause (C) of paragraph (2) of section 26(a)) exceeding such
reasonable amount as the Commission may prescribe, whether
such fees are payable to such company or to investment advisers
thereof; or
(7) if such registered company is a unit investment trust
the assets of which are securities issued by a management
company, the depositor of or principal underwriter for such
trust, or any affiliated person of such depositor or underwriter,
is to receive from such management company or any affiliated
person thereof any fee or payment on account of payments on
such certificate exceeding such reasonable amount as the Commission
may prescribe.
(i)(1) This section does not apply to any registered separate account
funding variable insurance contracts, or to the sponsoring
insurance company and principal underwriter of such account, except
as provided in paragraph (2).
(2) It shall be unlawful for any registered separate account
funding variable insurance contracts, or for the sponsoring
insurance company of such account, to sell any such contract
unless—
(A) such contract is a redeemable security; and
(B) the insurance company complies with section 26(e) and
any rules or regulations issued by the Commission under section
26(e).
FACE-AMOUNT CERTIFICATE COMPANIES
SEC. 28. ø80a–28¿ (a) It shall be unlawful for any registered
face-amount certificate company to issue or sell any face-amount
certificate, or to collect or accept any payment on any such certificate
issued by such company on or after the effective date of this
title, unless—
(1) such company, if organized before March 15, 1940, was
actively and continuously engaged in selling face-amount certificates
on and before that date, and has outstanding capital
stock worth upon a fair valuation of assets not less than
$50,000; or if organized on or after March 15, 1940, has capital
stock in an amount not less than $250,000 which has been
bona fide subscribed and paid for in cash; and
(2) such company maintains at all times minimum certificate
reserves on all its outstanding face-amount certificates in
an aggregate amount calculated and adjusted as follows:
(A) the reserves for each certificate of the installment
type shall be based on assumed annual, semi-annual,
quarterly, or monthly reserve payments according to the
manner in which gross payments for any certificate year
are made by the holder, which reserve payments shall be
sufficient in amount, as and when accumulated at a rate
not to exceed 31⁄2 per centum per annum compounded annually,
to provide the minimum maturity or face amount
of the certificate when due. Such reserve payments may be
graduated according to certificate years so that the reserve
payment or payments for the first certificate year shall
75 INVESTMENT COMPANY ACT OF 1940 Sec. 28
amount to at least 50 per centum of the required gross annual
payment for such year and the reserve payment or
payments for each of the second to fifth certificate years
inclusive shall amount to at least 93 per centum of each
such year’s required gross annual payment and for the
sixth and each subsequent certificate year the reserve payment
or payments shall amount to at least 96 per centum
of each such year’s required gross annual payment: Provided,
That such aggregate reserve payments shall amount
to at least 93 per centum of the aggregate gross annual
payments required to be made by the holder to obtain the
maturity of the certificate. The company may at its option
take as loading from the gross payment or payments for a
certificate year, as and when made by the certificate
holder, an amount or amounts equal in the aggregate for
such year to not more than the excess, if any, of the gross
payment or payments required to be made by the holder
for such year, over and above the percentage of the gross
annual payment required herein for such year for reserve
purposes. Such loading may be taken by the company prior
to or after the setting up of the reserve payment or payments
for such year and the reserve payment or payments
for such year may be graduated and adjusted to correspond
with the amount of the gross payment or payments
made by the certificate holder for such year less the
loading so taken;
(B) if the foregoing minimum percentages of the gross
annual payments required under the provisions of such
certificate should produce reserve payments larger than
are necessary at 31⁄2 per centum per annum compounded
annually to provide the minimum maturity or face amount
of the certificate when due, the reserve shall be based
upon reserve payments accumulated as provided under
preceding subparagraph (A) of this paragraph except that
in lieu of the 31⁄2 per centum rate specified therein, such
rate shall be lowered to the minimum rate, expressed in
multiples of one-eighth of 1 per centum, which will accumulate
such reserve payments to the maturity value when
due;
(C) if the actual annual gross payment to be made by
the certificate holder on any certificate issued prior to or
after the effective date of this Act is less than the amount
of any assumed reserve payment or payments for a certificate
year, such company shall maintain as a part of such
minimum certificate reserves a deficiency reserve equal to
the total present value of future deficiencies in the gross
payments, calculated at a rate not to exceed 31⁄2 per centum
per annum compounded annually;
(D) for each certificate of the installment type the
amount of the reserve shall at any time be at least equal
to (1) the then amount of the reserve payments set up
under section 28(a)(2) (A) or (B); (2) the accumulations on
such reserve payments as computed under subparagraphs
(A) or (B) of this paragraph (2); (3) the amount of any defiSec.
28 INVESTMENT COMPANY ACT OF 1940 76
ciency reserve required under subparagraph (C) hereof;
and (4) such amount as shall have been credited to the account
of each certificate holder in the form of any credit,
or any dividend, or any interest in addition to the minimum
maturity amount specified in such certificate, plus
any accumulations on any amount or amounts so credited,
at a rate not exceeding 31⁄2 per centum per annum compounded
annually;
(E) for each certificate which is fully paid, including
any fully paid obligations resulting from or effected upon
the maturity of the previously issued certificate, and for
each paid-up certificate issued as provided in subsection (f)
of this section prior to maturity, the amount of the reserve
shall at any time be at least equal to (1) such amount as
and when accumulated at a rate not to exceed 31⁄2 per centum
per annum compounded annually, will provide the
amount or amounts payable when due and (2) such
amount as shall have been credited to the account of each
such certificate holder in the form of any credit, or any
dividend, or any interest in addition to the minimum
maturity amount specified in the certificate, plus any accumulations
on any amount or amounts so credited, at a rate
not exceeding 31⁄2 per centum per annum compounded annually;
(F) for each certificate of the installment type under
which gross payments have been made by or credited to
the holder thereof covering a payment period or periods or
any part thereof beyond the then current payment period
as defined by the terms of such certificate, and for which
period or periods no reserve has been set up under subparagraph
(A) or (B) hereof, an advance payment reserve
shall be set up and maintained in the amount of the
present value of any such unapplied advance gross payments,
computed at a rate not to exceed 31⁄2 per centum
per annum compounded annually;
(G) such appropriate contingency reserves for death
and disability benefits and for reinstatement rights on any
such certificate providing for such benefits or rights as the
Commission shall prescribe by rule, regulation, or order
based upon the experience of face-amount companies in
relation to such contingencies.
At no time shall the aggregate certificate reserves herein required
by subparagraphs (A) to (F), inclusive, be less than the aggregate
surrender values and other amounts to which all certificate holders
may be then entitled.
For the purpose of this subsection (a), no certificate of the
installment type shall be deemed to be outstanding if before a surrender
value has been attained the holder thereof has been in continuous
default in making his payments thereon for a period of one
year.
(b) It shall be unlawful for any registered face-amount certificate
company to issue or sell any face-amount certificate, or to collect
or accept any payment on any such certificate issued by such
company on or after the effective date of this title, unless such com77
INVESTMENT COMPANY ACT OF 1940 Sec. 28
pany has, in cash or qualified investments, assets having a value
not less than the aggregate amount of the capital stock requirement
and certificate reserves as computed under the provisions of
subsection (a) hereof. As used in this subsection, ‘‘qualified investments’’
means investments of a kind which life-insurance companies
are permitted to invest in or hold under the provisions of the
Code of the District of Columbia as heretofore or hereafter
amended, and such other investments as the Commission shall by
rule, regulation, or order authorize as qualified investments. Such
investments shall be valued in accordance with the provisions of
said Code where such provisions are applicable. Investments to
which such provisions do not apply shall be valued in accordance
with such rules, regulations, or orders as the Commission shall
prescribe for the protection of investors.
(c) The Commission shall by rule, regulation, or order, in the
public interest or for the protection of investors, require a registered
face-amount certificate company to deposit and maintain,
upon such terms and conditions as the Commission shall prescribe
and as are appropriate for the protection of investors, with one or
more institutions having the qualifications required by paragraph
(1) of section 26(a) for a trustee of a unit investment trust, all or
any part of the investments maintained by such company as certificate
reserve requirements under the provisions of subsection (b)
hereof: Provided, however, That where qualified investments are
maintained on deposit by such company in respect of its liabilities
under certificates issued to or held by residents of any State as required
by the statute of such State or by any order, regulation, or
requirement of such State or any official or agency thereof, the
amount so on deposit, but not to exceed the amount of reserves required
by subsection (a) hereof for the certificates so issued or held,
shall be deducted from the amount of qualified investments that
may be required to be deposited hereunder.
Assets which are qualified investments under subsection (b)
and which are deposited under or as permitted by this subsection
(c), may be used and shall be considered as a part of the assets required
to be maintained under the provisions of said subsection (b).
(d) It shall be unlawful for any registered face-amount certificate
company to issue or sell any face-amount certificate, or to collect
or accept any payment on any such certificate issued by such
company on or after the effective date of this title, unless such certificate
contains a provision or provisions to the effect—
(1) that, in respect of any certificate of the installment
type, during the first certificate year the holder of the certificate,
upon surrender thereof, shall be entitled to a value payable
in cash not less than the reserve payments as specified in
subparagraph (A) or (B) of paragraph (2) of subsection (a) and
at the end of such certificate year, a value payable in cash at
least equal to 50 per centum of the amount of the gross annual
payment required thereby for such year;
(2) that, in respect of any certificate of the installment
type, at any time after the expiration of the first certificate
year and prior to maturity, the holder of the certificate, upon
surrender thereof, shall be entitled to a value payable in cash
not less than the then amount of the reserve for such certifiSec.
28 INVESTMENT COMPANY ACT OF 1940 78
cate required by numbered items (1) and (2) of subparagraph
(D) of paragraph (2) of subsection (a) hereof, less a surrender
charge that shall not exceed 2 per centum of the face or maturity
amount of the certificate, or 15 per centum of the amount
of such reserve, whichever is the lesser, but in no event shall
such value be less than 50 per centum of the amount of such
reserve. The amount of the surrender value for the end of each
certificate year shall be set out in the certificate;
(3) that, in respect of any certificate of the installment
type, the holder of the certificate, upon surrender thereof for
cash or upon receipt of a paid-up certificate as provided in subsection
(f) hereof, shall be entitled to a value payable in cash
equal to the then amount of any advance payment reserve
under such certificate required by subparagraph (F) of paragraph
(2) of subsection (a) hereof in addition to any other
amounts due the holder hereunder;
(4) that at any time prior to maturity, in respect of any
certificate which is fully paid, the holder of the certificate,
upon surrender thereof, shall be entitled to a value payable in
cash not less than the then amount of the reserve for such certificate
required by item (1) of subparagraph (E) of paragraph
(2) of subsection (a) hereof, less a surrender charge that shall
not exceed 2 per centum of the face or maturity amount of the
certificate, or 15 per centum of the amount of such reserve,
whichever is the lesser: Provided, however, That such surrender
charge shall not apply as to any obligations of a fully
paid type resulting from the maturity of a previously issued
certificate. The amount of the surrender value for the end of
each certificate year shall be set out in the certificate;
(5) that in respect of any certificate, the holder of the certificate,
upon maturity, upon surrender thereof for cash or
upon receipt of a paid-up certificate as provided in subsection
(f) hereof, shall be entitled to a value payable in cash equal to
the then amount of the reserve, if any, for such certificate required
by item (4) of subparagraph (D) of paragraph (2) of subsection
(a) hereof or item (2) of subparagraph (E) of paragraph
(2) of subsection (a) hereof in addition to any other amounts
due the holder hereunder.
The term ‘‘certificate year’’ as used in this section in respect of
any certificate of the installment type means a period or periods for
which one year’s payment or payments as provided by the certificate
have been made thereon by the holder and the certificate
maintained in force by such payments for the time for which the
same have been made, and in respect of any certificate which is
fully paid or paid-up means any year ending on the anniversary of
the date of issuance of the certificate.
Any certificate may provide for loans or advances by the company
to the certificate holder on the security of such certificate
upon terms prescribed therein but at an interest rate not exceeding
6 per centum per annum. The amount of the required reserves, deposits,
and the surrender values thereof available to the holder
may be adjusted to take into account any unpaid balance on such
loans or advances and interest thereon, for the purposes of this
subsection and subsections (b) and (c) hereof.
79 INVESTMENT COMPANY ACT OF 1940 Sec. 28
Any certificate may provide that the company at its option
may, prior to the maturity thereof, defer any payment or payments
to the certificate holder to which he may be entitled under this subsection
(d), for a period of not more than thirty days: Provided,
That in the event such option is exercised by the company, interest
shall accrue on any payment or payments due to the holder, for the
period of such deferment at a rate equal to that used in accumulating
the reserves for such certificate: And provided further, That
the Commission may, by rules and regulations or orders in the
public interest or for the protection of investors, make provision for
any other deferment upon such terms and conditions as it shall
prescribe.
(e) It shall be unlawful for any registered face-amount certificate
company to issue or sell any face-amount certificate, or to collect
or accept any payment on any such certificate issued by such
company on or after the effective date of this title, which certificate
makes the holder liable to any legal action or proceeding for any
unpaid amount on such certificate.
(f) It shall be unlawful for any registered face-amount certificate
company to issue or sell any face-amount certificate, or to collect
or accept any payment on any such certificate issued by such
company on or after the effective date of this title, (1) unless such
face-amount certificate contains a provision or provisions to the effect
that the holder shall have an optional right to receive a paidup
certificate in lieu of the then attained cash surrender value provided
therein and in the amount of such value plus accumulations
thereon at a rate to be specified in the paid-up certificate equal to
that used in computing the reserve on the original certificate under
subparagraph (A) or (B) of paragraph (2) of subsection (a) of this
section, such paid-up certificate to become due and payable at the
end of a period equal to the balance of the term of such original
certificate before maturity; and during the period prior to maturity
such paid-up certificate shall have a cash value upon surrender
thereof equal to the then amount of the reserve therefor; and (2)
unless such face-amount certificate contains a further provision or
provisions to the effect that if the holder be in continuous default
in his payments on such certificate for a period of six months without
having exercised his option to receive a paid-up certificate, as
herein provided, the company at the expiration of such six months
shall pay the surrender value in cash if such value is less than
$100 or if such value is $100 or more shall issue such paid-up certificate
to such holder and such payment or issuance, plus the payment
of all other amounts to which he may be then entitled under
the original certificate, shall operate to cancel his original certificate:
Provided, That in lieu of the issuance of a new paid-up certificate
the original certificate may be converted into a paid-up certificate
with the same effect; and (3) unless, where such certificate
provides, in the event of default, for the deferment of payments
thereon by the holder or of the due dates of such payments or of
the maturity date of the certificate, it shall also provide in effect
for the right of reinstatement by the holder of the certificate after
default and for an option in the holder, at the time of reinstatement,
to make up the payment or payments for the default period
next preceding such reinstatement with interest thereon not exSec.
28 INVESTMENT COMPANY ACT OF 1940 80
ceeding 6 per centum per annum, with the same effect as if no such
default in making such payments had occurred.
The term ‘‘default’’ as used in this subsection (f) shall, without
restricting its usual meaning, include a failure to make a payment
or payments as and when provided by the certificate.
(g) The foregoing provisions of this section shall not apply to
a face-amount certificate company which on or before the effective
date of this Act has discontinued the offering of face-amount certificates
to the public and issues face-amount certificates only to the
holders of certificates previously issued pursuant to an obligation
expressed or implied in such certificates.
(h) It shall be unlawful for any registered face-amount certificate
company which does not maintain the minimum certificate reserve
on all its outstanding face-amount certificates issued prior to
the effective date of this Act, in an aggregate amount calculated
and adjusted as provided in section 28, to declare or pay any dividends
on the shares of such company for or during any calendar
year which shall exceed one-third of the net earnings for the next
preceding calendar year or which shall exceed 10 per centum of the
aggregate net earnings for the next preceding five calendar years,
whichever is the lesser amount, or any dividend which shall have
been forbidden by the Commission pursuant to the provision of the
next sentence of this paragraph. At least thirty days before such
company shall declare, pay, or distribute any dividend, it shall give
the Commission written notice of its intention to declare, pay, or
distribute the same; and if at any time it shall appear to the Commission
that the declaration, payment or distribution of any dividend
for or during any calendar year might impair the financial
integrity of such company or its ability to meet its liabilities under
its outstanding face-amount certificates, it may by order forbid the
declaration, distribution, or payment of any such dividend.
(i) The foregoing provisions of this section shall apply to all
face-amount certificates issued prior to the effective date of this
subsection; to the collection or acceptance of any payment on such
certificates; to the issuance of face-amount certificates to the holders
of such certificates pursuant to an obligation expressed or implied
in such certificates; to the provisions of such certificates; to
the minimum certificate reserves and deposits maintained with respect
thereto; and to the assets that the issuer of such certificate
was and is required to have with respect to such certificates. With
respect to all face-amount certificates issued after the effective date
of this subsection, the provisions of this section shall apply except
as hereinafter provided.
(1) Notwithstanding subparagraph (A) of paragraph (2) of subsection
(a), the reserves for each certificate of the installment type
shall be based on assumed annual, semiannual, quarterly, or
monthly reserve payments according to the manner in which gross
payments for any certificate year are made by the holder, which reserve
payments shall be sufficient in amount, as and when accumulated
at a rate not to exceed 31⁄2 per centum per annum compounded
annually, to provide the minimum maturity or face
amount of the certificate when due. Such reserve payments may be
graduated according to certificate years so that the reserve payment
or payments for the first three certificate years shall amount

81 INVESTMENT COMPANY ACT OF 1940 Sec. 30
to at least 80 per centum of the required gross annual payment for
such years; the reserve payment or payments for the fourth certificate
year shall amount to at least 90 per centum of such year’s required
gross annual payment; the reserve payment or payments for
the fifth certificate year shall amount to at least 93 per centum of
such year’s gross annual payment; and for the sixth and each subsequent
certificate year the reserve payment or payments shall
amount to at least 96 per centum of each such year’s required gross
annual payment: Provided, That such aggregate reserve payments
shall amount to at least 93 per centum of the aggregate gross annual
payments required to be made by the holder to obtain the
maturity of the certificate. The company may at its option take as
loading from the gross payment or payments for a certificate year,
as and when made by the certificate holder, an amount or amounts
equal in the aggregate for such year to not more than the excess,
if any, of the gross payment or payments required to be made by
the holder for such year, over and above the percentage of the gross
annual payment required herein for such year for reserve purposes.
Such loading may be taken by the company prior to or after the
setting up of the reserve payment or payments for such year and
the reserve payment or payments for such year may be graduated
and adjusted to correspond with the amount of the gross payment
or payments made by the certificate holder for such year less the
loading so taken.
(2) Notwithstanding paragraphs (1) and (2) of subsection (d),
(A) in respect of any certificate of the installment type, during the
first certificate year, the holder of the certificate, upon surrender
thereof, shall be entitled to a value payable in cash not less than
80 per centum of the amount of the gross payments made on the
certificate; and (B) in respect of any certificate of the installment
type, at any time after the expiration of the first certificate year
and prior to maturity, the holder of the certificate, upon surrender
thereof, shall be entitled to a value payable in cash not less than
the then amount of the reserve for such certificate required by
clauses (1) and (2) of subparagraph (D) of paragraph (2) of subsection
(a), less a surrender charge that shall not exceed 2 per centum
of the face or maturity amount of the certificate, or 15 per centum
of the amount of such reserve, whichever is the lesser, but in
no event shall such value be less than 80 per centum of the gross
payments made on the certificate. The amount of the surrender
value for the end of each certificate year shall be set out in the certificate.
BANKRUPTCY OF FACE-AMOUNT CERTIFICATE COMPANIES
SEC. 29. [Section 29 amended section 67 and section 44 of the
Bankruptcy Act, with respect to the bankruptcy of face-amount certificate
companies, as defined in section 4(1) of the Investment
Company Act of 1940.]
PERIODIC AND OTHER REPORTS; REPORTS OF AFFILIATED PERSONS
SEC. 30. ø80a–29¿ (a) Every registered investment company
shall file annually with the Commission such information, documents,
and reports as investment companies having securities regSec.
30 INVESTMENT COMPANY ACT OF 1940 82
istered on a national securities exchange are required to file annually
pursuant to section 13(a) of the Securities Exchange Act of
1934 and the rules and regulations issued thereunder.
(b) Every registered investment company shall file with the
Commission—
(1) such information, documents, and reports (other than
financial statements), as the Commission may require to keep
reasonably current the information and documents contained
in the registration statement of such company filed under this
title; and
(2) copies of every periodic or interim report or similar
communication containing financial statements and transmitted
to any class of such company’s security holders, such
copies to be filed not later than ten days after such transmission.
Any information or documents contained in a report or other communication
to security holders filed pursuant to paragraph (2) may
be incorporated by reference in any report subsequently or concurrently
filed pursuant to paragraph (1).
(c)(1) The Commission shall take such action as it deems necessary
or appropriate, consistent with the public interest and the
protection of investors, to avoid unnecessary reporting by, and
minimize the compliance burdens on, registered investment
companies and their affiliated persons in exercising its authority—
(A) under subsection (f); and
(B) under subsection (b)(1), if the Commission requires the
filing of information, documents, and reports under that subsection
on a basis more frequently than semiannually.
(2) Action taken by the Commission under paragraph (1) shall
include considering, and requesting public comment on—
(A) feasible alternatives that minimize the reporting
burdens on registered investment companies; and
(B) the utility of such information, documents, and reports
to the Commission in relation to the costs to registered investment
companies and their affiliated persons of providing such
information, documents, and reports.
(d) The Commission shall issue rules and regulations permitting
the filing with the Commission, and with any national securities
exchange concerned, of copies of periodic reports, or of extracts
therefrom, filed by any registered investment company pursuant to
subsections (a) and (b), in lieu of any reports and documents required
of such company under section 13 or 15(d) of the Securities
Exchange Act of 1934.
(e) Every registered investment company shall transmit to its
stockholders, at least semiannually, reports containing such of the
following information and financial statements or their equivalent,
as of a reasonably current date, as the Commission may prescribe
by rules and regulations for the protection of investors, which reports
shall not be misleading in any material respect in the light
of the reports required to be filed pursuant to subsections (a) and
(b):
(1) a balance sheet accompanied by a statement of the
aggregate value of investments on the date of such balance
sheet;
83 INVESTMENT COMPANY ACT OF 1940 Sec. 30
(2) a list showing the amounts and values of securities
owned on the date of such balance sheet;
(3) a statement of income, for the period covered by the report,
which shall be itemized at least with respect to each category
of income and expense representing more than 5 per centum
of total income or expense;
(4) a statement of surplus, which shall be itemized at least
with respect to each charge or credit to the surplus account
which represents more than 5 per centum of the total charges
or credits during the period covered by the report;
(5) a statement of the aggregate remuneration paid by the
company during the period covered by the report (A) to all
directors and to all members of any advisory board for regular
compensation; (B) to each director and to each member of an
advisory board for special compensation; (C) to all officers; and
(D) to each person of whom any officer or director of the company
is an affiliated person; and
(6) a statement of the aggregate dollar amounts of purchases
and sales of investment securities, other than Government
securities, made during the period covered by the report:
Provided, That if in the judgment of the Commission any item required
under this subsection is inapplicable or inappropriate to any
specified type or types of investment company, the Commission
may by rules and regulations permit in lieu thereof the inclusion
of such item of a comparable character as it may deem applicable
or appropriate to such type or types of investment company.
(f) The Commission may, by rule, require that semiannual reports
containing the information set forth in subsection (e) include
such other information as the Commission deems necessary or
appropriate in the public interest or for the protection of investors.
(g) Financial statements contained in annual reports required
pursuant to subsections (a) and (e), if required by the rules and
regulations of the Commission, shall be accompanied by a certificate
of independent public accountants. The certificate of such
independent public accountants shall be based upon an audit not
less in scope or procedures followed than that which independent
public accountants would ordinarily make for the purpose of presenting
comprehensive and dependable financial statements, and
shall contain such information as the Commission may prescribe,
by rules and regulations in the public interest or for the protection
of investors, as to the nature and scope of the audit and the findings
and opinion of the accountants. Each such report shall state
that such independent public accountants have verified securities
owned, either by actual examination, or by receipt of a certificate
from the custodian, as the Commission may prescribe by rules and
regulations.
(h) Every person who is directly or indirectly the beneficial
owner of more than 10 per centum of any class of outstanding securities
(other than short-term paper) of which a registered closedend
company is the issuer or who is an officer, director, member
of an advisory board, investment adviser, or affiliated person of an
investment adviser of such a company shall in respect of his transactions
in any securities of such company (other than short-term
paper) be subject to the same duties and liabilities as those imSec.
31 INVESTMENT COMPANY ACT OF 1940 84
posed by section 16 of the Securities Exchange Act of 1934 upon
certain beneficial owners, directors, and officers in respect of their
transactions in certain equity securities.
(i) DISCLOSURE TO CHURCH PLAN PARTICIPANTS.—A person
that maintains a church plan that is excluded from the definition
of an investment company solely by reason of section 3(c)(14) shall
provide disclosure to plan participants, in writing, and not less frequently
than annually, and for new participants joining such a
plan after May 31, 1996, as soon as is practicable after joining such
plan, that—
(1) the plan, or any company or account maintained to
manage or hold plan assets and interests in such plan, company,
or account, are not subject to registration, regulation, or
reporting under this title, the Securities Act of 1933, the Securities
Exchange Act of 1934, or State securities laws; and
(2) plan participants and beneficiaries therefore will not be
afforded the protections of those provisions.
(j) NOTICE TO COMMISSION.—The Commission may issue rules
and regulations to require any person that maintains a church plan
that is excluded from the definition of an investment company
solely by reason of section 3(c)(14) to file a notice with the
Commission containing such information and in such form as the
Commission may prescribe as necessary or appropriate in the public
interest or consistent with the protection of investors.
ACCOUNTS AND RECORDS
SEC. 31. ø80a–30¿ (a) MAINTENANCE OF RECORDS.—
(1) IN GENERAL.—Each registered investment company,
and each underwriter, broker, dealer, or investment adviser
that is a majority-owned subsidiary of such a company, shall
maintain and preserve such records (as defined in section
3(a)(37) of the Securities Exchange Act of 1934) for such period
or periods as the Commission, by rules and regulations, may
prescribe as necessary or appropriate in the public interest or
for the protection of investors. Each investment adviser that is
not a majority-owned subsidiary of, and each depositor of any
registered investment company, and each principal underwriter
for any registered investment company other than a
closed-end company, shall maintain and preserve for such period
or periods as the Commission shall prescribe by rules and
regulations, such records as are necessary or appropriate to
record such person’s transactions with such registered
company.
(2) MINIMIZING COMPLIANCE BURDEN.—In exercising its authority
under this subsection, the Commission shall take such
steps as it deems necessary or appropriate, consistent with the
public interest and for the protection of investors, to avoid unnecessary
recordkeeping by, and minimize the compliance burden
on, persons required to maintain records under this subsection
(hereafter in this section referred to as ‘‘subject persons’’).
Such steps shall include considering, and requesting
public comment on—
(A) feasible alternatives that minimize the recordkeeping
burdens on subject persons;
85 INVESTMENT COMPANY ACT OF 1940 Sec. 31
(B) the necessity of such records in view of the public
benefits derived from the independent scrutiny of such
records through Commission examination;
(C) the costs associated with maintaining the information
that would be required to be reflected in such records;
and
(D) the effects that a proposed recordkeeping requirement
would have on internal compliance policies and
procedures.
(b) EXAMINATIONS OF RECORDS.—
(1) IN GENERAL.—All records required to be maintained
and preserved in accordance with subsection (a) shall be subject
at any time and from time to time to such reasonable periodic,
special, and other examinations by the Commission, or
any member or representative thereof, as the Commission may
prescribe.
(2) AVAILABILITY.—For purposes of examinations referred
to in paragraph (1), any subject person shall make available to
the Commission or its representatives any copies or extracts
from such records as may be prepared without undue effort,
expense, or delay as the Commission or its representatives
may reasonably request.
(3) COMMISSION ACTION.—The Commission shall exercise
its authority under this subsection with due regard for the benefits
of internal compliance policies and procedures and the
effective implementation and operation thereof.
(c) LIMITATIONS ON DISCLOSURE BY COMMISSION.—Notwithstanding
any other provision of law, the Commission shall not be
compelled to disclose any internal compliance or audit records, or
information contained therein, provided to the Commission under
this section. Nothing in this subsection shall authorize the Commission
to withhold information from the Congress or prevent the
Commission from complying with a request for information from
any other Federal department or agency requesting the information
for purposes within the scope of the jurisdiction of that department
or agency, or complying with an order of a court of the United
States in an action brought by the United States or the Commission.
For purposes of section 552 of title 5, United States Code, this
section shall be considered a statute described in subsection
(b)(3)(B) of such section 552.
(d) DEFINITIONS.—For purposes of this section—
(1) the term ‘‘internal compliance policies and procedures’’
means policies and procedures designed by subject persons to
promote compliance with the Federal securities laws; and
(2) the term ‘‘internal compliance and audit record’’ means
any record prepared by a subject person in accordance with internal
compliance policies and procedures.
(e) REGULATORY AUTHORITY.—The Commission may, in the
public interest or for the protection of investors, issue rules and
regulations providing for a reasonable degree of uniformity in the
accounting policies and principles to be followed by registered
investment companies in maintaining their accounting records and
in preparing financial statements required pursuant to this title.
Sec. 32 INVESTMENT COMPANY ACT OF 1940 86
(f) EXEMPTION AUTHORITY.—The Commission, upon application
made by any registered investment company, may by order exempt
a specific transaction or transactions from the provisions of any
rule or regulation made pursuant to subsection (e), if the Commission
finds that such rule or regulation should not reasonably be applied
to such transaction.
ACCOUNTANTS AND AUDITORS
SEC. 32. ø80a–31¿ (a) It shall be unlawful for any registered
management company or registered face-amount certificate company
to file with the Commission any financial statement signed or
certified by an independent public accountant, unless—
(1) such accountant shall have been selected at a meeting
held within thirty days before or after the beginning of the fiscal
year or before the annual meeting of stockholders in that
year by the vote, cast in person, of a majority of those members
of the board of directors who are not interested persons of such
registered company;
(2) such selection shall have been submitted for ratification
or rejection at the next succeeding annual meeting of stockholders
if such meeting be held, except that any vacancy occurring
between annual meetings, due to the death or resignation
of the accountant, may be filled by the vote of a majority of
those members of the board of directors who are not interested
persons of such registered company, cast in person at a meeting
called for the purpose of voting on such action;
(3) the employment of such accountant shall have been
conditioned upon the right of the company by vote of a majority
of the outstanding voting securities at any meeting called
for the purpose to terminate such employment forthwith without
any penalty; and
(4) such certificate or report of such accountant shall be
addressed both to the board of directors of such registered company
and to the security holders thereof.
If the selection of an accountant has been rejected pursuant to
paragraph (2) or his employment terminated pursuant to paragraph
(3), the vacancy so occurring may be filled by a vote of a majority
of the outstanding voting securities, either at the meeting at
which the rejection or termination occurred or, if not so filled, at
a subsequent meeting which shall be called for the purpose. In the
case of a common-law trust of the character described in section
16(c), no ratification of the employment of such accountant shall be
required but such employment may be terminated and such
accountant removed by action of the holders of record of a majority
of the outstanding shares of beneficial interest in such trust in the
same manner as is provided in section 16(c) in respect of the removal
of a trustee, and all the provisions therein contained as to
the calling of a meeting shall be applicable. In the event of such
termination and removal, the vacancy so occurring may be filled by
action of the holders of record of a majority of the shares of beneficial
interest either at the meeting, if any, at which such termination
and removal occurs, or by instruments in writing filed with
the custodian, or if not so filed within a reasonable time then at
a subsequent meeting which shall be called by the trustees for the
87 INVESTMENT COMPANY ACT OF 1940 Sec. 34
purpose. The provisions of paragraph (42) of section 2(a) as to a
majority shall be applicable to the vote cast at any meeting of the
shareholders of such a trust held pursuant to this subsection.
(b) No registered management company or registered faceamount
certificate company shall file with the Commission any
financial statement in the preparation of which the controller or
other principal accounting officer or employee of such company participated,
unless such controller, officer or employee was selected,
either by vote of the holders of such company’s voting securities at
the last annual meeting of such security holders, or by the board
of directors of such company.
(c) The Commission is authorized, by rules and regulations or
order in the public interest or for the protection of investors, to require
accountants and auditors to keep reports, work sheets, and
other documents and papers relating to registered investment companies
for such period or periods as the Commission may prescribe,
and to make the same available for inspection by the Commission
or any member or representative thereof.
FILING OF DOCUMENTS WITH COMMISSION IN CIVIL ACTIONS
SEC. 33. ø80a–32¿ Every registered investment company which
is a party and every affiliated person of such company who is a
party defendant to any action or claim by a registered investment
company or a security holder thereof in a derivative or representative
capacity against an officer, director, investment adviser,
trustee, or depositor of such company, shall file with the Commission,
unless already so filed, (1) a copy of all pleadings, verdicts,
or judgments filed with the court or served in connection with such
action or claim, (2) a copy of any proposed settlement, compromise,
or discontinuance of such action, and (3) a copy of such motions,
transcripts, or other documents filed in or issued by the court or
served in connection with such action or claim as may be requested
in writing by the Commission. If any document referred to in
clause (1) or (2)—
(A) is delivered to such company or party defendant, such
document shall be filed with the Commission not later than ten
days after the receipt thereof; or
(B) is filed in such court or delivered by such company or
party defendant, such document shall be filed with the Commission
not later than five days after such filing or delivery.
DESTRUCTION AND FALSIFICATION OF REPORTS AND RECORDS
SEC. 34. ø80a–33¿ (a) It shall be unlawful for any person, except
as permitted by rule, regulation, or order of the Commission,
willfully to destroy, mutilate, or alter any account, book, or other
document the preservation of which has been required pursuant to
section 31(a) or 32(c).
(b) It shall be unlawful for any person to make any untrue
statement of a material fact in any registration statement, application,
report, account, record, or other document filed or transmitted
pursuant to this title or the keeping of which is required pursuant
to section 31(a). It shall be unlawful for any person so filing, transmitting,
or keeping any such document to omit to state therein any
Sec. 35 INVESTMENT COMPANY ACT OF 1940 88
fact necessary in order to prevent the statements made therein, in
the light of the circumstances under which they were made, from
being materially misleading. For the purposes of this subsection,
any part of any such document which is signed or certified by an
accountant or auditor in his capacity as such shall be deemed to
be made, filed, transmitted, or kept by such accountant or auditor,
as well as by the person filing, transmitting, or keeping the complete
document.
UNLAWFUL REPRESENTATIONS AND NAMES
SEC. 35. ø80a–34¿ (a) MISREPRESENTATION OF GUARANTEES.—
(1) IN GENERAL.—It shall be unlawful for any person,
issuing or selling any security of which a registered investment
company is the issuer, to represent or imply in any manner
whatsoever that such security or company—
(A) has been guaranteed, sponsored, recommended, or
approved by the United States, or any agency, instrumentality
or officer of the United States;
(B) has been insured by the Federal Deposit Insurance
Corporation; or
(C) is guaranteed by or is otherwise an obligation of
any bank or insured depository institution.
(2) DISCLOSURES.—Any person issuing or selling the securities
of a registered investment company that is advised by,
or sold through, a bank shall prominently disclose that an
investment in the company is not insured by the Federal Deposit
Insurance Corporation or any other government agency.
The Commission may, after consultation with and taking into
consideration the views of the Federal banking agencies (as defined
in section 3 of the Federal Deposit Insurance Act), adopt
rules and regulations, and issue orders, consistent with the
protection of investors, prescribing the manner in which the
disclosure under this paragraph shall be provided.
(3) DEFINITIONS.—The terms ‘‘insured depository institution’’
and ‘‘appropriate Federal banking agency’’ have the same
meanings as given in section 3 of the Federal Deposit Insurance
Act.
(b) It shall be unlawful for any person registered under any
section of this title to represent or imply in any manner whatsoever
that such person has been sponsored, recommended, or approved,
or that his abilities or qualifications have in any respect been
passed upon by the United States or any agency or officer thereof.
(c) No provision of subsection (a) or (b) shall be construed to
prohibit a statement that a person or security is registered under
this Act, the Securities Act of 1933, or the Securities Exchange Act
of 1934, if such statement is true in fact and if the effect of such
registration is not misrepresented.
(d) DECEPTIVE OR MISLEADING NAMES.—It shall be unlawful
for any registered investment company to adopt as a part of the
name or title of such company, or of any securities of which it is
the issuer, any word or words that the Commission finds are materially
deceptive or misleading. The Commission is authorized, by
rule, regulation, or order, to define such names or titles as are
materially deceptive or misleading.
89 INVESTMENT COMPANY ACT OF 1940 Sec. 36
BREACH OF FIDUCIARY DUTY
SEC. 36. ø80a–35¿ (a) The Commission is authorized to bring
an action in the proper district court of the United States, or in the
United States court of any territory or other place subject to the
jurisdiction of the United States, alleging that a person serving or
acting in one or more of the following capacities has engaged
within five years of the commencement of the action or is about to
engage in any act or practice constituting a breach of fiduciary
duty involving personal misconduct in respect of any registered
investment company for which such person so serves or acts—
(1) as officer, director, member of any advisory board,
investment adviser, or depositor; or
(2) as principal underwriter, if such registered company is
an open-end company, unit investment trust, or face-amount
certificate company.
If such allegations are established, the court may enjoin such persons
from acting in any or all such capacities either permanently
or temporarily and award such injunctive or other relief against
such person as may be reasonable and appropriate in the circumstances,
having due regard to the protection of investors and
to the effectuation of the policies declared in section 1(b) of this
title.
(b) For the purposes of this subsection, the investment adviser
of a registered investment company shall be deemed to have a fiduciary
duty with respect to the receipt of compensation for services,
or of payments of a material nature, paid by such registered investment
company, or by the security holders thereof, to such investment
adviser or any affiliated person of such investment adviser.
An action may be brought under this subsection by the Commission,
or by a security holder of such registered investment company
on behalf of such company, against such investment adviser, or any
affiliated person of such investment adviser, or any other person
enumerated in subsection (a) of this section who has a fiduciary
duty concerning such compensation or payments, for breach of fiduciary
duty in respect of such compensation or payments paid by
such registered investment company or by the security holders
thereof to such investment adviser or person. With respect to any
such action the following provisions shall apply:
(1) It shall not be necessary to allege or prove that any
defendant engaged in personal misconduct, and the plaintiff
shall have the burden of proving a breach of fiduciary duty.
(2) In any such action approval by the board of directors
of such investment company of such compensation or payments,
or of contracts or other arrangements providing for
such compensation or payments, and ratification or approval of
such compensation or payments, or of contracts or other
arrangements providing for such compensation or payments,
by the shareholders of such investment company, shall be
given such consideration by the court as is deemed appropriate
under all the circumstances.
(3) No such action shall be brought or maintained against
any person other than the recipient of such compensation or
payments, and no damages or other relief shall be granted
Sec. 37 INVESTMENT COMPANY ACT OF 1940 90
against any person other than the recipient of such compensation
or payments. No award of damages shall be recoverable
for any period prior to one year before the action was instituted.
Any award of damages against such recipient shall be
limited to the actual damages resulting from the breach of
fiduciary duty and shall in no event exceed the amount of compensation
or payments received from such investment company,
or the security holders thereof, by such recipient.
(4) This subsection shall not apply to compensation or payments
made in connection with transactions subject to section
17 of this title, or rules, regulations, or orders thereunder, or
to sales loads for the acquisition of any security issued by a
registered investment company.
(5) Any action pursuant to this subsection may be brought
only in an appropriate district court of the United States.
(6) No finding by a court with respect to a breach of fiduciary
duty under this subsection shall be made a basis (A) for
a finding of a violation of this title for the purposes of sections
9 and 49 of this title, section 15 of the Securities Exchange Act
of 1934, or section 203 of title II of this Act, or (B) for an
injunction to prohibit any person from serving in any of the
capacities enumerated in subsection (a) of this section.
(c) For the purposes of subsections (a) and (b) of this section,
the term ‘‘investment adviser’’ includes a corporate or other trustee
performing the functions of an investment adviser.
LARCENY AND EMBEZZLEMENT
SEC. 37. ø80a–36¿ Whoever steals, unlawfully abstracts, unlawfully
and willfully converts to his own use or to the use of another,
or embezzles any of the moneys, funds, securities, credits,
property, or assets of any registered investment company shall be
deemed guilty of a crime, and upon conviction thereof shall be subject
to the penalties provided in section 49. A judgment of conviction
or acquittal on the merits under the laws of any State shall
be a bar to any prosecution under this section for the same act or
acts.
RULES, REGULATIONS, AND ORDERS; GENERAL POWERS OF
COMMISSION
SEC. 38. ø80a–37¿ (a) The Commission shall have authority
from time to time to make, issue, amend, and rescind such rules
and regulations and such orders as are necessary or appropriate to
the exercise of the powers conferred upon the Commission elsewhere
in this title, including rules and regulations defining accounting,
technical, and trade terms used in this title, and prescribing
the form or forms in which information required in registration
statements, applications, and reports to the Commission
shall be set forth. For the purposes of its rules or regulations the
Commission may classify persons, securities, and other matters
within its jurisdiction and prescribe different requirements for different
classes of persons, securities, or matters.
(b) The Commission, by such rules and regulations or order as
it deems necessary or appropriate in the public interest or for the

91 INVESTMENT COMPANY ACT OF 1940 Sec. 42
protection of investors, may authorize the filing of any information
or documents required to be filed with the Commission under this
title, title II of this Act, the Securities Act of 1933, the Securities
Exchange Act of 1934, the Public Utility Holding Company Act of
1935, or the Trust Indenture Act of 1939, by incorporating by reference
any information or documents theretofore or concurrently
filed with the Commission under this title or any of such Acts.
(c) No provision of this title imposing any liability shall apply
to any act done or omitted in good faith in conformity with any
rule, regulation, or order of the Commission, notwithstanding that
such rule, regulation, or order may, after such act or omission, be
amended or rescinded or be determined by judicial or other authority
to be invalid for any reason.
RULES AND REGULATIONS; PROCEDURE FOR ISSUANCE
SEC. 39. ø80a–38¿ Subject to the provisions of the Federal Register
Act and regulations prescribed under the authority thereof,
the rules and regulations of the Commission under this title, and
amendments thereof, shall be effective upon publication in the
manner which the Commission shall prescribe, or upon such later
date as may be provided in such rules and regulations.
ORDERS; PROCEDURE FOR ISSUANCE
SEC. 40. ø80a–39¿ (a) Orders of the Commission under this
title shall be issued only after appropriate notice and opportunity
for hearing. Notice to the parties to a proceeding before the Commission
shall be given by personal service upon each party or by
registered mail or certified mail or confirmed telegraphic notice to
the party’s last known business address. Notice to interested persons,
if any, other than parties may be given in the same manner
or by publication in the Federal Register.
(b) The Commission may provide, by appropriate rules or regulations,
that an application verified under oath may be admissible
in evidence in a proceeding before the Commission and that the
record in such a proceeding may consist, in whole or in part, of
such application.
(c) In any proceeding before the Commission, the Commission,
in accordance with such rules and regulations as it may prescribe,
shall admit as a party any interested State or State agency, and
may admit as a party any representative of interested security
holders, or any other person whose participation in the proceeding
may be in the public interest or for the protection of investors.
HEARINGS BY COMMISSION
SEC. 41. ø80a–40¿ Hearings may be public and may be held before
the Commission, any member or members thereof, or any officer
or officers of the Commission designated by it, and appropriate
records thereof shall be kept.
ENFORCEMENT OF TITLE
SEC. 42. ø80a–41¿ (a) The Commission may make such investigations
as it deems necessary to determine whether any person
has violated or is about to violate any provision of this title or of
Sec. 42 INVESTMENT COMPANY ACT OF 1940 92
any rule, regulation, or order hereunder, or to determine whether
any action in any court or any proceeding before the Commission
shall be instituted under this title against a particular person or
persons, or with respect to a particular transaction or transactions.
The Commission shall permit any person to file with it a statement
in writing, under oath or otherwise as the Commission shall determine,
as to all the facts and circumstances concerning the matter
to be investigated.
(b) For the purpose of any investigation or any other proceeding
under this title, any member of the Commission, or any officer
thereof designated by it, is empowered to administer oaths
and affirmations, subpena witnesses, compel their attendance, take
evidence, and require the production of any books, papers, correspondence,
memoranda, contracts, agreements, or other records
which are relevant or material to the inquiry. Such attendance of
witnesses and the production of any such records may be required
from any place in any State or in any Territory or other place subject
to the jurisdiction of the United States at any designated place
of hearing.
(c) In case of contumacy by, or refusal to obey a subpena issued
to, any person, the Commission may invoke the aid of any court of
the United States within the jurisdiction of which such investigation
or proceeding is carried on, or where such person resides or
carries on business, in requiring the attendance and testimony of
witnesses and the production of books, papers, correspondence,
memoranda, contracts, agreements, and other records. And such
court may issue an order requiring such person to appear before
the Commission or member or officer designated by the Commission,
there to produce records, if so ordered, or to give testimony
touching the matter under investigation or in question; any failure
to obey such order of the court may be punished by such court as
a contempt thereof. All process in any such case may be served in
the judicial district whereof such person is an inhabitant or wherever
he may be found. Any person who without just cause shall fail
or refuse to attend and testify or to answer any lawful inquiry or
to produce books, papers, correspondence, memoranda, contracts,
agreements, or other records, if in his or its power so to do, in obedience
to the subpena of the Commission, shall be guilty of a misdemeanor,
and upon conviction shall be subject to a fine of not
more than $1,000 or to imprisonment for a term of not more than
one year, or both.
(d) Whenever it shall appear to the Commission that any person
has engaged or is about to engage in any act or practice constituting
a violation of any provision of this title, or of any rule, regulation,
or order hereunder, it may in its discretion bring an action
in the proper district court of the United States, or the proper
United States court of any Territory or other place subject to the
jurisdiction of the United States, to enjoin such acts or practices
and to enforce compliance with this title or any rule, regulation, or
order hereunder. Upon a showing that such person has engaged or
is about to engage in any such act or practice, a permanent or temporary
injunction or decree or restraining order shall be granted
without bond. In any proceeding under this subsection to enforce
compliance with section 7, the court as a court of equity may, to
93 INVESTMENT COMPANY ACT OF 1940 Sec. 42
the extent it deems necessary or appropriate, take exclusive jurisdiction
and possession of the investment company or companies involved
and the books, records, and assets thereof, wherever located;
and the court shall have jurisdiction to appoint a trustee, who with
the approval of the court shall have power to dispose of any or all
of such assets, subject to such terms and conditions as the court
may prescribe. The Commission may transmit such evidence as
may be available concerning any violation of the provisions of this
title, or of any rule, regulation, or order thereunder, to the Attorney
General, who, in his discretion, may institute the appropriate
criminal proceedings under this title.
(e) MONEY PENALTIES IN CIVIL ACTIONS.—
(1) AUTHORITY OF COMMISSION.—Whenever it shall appear
to the Commission that any person has violated any provision
of this title, the rules or regulations thereunder, or a ceaseand-
desist order entered by the Commission pursuant to section
9(f) of this title, the Commission may bring an action in
a United States district court to seek, and the court shall have
jurisdiction to impose, upon a proper showing, a civil penalty
to be paid by the person who committed such violation.
(2) AMOUNT OF PENALTY.—
(A) FIRST TIER.—The amount of the penalty shall be
determined by the court in light of the facts and circumstances.
For each violation, the amount of the penalty
shall not exceed the greater of (i) $5,000 for a natural person
or $50,000 for any other person, or (ii) the gross
amount of pecuniary gain to such defendant as a result of
the violation.
(B) SECOND TIER.—Notwithstanding subparagraph (A),
the amount of penalty for each such violation shall not exceed
the greater of (i) $50,000 for a natural person or
$250,000 for any other person, or (ii) the gross amount of
pecuniary gain to such defendant as a result of the violation,
if the violation described in paragraph (1) involved
fraud, deceit, manipulation, or deliberate or reckless disregard
of a regulatory requirement.
(C) THIRD TIER.—Notwithstanding subparagraphs (A)
and (B), the amount of penalty for each such violation
shall not exceed the greater of (i) $100,000 for a natural
person or $500,000 for any other person, or (ii) the gross
amount of pecuniary gain to such defendant as a result of
the violation, if—
(I) the violation described in paragraph (1) involved
fraud, deceit, manipulation, or deliberate or
reckless disregard of a regulatory requirement; and
(II) such violation directly or indirectly resulted in
substantial losses or created a significant risk of substantial
losses to other persons.
(3) PROCEDURES FOR COLLECTION.—
(A) PAYMENT OF PENALTY TO TREASURY.—A penalty
imposed under this section shall be payable into the Treasury
of the United States, except as otherwise provided in
section 308 of the Sarbanes-Oxley Act of 2002.
Sec. 43 INVESTMENT COMPANY ACT OF 1940 94
(B) COLLECTION OF PENALTIES.—If a person upon
whom such a penalty is imposed shall fail to pay such penalty
within the time prescribed in the court’s order, the
Commission may refer the matter to the Attorney General
who shall recover such penalty by action in the appropriate
United States district court.
(C) REMEDY NOT EXCLUSIVE.—The actions authorized
by this subsection may be brought in addition to any other
action that the Commission or the Attorney General is
entitled to bring.
(D) JURISDICTION AND VENUE.—For purposes of section
44 of this title, actions under this paragraph shall be actions
to enforce a liability or a duty created by this title.
(4) SPECIAL PROVISIONS RELATING TO A VIOLATION OF A
CEASE-AND-DESIST ORDER.—In an action to enforce a cease-anddesist
order entered by the Commission pursuant to section
9(f), each separate violation of such order shall be a separate
offense, except that in the case of a violation through a continuing
failure to comply with the order, each day of the failure
to comply shall be deemed a separate offense.
COURT REVIEW OF ORDERS
SEC. 43. ø80a–42¿ (a) Any person or party aggrieved by an
order issued by the Commission under this title may obtain a review
of such order in the court of appeals of the United States
within any circuit wherein such person resides or has his principal
place of business, or in the United States Court of Appeals for the
District of Columbia, by filing in such court, within sixty days after
the entry of such order, a written petition praying that the order
of the Commission be modified or set aside in whole or in part. A
copy of such petition shall be forthwith transmitted by the clerk of
the court to any member of the Commission or any officer thereof
designated by the Commission for that purpose, and thereupon the
Commission shall file in the court the record upon which the order
complained of was entered, as provided in section 2112 of title 28,
United States Code. Upon the filing of such petition such court
shall have jurisdiction, which upon the filing of the record shall be
exclusive, to affirm, modify, or set aside such order, in whole or in
part. No objection to the order of the Commission shall be considered
by the court unless such objection shall have been urged before
the Commission or unless there were reasonable grounds for
failure so to do. The findings of the Commission as to the facts, if
supported by substantial evidence, shall be conclusive. If application
is made to the court for leave to adduce additional evidence,
and it is shown to the satisfaction of the court that such additional
evidence is material and that there were reasonable grounds for
failure to adduce such evidence in the proceeding before the Commission,
the court may order such additional evidence to be taken
before the Commission and to be adduced upon the hearing in such
manner and upon such terms and conditions as to the court may
seem proper. The Commission may modify its findings as to the
facts by reason of the additional evidence so taken, and it shall file
with the court such modified or new findings, which, if supported
by substantial evidence, shall be conclusive, and its recommenda95
INVESTMENT COMPANY ACT OF 1940 Sec. 45
tion, if any, for the modification or setting aside of the original
order. The judgment and decree of the court affirming, modifying,
or setting aside, in whole or in part, any such order of the Commission
shall be final, subject to review by the Supreme Court of the
United States upon certiorari or certification as provided in section
1254 of title 28, United States Code.
(b) The commencement of proceedings under subsection (a) to
review an order of the Commission issued under section 8(e) shall
operate as a stay of the Commission’s order unless the court otherwise
orders. The commencement of proceedings under subsection
(a) to review an order of the Commission issued under any provision
of this title other than section 8(e) shall not operate as a stay
of the Commission’s order unless the court specifically so orders.
JURISDICTION OF OFFENSES AND SUITS
SEC. 44. ø80a–43¿ The district courts of the United States and
the United States courts of any Territory or other place subject to
the jurisdiction of the United States shall have jurisdiction of violations
of this title or the rules, regulations, or orders thereunder,
and, concurrently with State and Territorial courts, of all suits in
equity and actions at law brought to enforce any liability or duty
created by, or to enjoin any violation of, this title or the rules, regulations,
or orders thereunder. Any criminal proceeding may be
brought in the district wherein any act or transaction constituting
the violation occurred. A criminal proceeding based upon a violation
of section 34, or upon a failure to file a report or other document
required to be filed under this title, may be brought in the
district wherein the defendant is an inhabitant or maintains his
principal office or place of business. Any suit or action to enforce
any liability or duty created by, or to enjoin any violation of, this
title or rules, regulations, or orders thereunder, may be brought in
any such district or in the district wherein the defendant is an
inhabitant or transacts business, and process in such cases may be
served in any district of which the defendant is an inhabitant or
transacts business or wherever the defendant may be found. Judgments
and decrees so rendered shall be subject to review as provided
in sections 1254, 1291, 1292, and 1294 of title 28, United
States Code. No costs shall be assesssed for or against the Commission
in any proceeding under this title brought by or against the
Commission in any court. The Commission may intervene as a
party in any action or suit to enforce any liability or duty created
by, or to enjoin any noncompliance with, section 36(b) of this title
at any stage of such action or suit prior to final judgment therein.
INFORMATION FILED WITH COMMISSION
SEC. 45. ø80a–44¿ (a) The information contained in any registration
statement, application, report, or other document filed
with the Commission pursuant to any provision of this title or of
any rule or regulation thereunder (as distinguished from any information
or document transmitted to the Commission) shall be made
available to the public, unless and except insofar as the Commission,
by rules and regulations upon its own motion, or by order
upon application, finds that public disclosure is neither necessary
Sec. 46 INVESTMENT COMPANY ACT OF 1940 96
nor appropriate in the public interest or for the protection of investors.
Except as provided in section 24(c) of the Securities Exchange
Act of 1934, it shall be unlawful for any member, officer, or employee
of the Commission to use for personal benefit, or to disclose
to any person other than an official or employee of the United
States or of a State, for official use, or for any such official or employee
to use for personal benefit, any information contained in any
document so filed or transmitted, if such information is not available
to the public.
(b) Photostatic or other copies of information contained in documents
filed with the Commission under this title and made available
to the public shall be furnished any person at such reasonable
charge and under such reasonable limitations as the Commission
shall prescribe.
ANNUAL REPORTS OF COMMISSION; EMPLOYEES OF THE COMMISSION
SEC. 46. ø80a–45¿ (a) The Commission shall submit annually
a report to the Congress covering the work of the Commission for
the preceding year and including such information, data, and recommendations
for further legislation in connection with the matters
covered by this title as it may find advisable.
(b) The provisions of section 4(b) of the Securities Exchange
Act of 1934 shall be applicable with respect to the power of the
Commission—
(1) to appoint and fix the compensation of such employees
as may be necessary for carrying out its functions under this
title, and
(2) to lease and allocate such real property as may be necessary
for carrying out its functions under this title.
VALIDITY OF CONTRACTS
SEC. 47. ø80a–46¿ (a) Any condition, stipulation, or provision
binding any person to waive compliance with any provision of this
title or with any rule, regulation, or order thereunder shall be void.
(b)(1) A contract that is made, or whose performance involves,
a violation of this title, or of any rule, regulation, or order thereunder,
is unenforceable by either party (or by a nonparty to the
contract who acquired a right under the contract with knowledge
of the facts by reason of which the making or performance violated
or would violate any provision of this title or of any rule, regulation,
or order thereunder) unless a court finds that under the circumstances
enforcement would produce a more equitable result
than nonenforcement and would not be inconsistent with the purposes
of this title.
(2) To the extent that a contract described in paragraph (1) has
been performed, a court may not deny rescission at the instance of
any party unless such court finds that under the circumstances the
denial of rescission would produce a more equitable result than its
grant and would not be inconsistent with the purposes of this title.
(3) This subsection shall not apply (A) to the lawful portion of
a contract to the extent that it may be severed from the unlawful
portion of the contract, or (B) to preclude recovery against any person
for unjust enrichment.
97 INVESTMENT COMPANY ACT OF 1940 Sec. 51
1 See also 18 U.S.C. 3571. [Printed in appendix to this volume.]
LIABILITY OF CONTROLLING PERSONS; PREVENTING COMPLIANCE WITH
TITLE
SEC. 48. ø80a–47¿ (a) It shall be unlawful for any person, directly
or indirectly, to cause to be done any act or thing through
or by means of any other person which it would be unlawful for
such person to do under the provisions of this title or any rule, regulation,
or order thereunder.
(b) It shall be unlawful for any person without just cause to
hinder, delay, or obstruct the making, filing, or keeping of any
information, document, report, record, or account required to be
made, filed, or kept under any provision of this title or any rule,
regulation, or order thereunder.
PENALTIES 1
SEC. 49. ø80a–48¿ Any person who willfully violates any provision
of this title or of any rule, regulation, or order hereunder, or
any person who willfully in any registration statement, application,
report, account, record, or other document filed or transmitted pursuant
to this title or the keeping of which is required pursuant to
section 31(a) makes any untrue statement of a material fact or
omits to state any material fact necessary in order to prevent the
statements made therein from being materially misleading in the
light of the circumstances under which they were made, shall upon
conviction be fined not more than $10,000 or imprisoned not more
than five years, or both; but no person shall be convicted under this
section for the violation of any rule, regulation, or order if he
proves that he had no actual knowledge of such rule, regulation,
or order.
EFFECT ON EXISTING LAW
SEC. 50. ø80a–49¿ Except where specific provision is made to
the contrary, nothing in this title shall affect (1) the jurisdiction of
the Commission under the Securities Act of 1933, the Securities
Exchange Act of 1934, the Public Utility Holding Company Act of
1935, the Trust Indenture Act of 1939, or title II of this Act, over
any person, security, or transaction, or (2) the rights, obligations,
duties, or liabilities of any person under such Acts; nor shall anything
in this title affect the jurisdiction of any other commission,
board, agency, or officer of the United States or of any State or
political subdivision of any State, over any person, security, or
transaction, insofar as such jurisdiction does not conflict with any
provision of this title or of any rule, regulation, or order hereunder.
SEPARABILITY OF PROVISIONS
SEC. 51. ø80a–50¿ If any provision of this title or any provision
incorporated in this title by reference, or the application of any
such provision to any person or circumstances, shall be held invalid,
the remainder of this title and the application of any such
provision to person or circumstances other than those as to which
it is held invalid shall not be affected thereby.
Sec. 52 INVESTMENT COMPANY ACT OF 1940 98
SHORT TITLE
SEC. 52. ø80a–51¿ This title may be cited as the ‘‘Investment
Company Act of 1940’’.
EFFECTIVE DATE
SEC. 53. ø80a–52¿ The effective date of the provisions of this
title, so far as the same relate to face-amount certificates or to faceamount
certificate companies, is January 1, 1941. The effective
date of provisions hereof, insofar as the same do not apply to faceamount
certificates or face-amount certificate companies, is November
1, 1940. Except as herein otherwise provided, every provision
of this title shall take effect on November 1, 1940.
ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY
SEC. 54. ø80a–53¿ (a) Any company defined in section 2(a)(48)
(A) and (B) may elect to be subject to the provisions of sections 55
through 65 by filing with the Commission a notification of election,
if such company—
(1) has a class of its equity securities registered under section
12 of the Securities Exchange Act of 1934; or
(2) has filed a registration statement pursuant to section
12 of the Securities Exchange Act of 1934 for a class of its equity
securities.
(b) The Commission may, by rule, prescribe the form and manner
in which notification of election under this section shall be
given. A business development company shall be deemed to be subject
to sections 55 through 65 upon receipt by the Commission of
such notification of election.
(c) Whenever the Commission finds, on its own motion or upon
application, that a business development company which has filed
a notification of election pursuant to subsection (a) of this section
has ceased to engage in business, the Commission shall so declare
by order revoking such company’s election. Any business development
company may voluntarily withdraw its election under subsection
(a) by filing a notice of withdrawal of election with the
Commission, in a form and manner which the Commission may, by
rule, prescribe. Such withdrawal shall be effective immediately
upon receipt by the Commission.
FUNCTIONS AND ACTIVITIES OF BUSINESS DEVELOPMENT COMPANIES
SEC. 55. ø80a–54¿ (a) It shall be unlawful for a business development
company to acquire any assets (other than those described
in paragraphs (1) through (7) of this subsection) unless, at the time
the acquisition is made, assets described in paragraphs (1) through
(6) below represent at least 70 per centum of the value of its total
assets (other than assets described in paragraph (7) below):
(1) securities purchased, in transactions not involving any
public offering or in such other transactions as the Commission
may, by rule, prescribe if it finds that enforcement of this title
and of the Securities Act of 1933 with respect to such transactions
is not necessary in the public interest or for the protection
of investors by reason of the small amount, or the limited
nature of the public offering, involved in such transactions—
99 INVESTMENT COMPANY ACT OF 1940 Sec. 55
(A) from the issuer of such securities, which issuer is
an eligible portfolio company, from any person who is, or
who within the preceding thirteen months has been, an
affiliated person of such eligible portfolio company, or from
any other person, subject to such rules and regulations as
the Commission may prescribe as necessary or appropriate
in the public interest or for the protection of investors; or
(B) from the issuer of such securities, which issuer is
described in section 2(a)(46) (A) and (B) but is not an eligible
portfolio company because it has issued a class of securities
with respect to which a member of a national securities
exchange, broker, or dealer may extend or maintain
credit to or for a customer pursuant to rules or regulations
adopted by the Board of Governors of the Federal Reserve
System under section 7 of the Securities Exchange Act of
1934, or from any person who is an officer or employee of
such issuer, if—
(i) at the time of the purchase, the business development
company owns at least 50 per centum of—
(I) the greatest number of equity securities of
such issuer and securities convertible into or
exchangeable for such securities; and
(II) the greatest amount of debt securities of
such issuer,
held by such business development company at any
point in time during the period when such issuer was
an eligible portfolio company, except that options, warrants,
and similar securities which have by their
terms expired and debt securities which have been
converted, or repaid or prepaid in the ordinary course
of business or incident to a public offering of securities
of such issuer, shall not be considered to have been
held by such business development company for purposes
of this requirement; and
(ii) the business development company is one of
the 20 largest holders of record of such issuer’s outstanding
voting securities;
(2) securities of any eligible portfolio company with respect
to which the business development company satisfies the
requirements of section 2(a)(46)(C)(ii);
(3) securities purchased in transactions not involving any
public offering from an issuer described in sections 2(a)(46) (A)
and (B) or from a person who is, or who within the preceding
thirteen months has been, an affiliated person of such issuer,
or from any person in transactions incident thereto, if such
securities were—
(A) issued by an issuer that is, or was immediately
prior to the purchase of its securities by the business
development company, in bankruptcy proceedings, subject
to reorganization under the supervision of a court of competent
jurisdiction, or subject to a plan or arrangement resulting
from such bankruptcy proceedings or reorganization;
Sec. 56 INVESTMENT COMPANY ACT OF 1940 100
(B) issued by an issuer pursuant to or in consummation
of such a plan or arrangement; or
(C) issued by an issuer that, immediately prior to the
purchase of such issuer’s securities by the business development
company, was not in bankruptcy proceedings but
was unable to meet its obligations as they came due without
material assistance other than conventional lending or
financing arrangements;
(4) securities of eligible portfolio companies purchased
from any person in transactions not involving any public offering,
if there is no ready market for such securities and if
immediately prior to such purchase the business development
company owns at least 60 per centum of the outstanding equity
securities of such issuer (giving effect to all securities presently
convertible into or exchangeable for equity securities of such
issuer as if such securities were so converted or exchanged);
(5) securities received in exchange for or distributed on or
with respect to securities described in paragraphs (1) through
(4) of this subsection, or pursuant to the exercise of options,
warrants, or rights relating to securities described in such
paragraphs;
(6) cash, cash items, Government securities, or high quality
debt securities maturing in one year or less from the time
of investment in such high quality debt securities; and
(7) office furniture and equipment, interests in real estate
and leasehold improvements and facilities maintained to conduct
the business operations of the business development company,
deferred organization and operating expenses, and other
noninvestment assets necessary and appropriate to its operations
as a business development company, including notes of
indebtedness of directors, officers, employees, and general partners
held by a business development company as payment for
securities of such company issued in connection with an executive
compensation plan described in section 57(j).
(b) For purposes of this section, the value of a business development
company’s assets shall be determined as of the date of the
most recent financial statements filed by such company with the
Commission pursuant to section 13 of the Securities Exchange Act
of 1934, and shall be determined no less frequently than annually.
QUALIFICATIONS OF DIRECTORS
SEC. 56. ø80a–55¿ (a) A majority of a business development
company’s directors or general partners shall be persons who are
not interested persons of such company.
(b) If, by reason of the death, disqualification, or bona fide resignation
of any director or general partner, a business development
company does not meet the requirements of subsection (a) of this
section, or the requirements of section 15(f)(1) of this title with respect
to directors, the operation of such provisions shall be suspended
for a period of 90 days or for such longer period as the
Commission may prescribe, upon its own motion or by order upon
application, as not inconsistent with the protection of investors.

101 INVESTMENT COMPANY ACT OF 1940 Sec. 57
TRANSACTIONS WITH CERTAIN AFFILIATES
SEC. 57. ø80a–56¿ (a) It shall be unlawful for any person who
is related to a business development company in a manner described
in subsection (b) of this section, acting as principal—
(1) knowingly to sell any security or other property to such
business development company or to any company controlled
by such business development company, unless such sale involves
solely (A) securities of which the buyer is the issuer, or
(B) securities of which the seller is the issuer and which are
part of a general offering to the holders of a class of its securities;
(2) knowingly to purchase from such business development
company or from any company controlled by such business
development company, any security or other property (except
securities of which the seller is the issuer);
(3) knowingly to borrow money or other property from such
business development company or from any company controlled
by such business development company (unless the borrower
is controlled by the lender), except as permitted in section
21(b) or section 62; or
(4) knowingly to effect any transaction in which such business
development company or a company controlled by such
business development company is a joint or a joint and several
participant with such person in contravention of such rules
and regulations as the Commission may prescribe for the purpose
of limiting or preventing participation by such business
development company or controlled company on a basis less
advantageous than that of such person, except that nothing
contained in this paragraph shall be deemed to preclude any
person from acting as manager of any underwriting syndicate
or other group in which such business development company or
controlled company is a participant and receiving compensation
therefor.
(b) The provisions of subsection (a) of this section shall apply
to the following persons:
(1) Any director, officer, employee, or member of an advisory
board of a business development company or any person
(other than the business development company itself) who is,
within the meaning of section 2(a)(3)(C) of this title, an affiliated
person of any such person specified in this paragraph.
(2) Any investment adviser or promoter of, general partner
in, principal underwriter for, or person directly or indirectly
either controlling, controlled by, or under common control with,
a business development company (except the business development
company itself and any person who, if it were not directly
or indirectly controlled by the business development company,
would not be directly or indirectly under the control of a person
who controls the business development company), or any person
who is, within the meaning of section 2(a)(3) (C) or (D), an
affiliated person of any such person specified in this paragraph.
(c) Notwithstanding paragraphs (1), (2), and (3) of subsection
(a), any person may file with the Commission an application for an
Sec. 57 INVESTMENT COMPANY ACT OF 1940 102
order exempting a proposed transaction of the applicant from one
or more provisions of such paragraphs. The Commission shall grant
such application and issue such order of exemption if evidence
establishes that—
(1) the terms of the proposed transaction, including the
consideration to be paid or received, are reasonable and fair
and do not involve overreaching of the business development
company or its shareholders or partners on the part of any person
concerned;
(2) the proposed transaction is consistent with the policy
of the business development company as recited in the filings
made by such company with the Commission under the Securities
Act of 1933, its registration statement and reports filed
under the Securities Exchange Act of 1934, and its reports to
shareholders or partners; and
(3) the proposed transaction is consistent with the general
purposes of this title.
(d) It shall be unlawful for any person who is related to a business
development company in the manner described in subsection
(e) of this section and who is not subject to the prohibitions of subsection
(a) of this section, acting as principal—
(1) knowingly to sell any security or other property to such
business development company or to any company controlled
by such business development company, unless such sale involves
solely (A) securities of which the buyer is the issuer, or
(B) securities of which the seller is the issuer and which are
part of a general offering to the holders of a class of its securities;
(2) knowingly to purchase from such business development
company or from any company controlled by such business
development company, any security or other property (except
securities of which the seller is the issuer);
(3) knowingly to borrow money or other property from such
business development company or from any company controlled
by such business development company (unless the borrower
is controlled by the lender), except as permitted in section
21(b); or
(4) knowingly to effect any transaction in which such business
development company or a company controlled by such
business development company is a joint or a joint and several
participant with such affiliated person in contravention of such
rules and regulations as the Commission may prescribe for the
purpose of limiting or preventing participation by such business
development company or controlled company on a basis
less advantageous than that of such affiliated person, except
that nothing contained in this paragraph shall be deemed to
preclude any person from acting as manager of any underwriting
syndicate or other group in which such business development
company or controlled company is a participant and receiving
compensation therefor.
(e) The provisions of subsection (d) of this section shall apply
to the following persons:
(1) Any person (A) who is, within the meaning of section
2(a)(3)(A), an affiliated person of a business development com103
INVESTMENT COMPANY ACT OF 1940 Sec. 57
pany, (B) who is an executive officer or a director of, or general
partner in, any such affiliated person, or (C) who directly or indirectly
either controls, is controlled by, or is under common
control with, such affiliated person.
(2) Any person who is an affiliated person of a director, officer,
employee, investment adviser, member of an advisory
board or promoter of, principal underwriter for, general partner
in, or an affiliated person of any person directly or indirectly
either controlling or under common control with a business
development company (except the business development
company itself and any person who, if it were not directly or
indirectly controlled by the business development company,
would not be directly or indirectly under the control of a person
who controls the business development company).
For purposes of this subsection, the term ‘‘executive officer’’ means
the president, secretary, treasurer, any vice president in charge of
a principal business function, and any other person who performs
similar policymaking functions.
(f) Notwithstanding subsection (d) of this section, a person described
in subsection (e) may engage in a proposed transaction described
in subsection (d) if such proposed transaction is approved
by the required majority (as defined in subsection (o)) of the directors
of or general partners in the business development company
on the basis that—
(1) the terms thereof, including the consideration to be
paid or received, are reasonable and fair to the shareholders or
partners of the business development company and do not involve
overreaching of such company or its shareholders or partners
on the part of any person concerned;
(2) the proposed transaction is consistent with the interests
of the shareholders or partners of the business development
company and is consistent with the policy of such company
as recited in filings made by such company with the Commission
under the Securities Act of 1933, its registration statement
and reports filed under the Securities Exchange Act of
1934, and its reports to shareholders or partners; and
(3) the directors or general partners record in their minutes
and preserve in their records, for such periods as if such
records were required to be maintained pursuant to section
31(a), a description of such transaction, their findings, the
information or materials upon which their findings were based,
and the basis therefor.
(g) Notwithstanding subsection (a) or (d), a person may, in the
ordinary course of business, sell to or purchase from any company
merchandise or may enter into a lessor-lessee relationship with any
person and furnish the services incident thereto.
(h) The directors of or general partners in any business development
company shall adopt, and periodically review and update
as appropriate, procedures reasonably designed to ensure that reasonable
inquiry is made, prior to the consummation of any transaction
in which such business development company or a company
controlled by such business development company proposes to participate,
with respect to the possible involvement in the transaction
of persons described in subsections (b) and (e) of this section.
Sec. 57 INVESTMENT COMPANY ACT OF 1940 104
(i) Until the adoption by the Commission of rules or regulations
under subsections (a) and (d) of this section, the rules and
regulations of the Commission under subsections (a) and (d) of section
17 applicable to registered closed-end investment companies
shall be deemed to apply to transactions subject to subsections (a)
and (d) of this section. Any rules or regulations adopted by the
Commission to implement this section shall be no more restrictive
than the rules or regulations adopted by the Commission under
subsections (a) and (d) of section 17 that are applicable to all registered
closed-end investment companies.
(j) Notwithstanding subsections (a) and (d) of this section, any
director, officer, or employee of, or general partner in, a business
development company may—
(1) acquire warrants, options, and rights to purchase voting
securities of such business development company, and
securities issued upon the exercise or conversion thereof, pursuant
to an executive compensation plan offered by such company
which meets the requirements of section 61(a)(3)(B); and
(2) borrow money from such business development company
for the purpose of purchasing securities issued by such
company pursuant to an executive compensation plan, if each
such loan—
(A) has a term of not more than ten years;
(B) becomes due within a reasonable time, not to exceed
sixty days, after the termination of such person’s
employment or service;
(C) bears interest at no less than the prevailing rate
applicable to 90-day United States Treasury bills at the
time the loan is made;
(D) at all times is fully collateralized (such collateral
may include any securities issued by such business development
company); and
(E)(i) in the case of a loan to any officer or employee
of such business development company (including any officer
or employee who is also a director of such company),
is approved by the required majority (as defined in subsection
(o)) of the directors of or general partners in such
company on the basis that the loan is in the best interests
of such company and its shareholders or partners; or
(ii) in the case of a loan to any director of such business
development company who is not also an officer or
employee of such company, or to any general partner in
such company, is approved by order of the Commission,
upon application, on the basis that the terms of the loan
are fair and reasonable and do not involve overreaching of
such company or its shareholders or partners.
(k) It shall be unlawful for any person described in subsection
(l)—
(1) acting as agent, to accept from any source any compensation
(other than a regular salary or wages from the business
development company) for the purchase or sale of any
property to or for such business development company or any
controlled company thereof, except in the course of such person’s
business as an underwriter or broker; or
105 INVESTMENT COMPANY ACT OF 1940 Sec. 57
(2) acting as broker, in connection with the sale of securities
to or by the business development company or any controlled
company thereof, to receive from any source a commission,
fee, or other remuneration for effecting such transaction
which exceeds—
(A) the usual and customary broker’s commission if
the sale is effected on a securities exchange;
(B) 2 per centum of the sales price if the sale is effected
in connection with a secondary distribution of such
securities; or
(C) 1 per centum of the purchase or sale price of such
securities if the sale is otherwise effected,
unless the Commission, by rules and regulations or order in the
public interest and consistent with the protection of investors, permits
a larger commission.
(l) The provisions of subsection (k) of this section shall apply
to the following persons:
(1) Any affiliated person of a business development company.
(2)(A) Any person who is, within the meaning of section
2(a)(3) (B), (C), or (D), an affiliated person of any director, officer,
employee, or member of an advisory board of the business
development company.
(B) Any person who is, within the meaning of section
2(a)(3) (A), (B), (C), or (D), an affiliated person of any investment
adviser of, general partner in, or person directly or indirectly
either controlling, controlled by, or under common control
with, the business development company.
(C) Any person who is, within the meaning of section
2(a)(3)(C), an affiliated person of any person who is an affiliated
person of the business development company within the
meaning of section 2(a)(3)(A).
(m) For purposes of subsections (a) and (d), a person who is a
director, officer, or employee of a party to a transaction and who
receives his usual and ordinary fee or salary for usual and customary
services as a director, officer, or employee from such party
shall not be deemed to have a financial interest or to participate
in the transaction solely by reason of his receipt of such fee or salary.
(n)(1) Notwithstanding subsection (a)(4) of this section, a business
development company may establish and maintain a profitsharing
plan for its directors, officers, employees, and general partners
and such directors, officers, employees, and general partners
may participate in such profit-sharing plan, if—
(A)(i) in the case of a profit-sharing plan for officers and
employees of the business development company (including any
officer or employee who is also a director of such company),
such profit-sharing plan is approved by the required majority
(as defined in subsection (o)) of the directors of or general partners
in such company on the basis that such plan is reasonable
and fair to the shareholders or partners of such company, does
not involve overreaching of such company or its shareholders
or partners on the part of any person concerned, and is conSec.
58 INVESTMENT COMPANY ACT OF 1940 106
sistent with the interests of the shareholders or partners of
such company; or
(ii) in the case of a profit-sharing plan which includes one
or more directors of the business development company who
are not also officers or employees of such company, or one or
more general partners in such company, such profit-sharing
plan is approved by order of the Commission, upon application,
on the basis that such plan is reasonable and fair to the shareholders
or partners of such company, does not involve overreaching
of such company or its shareholders or partners on
the part of any person concerned, and is consistent with the interests
of the shareholders or partners of such company; and
(B) the aggregate amount of benefits which would be paid
or accrued under such plan shall not exceed 20 per centum of
the business development company’s net income after taxes in
any fiscal year.
(2) This subsection may not be used where the business development
company has outstanding any stock option, warrant, or
right issued as part of an executive compensation plan, including
a plan pursuant to section 61(a)(3)(B), or has an investment adviser
registered or required to be registered under title II of this
Act.
(o) The term ‘‘required majority’’, when used with respect to
the approval of a proposed transaction, plan, or arrangement,
means both a majority of a business development company’s directors
or general partners who have no financial interest in such
transaction, plan, or arrangement and a majority of such directors
or general partners who are not interested persons of such company.
CHANGES IN INVESTMENT POLICY
SEC. 58. ø80a–57¿ No business development company shall,
unless authorized by the vote of a majority of its outstanding voting
securities or partnership interests, change the nature of its
business so as to cease to be, or to withdraw its election as, a business
development company.
INCORPORATION OF PROVISIONS
SEC. 59. ø80a–58¿ Notwithstanding the exemption set forth in
section 6(f), sections 1, 2, 3, 4, 5, 6, 9, 10(f), 15 (a), (c), and (f),
16(b), 17 (f) through (j), 19(a), 20(b), 32 (a) and (c), 33 through 47,
and 49 through 53 of this title shall apply to a business development
company to the same extent as if it were a registered closedend
investment company.
FUNCTIONS AND ACTIVITIES OF BUSINESS DEVELOPMENT COMPANIES
SEC. 60. ø80a–59¿ Notwithstanding the exemption set forth in
section 6(f), section 12 shall apply to a business development company
to the same extent as if it were a registered closed-end investment
company, except that the Commission shall not prescribe any
rule, regulation, or order pursuant to section 12(a)(1) governing the
circumstances in which a business development company may borrow
from a bank in order to purchase any security.
107 INVESTMENT COMPANY ACT OF 1940 Sec. 61
CAPITAL STRUCTURE
SEC. 61. ø80a–60¿ (a) Notwithstanding the exemption set forth
in section 6(f), section 18 shall apply to a business development
company to the same extent as if it were a registered closed-end
investment company, except as follows:
(1) The asset coverage requirements of section 18(a)(1) (A)
and (B) applicable to business development companies shall be
200 per centum.
(2) Notwithstanding section 18(c), a business development
company may issue more than one class of senior security representing
indebtedness.
(3) Notwithstanding section 18(d)—
(A) a business development company may issue warrants,
options, or rights to subscribe or convert to voting
securities of such company, accompanied by securities, if—
(i) such warrants, options, or rights expire by
their terms within ten years;
(ii) such warrants, options, or rights are not separately
transferable unless no class of such warrants,
options, or rights and the securities accompanying
them has been publicly distributed;
(iii) the exercise or conversion price is not less
than the current market value at the date of issuance,
or if no such market value exists, the current net asset
value of such voting securities; and
(iv) the proposal to issue such securities is authorized
by the shareholders or partners of such business
development company, and such issuance is approved
by the required majority (as defined in section 57(o))
of the directors of or general partners in such company
on the basis that such issuance is in the best interests
of such company and its shareholders or partners;
(B) a business development company may issue, to its
directors, officers, employees, and general partners, warrants,
options, and rights to purchase voting securities of
such company pursuant to an executive compensation
plan, if—
(i)(I) in the case of warrants, options, or rights
issued to any officer or employee of such business
development company (including any officer or employee
who is also a director of such company), such
securities satisfy the conditions in clauses (i), (iii), and
(iv) of subparagraph (A); or (II) in the case of warrants,
options, or rights issued to any director of such
business development company who is not also an officer
or employee of such company, or to any general
partner in such company, the proposal to issue such
securities satisfies the conditions in clauses (i) and (iii)
of subparagraph (A), is authorized by the shareholders
or partners of such company, and is approved by order
of the Commission, upon application, on the basis that
the terms of the proposal are fair and reasonable and
Sec. 61 INVESTMENT COMPANY ACT OF 1940 108
do not involve overreaching of such company or its
shareholders or partners;
(ii) such securities are not transferable except for
disposition by gift, will, or intestacy;
(iii) no investment adviser of such business development
company receives any compensation described
in paragraph (1) of section 205 of title II of this Act,
except to the extent permitted by clause (A) or (B) of
that section; and
(iv) such business development company does not
have a profit-sharing plan described in section 57(n);
and
(C) a business development company may issue warrants,
options, or rights to subscribe to, convert to, or purchase
voting securities not accompanied by securities, if—
(i) such warrants, options, or rights satisfy the
conditions in clauses (i) and (iii) of subparagraph (A);
and
(ii) the proposal to issue such warrants, options,
or rights is authorized by the shareholders or partners
of such business development company, and such
issuance is approved by the required majority (as defined
in section 57(o)) of the directors of or general
partners in such company on the basis that such
issuance is in the best interests of the company and its
shareholders or partners.
Notwithstanding this paragraph, the amount of voting securities
that would result from the exercise of all outstanding warrants,
options, and rights at the time of issuance shall not exceed
25 per centum of the outstanding voting securities of the
business development company, except that if the amount of
voting securities that would result from the exercise of all outstanding
warrants, options, and rights issued to such company’s
directors, officers, employees, and general partners pursuant
to any executive compensation plan meeting the requirements
of subparagraph (B) of this paragraph would exceed 15
per centum of the outstanding voting securities of such company,
then the total amount of voting securities that would result
from the exercise of all outstanding warrants, options, and
rights at the time of issuance shall not exceed 20 per centum
of the outstanding voting securities of such company.
(4) For purposes of measuring the asset coverage requirements
of section 18(a), a senior security created by the guarantee
by a business development company of indebtedness
issued by another company shall be the amount of the maximum
potential liability less the fair market value of the net
unencumbered assets (plus the indebtedness which has been
guaranteed) available in the borrowing company whose debts
have been guaranteed, except that a guarantee issued by a
business development company of indebtedness issued by a
company which is a wholly-owned subsidiary of the business
development company and is licensed as a small business
investment company under the Small Business Investment Act
of 1958 shall not be deemed to be a senior security of such
109 INVESTMENT COMPANY ACT OF 1940 Sec. 63
business development company for purposes of section 18(a) if
the amount of the indebtedness at the time of its issuance by
the borrowing company is itself taken fully into account as a
liability by such business development company, as if it were
issued by such business development company, in determining
whether such business development company, at that time,
satisfies the asset coverage requirements of section 18(a).
(b) A business development company shall comply with the
provisions of this section at the time it becomes subject to sections
55 through 65, as if it were issuing a security of each class which
it has outstanding at such time.
LOANS
SEC. 62. ø80a–61¿ Notwithstanding the exemption set forth in
section 6(f), section 21 shall apply to a business development company
to the same extent as if it were a registered closed-end investment
company, except that nothing in that section shall be deemed
to prohibit—
(1) any loan to a director, officer, or employee of, or general
partner in, a business development company for the purpose of
purchasing securities of such company as part of an executive
compensation plan, if such loan meets the requirements of section
57(j); or
(2) any loan to a company controlled by a business development
company, which companies could be deemed to be
under common control solely because a third person controls
such business development company.
DISTRIBUTION AND REPURCHASE OF SECURITIES
SEC. 63. ø80a–62¿ Notwithstanding the exemption set forth in
section 6(f), section 23 shall apply to a business development company
to the same extent as if it were a registered closed-end investment
company, except as follows:
(1) The prohibitions of section 23(a)(2) shall not apply to
any company which (A) is a wholly-owned subsidiary of, or directly
or indirectly controlled by, a business development company,
and (B) immediately after the issuance of any of its securities
for property other than cash or securities, will not be an
investment company within the meaning of section 3(a).
(2) Notwithstanding the provisions of section 23(b), a business
development company may sell any common stock of
which it is the issuer at a price below the current net asset
value of such stock, and may sell warrants, options, or rights
to acquire any such common stock at a price below the current
net asset value of such stock, if—
(A) the holders of a majority of such business development
company’s outstanding voting securities, and the
holders of a majority of such company’s outstanding voting
securities that are not affiliated persons of such company,
approved such company’s policy and practice of making
such sales of securities at the last annual meeting of
shareholders or partners within one year immediately
prior to any such sale, except that the shareholder apSec.
64 INVESTMENT COMPANY ACT OF 1940 110
proval requirements of this subparagraph shall not apply
to the initial public offering by a business development
company of its securities;
(B) a required majority (as defined in section 57(o)) of
the directors of or general partners in such business development
company have determined that any such sale
would be in the best interests of such company and its
shareholders or partners; and
(C) a required majority (as defined in section 57(o)) of
the directors of or general partners in such business development
company, in consultation with the underwriter or
underwriters of the offering if it is to be underwritten,
have determined in good faith, and as of a time immediately
prior to the first solicitation by or on behalf of such
company of firm commitments to purchase such securities
or immediately prior to the issuance of such securities,
that the price at which such securities are to be sold is not
less than a price which closely approximates the market
value of those securities, less any distributing commission
or discount.
(3) A business development company may sell any common
stock of which it is the issuer at a price below the current net
asset value of such stock upon the exercise of any warrant, option,
or right issued in accordance with section 61(a)(3).
ACCOUNTS AND RECORDS
SEC. 64. ø80a–63¿ (a) Notwithstanding the exemption set forth
in section 6(f), section 31 shall apply to a business development
company to the same extent as if it were a registered closed-end
investment company, except that the reference to the financial
statements required to be filed pursuant to section 30 shall be construed
to refer to the financial statements required to be filed by
such business development company pursuant to section 13 of the
Securities Exchange Act of 1934.
(b)(1) In addition to the requirements of subsection (a), a business
development company shall file with the Commission and supply
annually to its shareholders a written statement, in such form
and manner as the Commission may, by rule, prescribe, describing
the risk factors involved in an investment in the securities of a
business development company due to the nature of such company’s
investment portfolio and capital structure, and shall supply
copies of such statement to any registered broker or dealer upon
request.
(2) If the Commission finds it is necessary or appropriate in
the public interest and consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of
this title, the Commission may also require, by rule, any person
who, acting as principal or agent, sells a security of a business
development company to inform the purchaser of such securities, at
or before the time of sale, of the existence of the risk statement
prepared by such business development company pursuant to this
subsection, and make such risk statement available on request.
The Commission, in making such rules and regulations, shall consider,
among other matters, whether any such rule or regulation
111 INVESTMENT COMPANY ACT OF 1940 Sec. 65
would impose any unreasonable burdens on such brokers or dealers
or unreasonably impair the maintenance of fair and orderly
markets.
LIABILITY OF CONTROLLING PERSONS; PREVENTING COMPLIANCE WITH
TITLE
SEC. 65. ø80a–64¿ Notwithstanding the exemption set forth in
section 6(f), section 48 shall apply to a business development company
to the same extent as if it were a registered closed-end investment
company, except that the provisions of section 48(a) shall not
be construed to require any company which is not an investment
company within the meaning of section 3(a) to comply with the provisions
of this title which are applicable to a business development
company solely because such company is a wholly-owned subsidiary
of, or directly or indirectly controlled by, a business development
company.

5. <<INVESTMENT ADVISERS ACT OF 1940>>:

INVESTMENT ADVISERS ACT OF 1940
(References in brackets ø ¿ are to title 15, United States Code)
TITLE II—INVESTMENT ADVISERS
FINDINGS
SEC. 201. ø80b–1¿ Upon the basis of facts disclosed by the
record and report 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 advisers are of national concern, in
that, among other things—
(1) their advice, counsel, publications, writings, analyses,
and reports are furnished and distributed, and their contracts,
subscription agreements, and other arrangements with clients
are negotiated and performed, by the use of the mails and
means and instrumentalities of interstate commerce;
(2) their advice, counsel, publications, writings, analyses,
and reports customarily relate to the purchase and sale of securities
traded on national securities exchanges and in interstate
over-the-counter markets, securities issued by companies
engaged in business in interstate commerce, and securities
issued by national banks and member banks of the Federal Reserve
System; and
(3) the foregoing transactions occur in such volume as substantially
to affect interstate commerce, national securities exchanges,
and other securities markets, the national banking
system and the national economy.
DEFINITIONS
SEC. 202. ø80b–2¿ (a) When used in this title, unless the context
otherwise requires, the following definitions shall apply:
(1) ‘‘Assignment’’ includes any direct or indirect transfer or
hypothecation of an investment advisory contract by the assignor
or of a controlling block of the assignor’s outstanding
voting securities by a security holder of the assignor; but if the
investment adviser is a partnership, no assignment of an investment
advisory contract shall be deemed to result from the
death or withdrawal of a minority of the members of the investment
adviser having only a minority interest in the business
of the investment adviser, or from the admission to the
investment adviser 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.
(2) ‘‘Bank’’ means (A) a banking institution organized
under the laws of the United States, (B) a member bank of the
Federal Reserve System, (C) any other banking institution or
3 INVESTMENT ADVISERS ACT OF 1940 Sec. 202
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 clauses (A), (B), or (C) of
this paragraph.
(3) The term ‘‘broker’’ has the same meaning as given in
section 3 of the Securities Exchange Act of 1934.
(4) ‘‘Commission’’ means the Securities and Exchange
Commission.
(5) ‘‘Company’’ means a corporation, a partnership, an association,
a joint-stock company, a trust, or any organized
group of persons, whether incorporated or not; or any receiver,
trustee in bankruptcy, or similar official, or any liquidating
agent for any of the foregoing, in his capacity as such.
(6) ‘‘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.
(7) The term ‘‘dealer’’ has the same meaning as given in
section 3 of the Securities Exchange Act of 1934, but does not
include an insurance company or investment company.
(8) ‘‘Director’’ means any director of a corporation or any
person performing similar functions, with respect to any organization,
whether incorporated or unincorporated.
(9) ‘‘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.
(10) ‘‘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.
(11) ‘‘Investment adviser’’ means any person who, for compensation,
engages in the business of advising others, either directly
or through publications or writings, as to the value of securities
or as to the advisability of investing in, purchasing, or
selling securities, or who, for compensation and as part of a
regular business, issues or promulgates analyses or reports
concerning securities; but does not include (A) a bank, or any
bank holding company as defined in the Bank Holding Company
Act of 1956, which is not an investment company, except
that the term ‘‘investment adviser’’ includes any bank or bank
holding company to the extent that such bank or bank holding
Sec. 202 INVESTMENT ADVISERS ACT OF 1940 4
company serves or acts as an investment adviser to a registered
investment company, but if, in the case of a bank, such
services or actions are performed through a separately identifiable
department or division, the department or division, and
not the bank itself, shall be deemed to be the investment adviser;
(B) any lawyer, accountant, engineer, or teacher whose
performance of such services is solely incidental to the practice
of his profession; (C) any broker or dealer whose performance
of such services is solely incidental to the conduct of his business
as a broker or dealer and who receives no special compensation
therefor; (D) the publisher of any bona fide newspaper,
news magazine or business or financial publication of
general and regular circulation; (E) any person whose advice,
analyses, or reports relate to no securities other than securities
which are direct obligations of or obligations guaranteed as to
principal or interest by the United States, or securities issued
or guaranteed by corporations in which the United States has
a direct or indirect interest which shall have been designated
by the Secretary of the Treasury, pursuant to section 3(a)(12)
of the Securities Exchange Act of 1934, as exempted securities
for the purposes of that Act; or (F) such other persons not within
the intent of this paragraph, as the Commission may designate
by rules and regulations or order.
(12) ‘‘Investment company’’, affiliated person, and ‘‘insurance
company’’ have the same meanings as in the Investment
Company Act of 1940. ‘‘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.
(13) ‘‘Investment supervisory services’’ means the giving of
continuous advice as to the investment of funds on the basis
of the individual needs of each client.
(14) ‘‘Means or instrumentality of interstate commerce’’ includes
any facility of a national securities exchange.
(15) ‘‘National securities exchange’’ means an exchange
registered under section 6 of the Securities Exchange Act of
1934.
(16) ‘‘Person’’ means a natural person or a company.
(17) The term ‘‘person associated with an investment adviser’’
means any partner, officer, or director of such investment
adviser (or any person performing similar functions), or
any person directly or indirectly controlling or controlled by
such investment adviser, including any employee of such
investment adviser, except that for the purposes of section 203
of this title (other than subsection (f) thereof), persons associated
with an investment adviser whose functions are clerical or
ministerial shall not be included in the meaning of such term.
The Commission may by rules and regulations classify, for the
purposes of any portion or portions of this title, persons, including
employees controlled by an investment adviser.
(18) ‘‘Security’’ means any note, stock, treasury stock, security
future, bond, debenture, evidence of indebtedness, certificate
of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or
5 INVESTMENT ADVISERS ACT OF 1940 Sec. 202
subscription, transferable share, investment contract, votingtrust
certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, any put,
call, straddle, option, or privilege on any security (including a
certificate of deposit) or on any group or index of securities (including
any interest therein or based on the value thereof), or
any put, call, straddle, option, or privilege entered into on a
national securities exchange relating to foreign currency, or, in
general, any interest or instrument commonly known as a
‘‘security’’, or any certificate of interest or participation in, temporary
or interim certificate for, receipt for, guaranty of, or
warrant or right to subscribe to or purchase any of the foregoing.
(19) ‘‘State’’ means any State of the United States, the District
of Columbia, Puerto Rico, the Virgin Islands, or any other
possession of the United States.
(20) ‘‘Underwriter’’ means any person who has purchased
from an issuer with a view to, or sells for an issuer in connection
with, the distribution of any security, or participates or
has a direct or indirect participation in any such undertaking,
or participates or has a participation in the direct or indirect
underwriting of any such undertaking; but such term shall not
include a person whose interest is limited to a commission
from an underwriter or dealer not in excess of the usual and
customary distributor’s or seller’s commission. As used in this
paragraph the term ‘‘issuer’’ shall include in addition to an
issuer, any person directly or indirectly controlling or controlled
by the issuer, or any person under direct or indirect
common control with the issuer.
(21) ‘‘Securities Act of 1933’’, ‘‘Securities Exchange Act of
1934’’, ‘‘Public Utility Holding Company Act of 1935’’, and
‘‘Trust Indenture Act of 1939’’, mean those Acts, respectively,
as heretofore or hereafter amended.
(22) ‘‘Business development company’’ means any company
which is a business development company as defined in section
2(a)(48) of title I of this Act and which complies with section
55 of title I of this Act, except that—
(A) the 70 per centum of the value of the total assets
condition referred to in sections 2(a)(48) and 55 of title I
of this Act shall be 60 per centum for purposes of determining
compliance therewith;
(B) such company need not be a closed-end company
and need not elect to be subject to the provisions of sections
55 through 65 of title I of this Act; and
(C) the securities which may be purchased pursuant to
section 55(a) of title I of this Act may be purchased from
any person.
For purposes of this paragraph, all terms in sections 2(a)(48)
and 55 of title I of this Act shall have the same meaning set
forth in such title as if such company were a registered closedend
investment company, except that the value of the assets of
a business development company which is not subject to the
provisions of sections 55 through 65 of title I of this Act shall
be determined as of the date of the most recent financial stateSec.
202 INVESTMENT ADVISERS ACT OF 1940 6
ments which it furnished to all holders of its securities, and
shall be determined no less frequently than annually.
(23) ‘‘Foreign securities authority’’ means any foreign government,
or any governmental body or regulatory organization
empowered by a foreign government to administer or enforce
its laws as they relate to securities matters.
(24) ‘‘Foreign financial regulatory authority’’ means any
(A) foreign securities authority, (B) other governmental body or
foreign equivalent of a self-regulatory organization empowered
by a foreign government to administer or enforce its laws relating
to the regulation of fiduciaries, trusts, commercial lending,
insurance, trading in contracts of sale of a commodity for future
delivery, or other instruments traded on or subject to the
rules of a contract market, board of trade or foreign equivalent,
or other financial activities, or (C) membership organization a
function of which is to regulate the participation of its members
in activities listed above.
(25) ‘‘Supervised person’’ means any partner, officer,
director (or other person occupying a similar status or performing
similar functions), or employee of an investment adviser,
or other person who provides investment advice on behalf
of the investment adviser and is subject to the supervision
and control of the investment adviser.
(26) The term ‘‘separately identifiable department or division’’
of a bank means a unit—
(A) that is under the direct supervision of an officer or
officers designated by the board of directors of the bank as
responsible for the day-to-day conduct of the bank’s investment
adviser activities for one or more investment companies,
including the supervision of all bank employees engaged
in the performance of such activities; and
(B) for which all of the records relating to its investment
adviser activities are separately maintained in or
extractable from such unit’s own facilities or the facilities
of the bank, and such records are so maintained or otherwise
accessible as to permit independent examination and
enforcement by the Commission of this Act or the Investment
Company Act of 1940 and rules and regulations promulgated
under this Act or the Investment Company Act
of 1940.
(27) The terms ‘‘security future’’ and ‘‘narrow-based security
index’’ have the same meanings as provided in section
3(a)(55) of the Securities Exchange Act of 1934.
(b) No provision in this title shall apply to, or be deemed to include,
the United States, a State, or any political subdivision of a
State, or any agency, authority, or instrumentality of any one or
more of the foregoing, or any corporation which is wholly owned directly
or indirectly by any one or more of the foregoing, or any officer,
agent, or employee of any of the foregoing acting as such in the
course of his official duty, unless such provision makes specific reference
thereto.
(c) CONSIDERATION OF PROMOTION OF EFFICIENCY, COMPETITION,
AND CAPITAL FORMATION.—Whenever pursuant to this title
the Commission is engaged in rulemaking and is required to con7
INVESTMENT ADVISERS ACT OF 1940 Sec. 203
1 Section 303(d) of the National Securities Markets Improvment Act of 1996 (P.L. 104–290;
110 Stat. 3438) amended section 203 of the Investment Advisers Act of 1940 by striking ‘‘subsection
(b) of this section’’ and inserting ‘‘subsection (b) and section 203A’’. This compilation reflects
this amendment even though the italicized words were not in the underlying law at the
time of the amendment.
2 See also 7 U.S.C. 2, 2a, 6m. [Printed in appendix to this volume.]
sider or determine whether an action is necessary or appropriate
in the public interest, the Commission shall also consider, in addition
to the protection of investors, whether the action will promote
efficiency, competition, and capital formation.
REGISTRATION OF INVESTMENT ADVISERS
SEC. 203. ø80b–3¿ (a) Except as provided in subsection (b) and
section 203A 1, it shall be unlawful for any investment adviser, unless
registered under this section, to make use of the mails or any
means or instrumentality of interstate commerce in connection
with his or its business as an investment adviser.2
(b) The provisions of subsection (a) shall not apply to—
(1) any investment adviser all of whose clients are residents
of the State within which such investment adviser maintains
his or its principal office and place of business, and who
does not furnish advice or issue analyses or reports with respect
to securities listed or admitted to unlisted trading privileges
on any national securities exchange;
(2) any investment adviser whose only clients are insurance
companies;
(3) any investment adviser who during the course of the
preceding twelve months has had fewer than fifteen clients and
who neither holds himself out generally to the public as an
investment adviser nor acts as an investment adviser to any
investment company registered under title I of this Act, or a
company which has elected to be a business development company
pursuant to section 54 of title I of this Act and has not
withdrawn its election. For purposes of determining the number
of clients of an investment adviser under this paragraph,
no shareholder, partner, or beneficial owner of a business
development company, as defined in this title, shall be deemed
to be a client of such investment adviser unless such person is
a client of such investment adviser separate and apart from his
status as a shareholder, partner, or beneficial owner;
(4) any investment adviser that is a charitable organization,
as defined in section 3(c)(10)(D) of the Investment Company
Act of 1940, or is a trustee, director, officer, employee, or
volunteer of such a charitable organization acting within the
scope of such person’s employment or duties with such organization,
whose advice, analyses, or reports are provided only to
one or more of the following:
(A) any such charitable organization;
(B) a fund that is excluded from the definition of an
investment company under section 3(c)(10)(B) of the
Investment Company Act of 1940; or
(C) a trust or other donative instrument described in
section 3(c)(10)(B) of the Investment Company Act of 1940,
or the trustees, administrators, settlors (or potential setSec.
203 INVESTMENT ADVISERS ACT OF 1940 8
tlors), or beneficiaries of any such trust or other instrument;
(5) any plan described in section 414(e) of the Internal
Revenue Code of 1986, any person or entity eligible to establish
and maintain such a plan under the Internal Revenue Code of
1986, or any trustee, director, officer, or employee of or volunteer
for any such plan or person, if such person or entity, acting
in such capacity, provides investment advice exclusively to,
or with respect to, any plan, person, or entity or any company,
account, or fund that is excluded from the definition of an
investment company under section 3(c)(14) of the Investment
Company Act of 1940; or
(6) any investment adviser that is registered with the
Commodity Futures Trading Commission as a commodity trading
advisor whose business does not consist primarily of acting
as an investment adviser, as defined in section 202(a)(11) of
this title, and that does not act as an investment adviser to—
(A) an investment company registered under title I of
this Act; or
(B) a company which has elected to be a business
development company pursuant to section 54 of title I of
this Act and has not withdrawn its election.
(c)(1) An investment adviser, or any person who presently contemplates
becoming an investment adviser, may be registered by
filing with the Commission an application for registration in such
form and containing such of the following information and documents
as the Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of investors:
(A) the name and form of organization under which the
investment adviser engages or intends to engage in business;
the name of the State or other sovereign power under which
such investment adviser is organized; the location of his or its
principal business office and branch offices, if any; the names
and addresses of his or its partners, officers, directors, and persons
performing similar functions or, if such an investment adviser
be an individual, of such individual; and the number of
his or its employees;
(B) the education, the business affiliations for the past ten
years, and the present business affiliations of such investment
adviser and of his or its partners, officers, directors, and persons
performing similar functions and of any controlling person
thereof;
(C) the nature of the business of such investment adviser,
including the manner of giving advice and rendering analyses
or reports;
(D) a balance sheet certified by an independent public
accountant and other financial statements (which shall, as the
Commission specifies, be certified);
(E) the nature and scope of the authority of such investment
adviser with respect to clients’ funds and accounts;
(F) the basis or bases upon which such investment adviser
is compensated;
(G) whether such investment adviser, or any person associated
with such investment adviser, is subject to any disquali9
INVESTMENT ADVISERS ACT OF 1940 Sec. 203
fication which would be a basis for denial, suspension, or revocation
of registration of such investment adviser under the
provisions of subsection (e) of this section; and
(H) a statement as to whether the principal business of
such investment adviser consists or is to consist of acting as
investment adviser and a statement as to whether a substantial
part of the business of such investment adviser, consists or
is to consist of rendering investment supervisory services.
(2) Within forty-five days of the date of the filing of such application
(or within such longer period as to which the applicant consents)
the Commission shall—
(A) by order grant such registration; or
(B) institute proceedings to determine whether registration
should be denied. Such proceedings shall include notice of the
grounds for denial under consideration and opportunity for
hearing and shall be concluded within one hundred twenty
days of the date of the filing of the application for registration.
At the conclusion of such proceedings the Commission, by
order, shall grant or deny such registration. The Commission
may extend the time for conclusion of such proceedings for up
to ninety days if it finds good cause for such extension and
publishes its reasons for so finding or for such longer period as
to which the applicant consents.
The Commission shall grant such registration if the Commission
finds that the requirements of this section are satisfied and that
the applicant is not prohibited from registering as an investment
adviser under section 203A. The Commission shall deny such registration
if it does not make such a finding or if it finds that if the
applicant were so registered, its registration would be subject to
suspension or revocation under subsection (e) of this section.
(d) Any provision of this title (other than subsection (a) of this
section) which prohibits any act, practice, or course of business if
the mails or any means or instrumentality of interstate commerce
are used in connection therewith shall also prohibit any such act,
practice, or course of business by any investment adviser registered
pursuant to this section or any person acting on behalf of such an
investment adviser, irrespective of any use of the mails or any
means or instrumentality of interstate commerce in connection
therewith.
(e) The Commission, by order, shall censure, place limitations
on the activities, functions, or operations of, suspend for a period
not exceeding twelve months, or revoke the registration of any
investment adviser if it finds, on the record after notice and opportunity
for hearing, that such censure, placing of limitations, suspension,
or revocation is in the public interest and that such
investment adviser, or any person associated with such investment
adviser, whether prior to or subsequent to becoming so associated—
(1) has willfully made or caused to be made in any application
for registration or report required to be filed with the
Commission under this title, or in any proceeding before the
Commission with respect to registration, any statement which
was at the time and in the light of the circumstances under
which it was made false or misleading with respect to any
material fact, or has omitted to state in any such application
Sec. 203 INVESTMENT ADVISERS ACT OF 1940 10
or report any material fact which is required to be stated
therein.
(2) has been convicted within ten years preceding the filing
of any application for registration or at any time thereafter of
any felony or misdemeanor or of a substantially equivalent
crime by a foreign court of competent jurisdiction which the
Commission finds—
(A) involves the purchase or sale of any security, the
taking of a false oath, the making of a false report, bribery,
perjury, burglary, any substantially equivalent activity
however denominated by the laws of the relevant foreign
government, or conspiracy to commit any such offense;
(B) arises out of the conduct of the business of a
broker, dealer, municipal securities dealer, investment adviser,
bank, insurance company, government securities
broker, government securities dealer, fiduciary, transfer
agent, foreign person performing a function substantially
equivalent to any of the above, or entity or person required
to be registered under the Commodity Exchange Act or
any substantially equivalent statute or regulation;
(C) involves the larceny, theft, robbery, extortion, forgery,
counterfeiting, fraudulent concealment, embezzlement,
fraudulent conversion, or misappropriation of funds
or securities or substantially equivalent activity however
denominated by the laws of the relevant foreign government;
or
(D) involves the violation of section 152, 1341, 1342, or
1343 or chapter 25 or 47 of title 18, United States Code,
or a violation of substantially equivalent foreign statute.
(3) has been convicted during the 10-year period preceding
the date of filing of any application for registration, or at any
time thereafter, of—
(A) any crime that is punishable by imprisonment for
1 or more years, and that is not described in paragraph
(2); or
(B) a substantially equivalent crime by a foreign court
of competent jurisdiction.
(4) is permanently or temporarily enjoined by order, judgment,
or decree of any court of competent jurisdiction, including
any foreign court of competent jurisdiction, from acting as
an investment adviser, underwriter, broker, dealer, municipal
securities dealer, government securities broker, government
securities dealer, transfer agent, foreign person performing a
function substantially equivalent to any of the above, or entity
or person required to be registered under the Commodity Exchange
Act or any substantially equivalent statute or regulation,
or as an affiliated person or employee of any investment
company, bank, insurance company, foreign entity substantially
equivalent to any of the above, or entity or person required
to be registered under the Commodity Exchange Act or
any substantially equivalent statute or regulation, or from engaging
in or continuing any conduct or practice in connection