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An investment company is a financial institution principally engaged in holding, managing and investing securities. These companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under the Investment Company Act of 1940. Investment companies invest money on behalf of their clients who, in return, share in the profits and losses.

Investment companies are designed for long-term investment, not short-term trading.

Investment companies do not include brokerage companies, insurance companies, or banks.

In United States securities law, there are at least three types of investment companies:[1]

In general, each of these investment companies must register under the Securities Act of 1933 and the Investment Company Act of 1940.[2] A fourth and lesser-known type of investment company under the Investment Company Act of 1940 is a Face-Amount Certificate Company.

A major type of company not covered under the Investment Company Act 1940 is private investment companies, which are simply private companies that make investments in stocks or bonds, but are limited to under 250 investors and are not regulated by the SEC.[3] These funds are often composed of very wealthy investors.

Investment companies that choose to register under the Investment Company Act of 1940, or any investment fund that is subject to similar regulation in another jurisdiction are considered regulated funds. This provides certain protections and oversight for investors. Regulated funds normally have restrictions on the types and amounts of investments the fund manager can make. Typically, regulated funds may only invest in listed securities and no more than 5% of the fund may be invested in a single security. The majority of investment companies are mutual funds, both in terms of number of funds and assets under management.[4]

History

The first investment trusts were established in Europe in the late 1700s by a Dutch trader who wanted to enable small investors to pool their funds and diversify. This is where the idea of investment companies originated, as stated by K. Geert Rouwenhorst.[4][5] In the 1800s in England, "investment pooling" emerged with trusts that resembled modern investment funds in structure. For example, the Foreign and Colonial Government Trust formed in London in 1868 provided small investors the advantages of diversification previously only available to the wealthy.

The Scottish American Investment Trust, founded in 1873, was one of the first funds to invest in American securities and help finance the post-Civil War U.S. economy. This established a link between British fund models and U.S. markets. The first mutual fund, or open-end fund, was introduced in Boston in 1924 by the Massachusetts Investors Trust. This fund introduced innovations like continuous share offerings, share redemptions, and clear investment policies.

The 1929 stock market crash and Great Depression temporarily hampered investment funds. But new securities regulations in the 1930s like the 1933 Securities Act restored investor confidence. A number of innovations then led to steady growth in investment company assets and accounts over the decades.[6]

Securities legislation

The Investment Company Act of 1940

The Investment Company Act of 1940 regulates the structure and operations of investment companies. It requires registration and disclosure for companies with over 100 investors. The act governs investment company capital, custody of assets, transactions with affiliates, and fund board duties.[6]

The Investment Advisers Act of 1940

The Investment Advisers Act of 1940 regulates investment advisers to registered funds and other large advisers. It establishes registration, recordkeeping, reporting and other requirements for advisers.[6]

The Securities Exchange Act of 1934

The Securities Exchange Act of 1934 regulates trading, buying and selling of securities including investment company shares. It governs broker-dealers who sell fund shares. In 1938, it authorized the creation of self-regulatory organizations like FINRA to oversee broker-dealers.[6]

The Securities Act of 1933

The Securities Act of 1933 requires public securities offerings, including of investment company shares, to be registered. It also mandates that investors receive a current prospectus describing the fund.[6]

See also

References

  1. ^ "Investment Companies". U.S. Securities and Exchange Commission (SEC). Retrieved 2006-04-11.
  2. ^ Lemke, Lins and Smith, Regulation of Investment Companies, §4.01 (Matthew Bender, 2016 ed.).
  3. ^ "Investment Clubs and the SEC", sec.gov, Modified January 16, 2013.
  4. ^ a b "Investment company Fact Book" (PDF). Investment Company Institute. 2023.
  5. ^ Rouwenhorst, K. Geert (2004). The Origins of Mutual Funds. Yale School of Management - International Center for Finance.
  6. ^ a b c d e "How US-Registered Investment Companies Operate and the Core Principles Underlying Their Regulation" (PDF). Investment Company Institute. May 2022.


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