“He who loves money will not be satisfied with money, nor he who loves wealth with his income; this also is vanity.
When goods increase, they increase who eat them, and what advantage has their owner but to see them with his eyes?
Sweet is the sleep of a laborer, whether he eats little or much, but the full stomach of the rich will not let him sleep.”
Sources:
(1) https://www.openbible.info/topics/money
(3) https://www.sec.gov/investment/laws-and-rules
(4) Investment Advisers Act of 1940 PDF
(5) Investment Company Act of 1940 PDF
(6) CFR Title 17, Chapter II, Part 270: Rules & Regulations of Investment Company Act of 1940.
(7) https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry
(8) https://www.investopedia.com/terms/i/investmentcompanyact.asp
(10) A “No Action” Letter filed with the SEC on June 24, 2019.
(11) https://www.investopedia.com/terms/s/section12d-1-limit.asp
(12) SEC – Final Rule- PDF -“Fund of Funds Investments” effective Jan 19, 2021.
(13) https://corpgov.law.harvard.edu/2024/11/04/governance-protections-of-the-1940-act-and-abuses-allowed-by-annual-meetings/
The Investment Company Act of 1940
Two Separate Acts
While both the Investment Company Act of 1940 & The Investment Advisers Act of 1940 were both signed into law by President Franklin D. Roosevelt, the Investment Company Act of 1940 differs from the Investment Advisers Act of 1940.
The Investment Advisers Act of 1940 regulates investment advisors.
The Investment Company Act of 1940:
“regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public.”
The Investment Company Act of 1940 aims to minimize conflicts of interest that could take place within what can be considered relatively complex operations, like mutual funds, unit investment trusts, exchange-traded funds, management investment companies, and non-exempt hedge funds.
The Investment Company Act of 1940 also requires these companies to disclose information about “the fund and its investment objectives” & “company structure and operations” when “stock is first sold and, henceforth, at regular intervals.”
The Investment Company Act of 1940 has successfully protected individuals who undertake specific financial retirement mechanisms such as 401(k)s & annuities.
A Complex List of Rules & Regulations
The Securities & Exchange Commission (SEC)—as regulator of the Investment Company Act of 1940—has laid out a complex list of rules & regulations inside CFR, Title 17, Chapter II, Part 270: Rules & Regulations, Investment Company Act of 1940:
The Investment Company Act of 1940 has undergone several amendments & changes throughout the years.
Author & lawyer, Michael B. Weiner considers the Investment Company Act of 1940 among the most complex federal security regulations.
“The one who loves money is never satisfied with money, Nor the one who loves wealth with big profits. More smoke.
The more loot you get, the more looters show up. And what fun is that–to be robbed in broad daylight?
Hard and honest work earns a good night’s sleep, Whether supper is beans or steak. But a rich man’s belly gives him insomnia.”
Guiding Principles
Author & lawyer, Michael B. Weiner summarizes the Investment Company Act of 1940 with several guiding principles: (1) Preventing Overreaching By Fund Insiders, (2) Promoting Effective Disclosure, and (3) Ensuring The Equitable Treatment Of Shareholders.
Principle #1: Preventing Overreach By Fund Insiders
An advisor often manages the daily operations & affairs of a fund. This advisor, having access to the daily management activities, has unique opportunities for abuse.
As a result of this potential for abuse, the SEC & fund industry—who helped write the Investment Company Act of 1940—asked Congress to include strategic measures that require independent oversight of fund management.
Congress achieved this independent oversight by requiring that:
In practice, these independent directors make up about 75% or more of most board of director positions, though regulation requirements are lower than 75%. Additionally, a majority of positions on the board of directors have to be approved by a shareholder vote.
Principle #2: Promoting Effective Disclosure
Before the Investment Company Act of 1940, some advisors engaged in “bait and switch” tactics.
The advisors would promote/“bait” the fund strategy in a specific direction, and then, without shareholder vote or notification, change/“switch” the direction of the fund strategy.
This “bait and switch” often benefited the monetary interests of the advisor, over the interests of the shareholders.
In response to these tactics, the SEC & fund industry promoted effective disclosures & advertising. Registration statements and other required filings, could no longer provide untrue material statements or omit material information that a prudent investor would rely upon to make an investment decision.
Click the image to read the entire nine-page letter.
Principle #3: Ensuring The Equitable Treatment Of Shareholders
Before the creation of the Investment Company Act of 1940, sophisticated schemes—such as: pyramiding, excessive leveraging, and voting abuses—took place. These sophisticated schemes harmed many security holders.
In response to both pyramiding & the layering of fees, Section 12(d)(1)(A)-(B) of the Investment Company Act of 1940 limits how much & how concentrated a fund can be in another fund.
However, Congress & The SEC, have provided exceptions for some of these rules.
Ultimately, the new SEC final ruling aims to be more balanced because a fund investing in another fund can be a useful & appropriate portfolio management tool/strategy. The same is true for limiting & balancing the use of a fund to utilize derivatives as a measure of protection.
The Investment Company Act of 1940 also requires equal voting rights with a “one share, one vote” principal. This principal helped curb against the past misuse of special rules, funds utilized to give certain shareholders an oversized voting interest and elect their own candidates to the board of director.
“One who loves money will not be satisfied with money, nor one who loves abundance with its income. This too is futility.
When good things increase, those who consume them increase. So what is the advantage to their owners except to look at them?
The sleep of the laborer is sweet, whether he eats little or much; but the full stomach of the rich person does not allow him to sleep.”
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