What is the Investment Act 1940?
• The Investment Act 1940, or better known as the Investment Company Act, was a formal act of Congress that in essence, formed the backbone of the financial regulatory platform in the United States of America. Passed as a United States Public Law on August 22, 1940, the Investment Act 1940 was a set of extensive rules issued by the Securities and Exchange Commission to prevent fraudulent and misguided behavior in the financial markets.
History of the Investment Act 1940:
• Following the creation of the mutual in 1924, investors, as a result of the success of the mutual fund, encouraged innovation in the market. Five years after the creation of the fund however; the Wall Street Crash of 1929 rocked investor confidence. In response to the economic calamity, the United States Congress created the Securities Act of 1933 and the Securities Exchange Act of 1934 to better regulate the stock market and the securities industry as a whole. Given the destruction caused by the Great Depression and more specifically the Stock Market Crash of 1929, legislation aimed to protect the interest of the American public and re-instill their confidence in the market.
• In 1940, Investment companies were still considered in infantile stages. To strengthen investors’ confidence in various securities and public companies and to protect the public interest from new formations of securities, Congress passed the Investment Act 1940.
• When passed, the Investment Act 1940 established separate standards by which investment companies were to be regulated. The Investment Act 1940 defined and regulated all investment companies, including the newly-formed mutual fund market. Prior to the passing of the Investment Act 1940, mutual funds were not only deregulated, but not even defined.
Effects of the Investment Act 1940:
• The Investment Act 1940 aims to mitigate and eradicate all conditions which adversely affect the national public interest and the overall interest of investors in the market. More specifically, the Investment Act 1940, regulated conflicts of interest in securities exchanges and investment companies. The investment Act 1940 also protected the public by legally requiring disclosure of financial materials concerning an investment company.
• Additionally, the Investment Act 1940 placed restrictions on mutual fund activities, including their ability to engage in short selling. That being said, the Investment Act 1940 did not institute provisions for the United States Securities and Exchange Commission to make specific judgments concerning the supervision of an investment company’s actual investment decisions. The legislation; however, did require such companies to publicly disclose investment information and information regarding their own financial health.
Who does the Investment Act 1940 apply to?
• The Investment Act 1940 applies to all investment companies, but will provide exemptions to several types of investment companies from the act’s coverage regulations. The most common exemptions, which are found in various sections of the act, are not placed on Hedge Funds for example. The Investment Act 1940 is a Federal Law and is therefore not to be interpreted individually among the states.