Investment Company Registration and Regulation Package1
This Investment Company Registration and Regulation Package (“Package”) contains general information about investment companies (e.g., mutual funds, closed-end funds, and unit investment trusts) and supersedes the “Investment Company Registration Package” that was previously distributed in a printed format. Due to continuous changes in the federal securities laws, we no longer print the Investment Company Registration Package in hard copy. All of the information that was contained in the prior version, however, is now available through hyperlinks to Internet web sites, which are provided below. Further, SEC publications are available from the SEC’s Publications Office by calling (202) 551-4040.
Important Note about the Scope of the Information Provided in this Package
This Package is intended to serve as a general guide only. It is not a comprehensive manual on the regulation of investment companies, investment company service providers, or related entities. This Package is not intended to provide formal or binding legal advice of the Commission or the staff and is not a substitute for, and may not be relied on instead of, the actual federal securities laws and the advice of legal counsel. If you intend to start an investment company, or have legal questions regarding the regulation of investment companies or similar companies, you must consult the applicable statutes and rules. Frequently, you also will need to consult interpretive guidance (e.g., legislative history, Commission releases, and no-action letters). We further recommend that you consult with an attorney and with a certified public accountant with experience under the federal securities laws. This Package was prepared by the SEC staff. The Commission has expressed no views regarding its content.
If you have questions or comments about this Package or the information in the listed web sites, please telephone us at (202) 551-6865, or E-mail us at IMOCC@sec.gov.
TABLE OF CONTENTS
The Securities and Exchange Commission (“SEC” or “Commission”) is the primary regulator of investment companies and investment advisers. The Division of Investment Management of the SEC has prepared this Package as a general guide to the principal federal securities laws and regulations governing investment companies.
The primary law that governs investment companies is the Investment Company Act of 1940 (the “Investment Company Act”). The SEC has adopted various regulations under the Investment Company Act that further govern investment company operations. These regulations are published in Title 17 of the Code of Federal Regulations (“CFR”), Part 270.
Generally, persons who manage the portfolios of registered investment companies must register with the Commission as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”). See General Information on the Regulation of Investment Advisers. The Advisers Act, and regulations adopted by the Commission under the Investment Advisers Act, govern registered investment advisers. The regulations are published in 17 CFR, Part 275.
Investment companies are also subject to other federal securities laws (e.g., the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934). The SEC has also adopted various regulations generally applicable to investment companies under these laws.
Regulations under the Investment Company Act and the other federal securities laws are amended from time to time. You can find SEC proposed regulations and newly amended or adopted regulations in releases published by the Commission.
Section 3(a)(1) of the Investment Company Act defines an “investment company” for purposes of the federal securities laws. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as an issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in “securities.” See Section 2(a)(36) of the Investment Company Act of the Investment Company. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as an issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire “investment securities” having a value exceeding 40 percent of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis. See Section 3(a)(2) of the Investment Company Act.
Investment companies are classified as management companies, unit investment trusts, or face-amount certificate companies. See Section 4 of the Investment Company Act.
(a) Management companies usually are structured as corporations or trusts. A management company’s board of directors (or trustees) oversees the management of the company. See Section 2(a)(12) of the Investment Company Act. A management company’s investment adviser (which is typically a separate entity, registered with the Commission) manages the company’s portfolio securities for a fee. See Section 2(a)(20) of the Investment Company Act.
Management companies are divided into open-end companies and closed-end companies. See Section 5(a) of the Investment Company Act. Management companies are further classified as “diversified” or “non-diversified” funds based on the composition of their assets. See Section 5(b) of the Investment Company Act.
(b) Unit investment trusts (“UITs”) are investment companies that do not have a board of directors, corporate officers, or an investment adviser. They generally invest in a relatively fixed portfolio of securities. UITs typically offer to the public a specific, fixed number of redeemable securities (or “units”). UIT sponsors may maintain a secondary market for trading UIT units after the initial public offering. See Sections 4(2) and Section 26 of the Investment Company Act.
(c) Face-amount certificate companies are investment companies that are engaged or propose to engage in the business of issuing face-amount certificates of the installment type, or which have been engaged in such business and have any such certificates outstanding. See Section 3(a)(1)(B) and Section 4(1) of the Investment Company Act. The term “face-amount certificate” is defined in Section 2(a)(15) of the Investment Company Act. There are only a few face-amount certificate companies in existence today.
A relatively new type of investment company is an exchange-traded fund (“ETF”): an investment company that is registered under the Investment Company Act either as an open-end fund or as a UIT. See SEC Concept Release: Actively Managed Exchange-Traded Funds, SEC Release No. IC-25258 (Nov. 8, 2001) for a discussion of the background of ETFs.
Investment pools that do not meet the definition of “investment company” in Section 3(a) of the Investment Company Act because, for example, they do not invest in securities (e.g., commodity pools that do not hold or invest in securities) are not investment companies and, therefore, are not regulated as investment companies under the Investment Company Act. (Such issuers may, however, be required to register their securities under the Securities Act.)
The Investment Company Act also specifically excludes certain investment pools from the definition of “investment company.” The Investment Company Act also exempts from regulation under the Investment Company Act a number of investment pools and entities. If an issuer falls within one of these exclusions or exemptions, it may not register as an investment company with the Commission. For example:
Section 2(b) of the Investment Company Act exempts certain governments, government agencies, and instrumentalities from the provisions of the Investment Company Act.
Section 3(b)(1) of the Investment Company Act excludes some issuers from the definition of investment company if they are primarily engaged in a business other than investing, reinvesting, holding or trading securities.
Section 3(b)(2) of the Investment Company Act provides that the Commission may exclude some issuers from the definition of investment company if the Commission, upon application by the issuer, finds and by order declares the issuer to be primarily engaged in a business other than that of investing, reinvesting, owning, holding, or trading in securities either directly or through majority-owned subsidiaries or through controlled companies conducting similar businesses.
Section 3(c) of the Investment Company Act excludes certain other issuers from the definition of investment company. These issuers include, for example, broker-dealers, charitable organizations, pension plans, and church plans. Two exceptions under Section 3(c) of the Investment Company Act are discussed in more detail below under “Private Investment Companies.”
Section 6 of the Investment Company Act exempts certain investment companies from the provisions of the Investment Company Act, such as investment companies organized or otherwise created under the laws of, and having their principal office and place of business in Puerto Rico, the Virgin Islands, or any other possession of the United States, whose securities are not offered or sold except in the jurisdiction in which the investment company is organized. Further, Section 6(c) of the Investment Company Act provides the Commission with broad authority to exempt persons, securities or transactions from any provision of the Investment Company Act, or the regulations thereunder, if and to the extent that such exemption is in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Investment Company Act. See Commission Policy and Guidelines for Filing of Applications for Exemption, SEC Release No. IC-14492 (Apr. 30, 1985) (available by contacting the Commission’s Publication Unit at (202) 942-4040). Issuers that are not subject to the Investment Company Act must consider whether they may be subject to any obligations under the other federal securities laws.
Investment Clubs. Investment clubs may not be investment companies at all. An investment club is a group of people who pool their money and invest it in securities. Each person in the investment club holds a membership interest in the pool. If every member in an investment club actively participates in deciding what investments to make, the membership interests in the club may not be considered securities as defined in the Investment Company Act. If the investment club has any passive members, however, it may be issuing securities and should consider its regulatory obligations under the Investment Company Act and other federal securities laws. Also, investment clubs that do not invest in securities are not investment companies.
Many companies rely on one of the exceptions from the definition of investment company set forth in Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. These companies are commonly known as “private investment companies.” Some private investment companies are commonly known as “hedge funds.” See Staff Report to the U.S. Securities and Exchange Commission: Implications of the Growth of Hedge Funds (2003).
Section 3(c)(1) excepts from the definition of investment company any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and that is not making and does not at that time propose to make a public offering of such securities.
Section 3(c)(7) excepts from the definition of investment company any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers and that is not making and does not at that time propose to make a public offering of such securities. The term “qualified purchaser” is defined in Section 2(a)(51) of the Investment Company Act.
The term “public offering,” as used in Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act, has the same meaning that it has in Section 4(2) of the Securities Act. See Nonpublic Offering Exemption, SEC Release No. 33-4552 (Nov. 6, 1962), for a discussion of the private offering exemption. See also Use of Electronic Media, SEC Release No. 33-7856 (Apr. 28, 2000); Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore, SEC Release No. 33-7516 (Mar. 23, 1998).
Many private investment companies offer their shares pursuant to Rule 506 of Regulation D under the Securities Act. Rule 506 is a “safe harbor,” which means that an offering that complies with the requirements of Rule 506 will not be considered a public offering within the meaning of Section 4(2) of the Securities Act. Regulations under the Securities Act, including Rule 506, are published in Title 17 of the CFR, Part 230. For questions about the scope and application of Section 4(2) and Rule 506, contact the Division of Corporation Finance of the SEC at SmallBusiness@SEC.gov.
If an investment company is organized or otherwise created under the laws of the United States or of a State, meets the definition of an investment company, and cannot rely on an exception or an exemption from registration, generally it must register with the Commission under the Investment Company Act and must register its public offerings under the Securities Act. Issuers that are excluded or exempted from the definition of investment company should consider whether they may be subject to obligations under the other federal securities laws.
An investment company that is organized or otherwise created under the laws of a foreign country may not register as an investment company, or publicly offer its securities through interstate commerce in the United States, unless the company applies to the Commission for an order permitting the company to register under the Investment Company Act, and to make a public offering in the United States. The Commission may issue an order granting the application 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 the Investment Company Act against the company, and further finds that granting the application is otherwise consistent with the public interest and the protection of investors. See Section 7(d) of the Investment Company Act. Foreign investment companies, however, generally find it difficult or undesirable to meet this standard because foreign regulatory schemes differ significantly from the Investment Company Act.
To register with the Commission as an investment company, an issuer first must file a notification of registration pursuant to Section 8(a) of the Investment Company Act. See Form N-8A. Within three months after filing a notification of registration, an investment company must file a registration statement with the Commission on the appropriate form. See Section 8(b) of the Investment Company Act, and Rule 8b-5 thereunder.
Form N-1A (Registration form for mutual funds).
Form N-2 (Registration form for closed-end funds).
Form N-3 (Registration form for separate accounts that offer variable annuity contracts that are registered under the Investment Company Act as management investment companies. The term “separate account” is defined in Section 2(a)(37) of the Investment Company Act.).
Form N-4 (Registration form for separate accounts that offer variable annuity contracts that are registered under the Investment Company Act as UITs).
Form N-6 (Registration form for separate accounts that offer variable life insurance policies that are registered under the Investment Company Act as UITs).
Investment companies must file most forms electronically, using the Commission’s Electronic Data Gathering and Retrieval system (“EDGAR”). Information about how to make filings on EDGAR is available on the Commission’s web page, or by contacting EDGAR Filer Support at (202) 551-8900.
Registration fees for investment companies are calculated pursuant to Section 6(b) of the Securities Act. Closed-end funds pay their registration fees prior to the effective date of their registration statements. Mutual funds and UITs, however, are not required to pay registration fees when they initially file their registration statements. Under Section 24(f) of the Investment Company Act, mutual funds and UITs register an indefinite amount of securities under the Securities Act when their initial registration statements become effective. Mutual funds and UITs are required to file annual notices on Form 24F-2 with information about the number and amount of securities sold and redeemed in the past fiscal year, and must pay their filing fees with their annual notices.
After registering with the Commission, investment companies periodically must file certain reports with the Commission and send certain reports to their shareholders. For example, registered management investment companies must file Form N-CSR within ten days after the transmission to shareholders of any annual or semi-annual report that is required to be transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act.
Investment companies are subject to minimum capital requirements. No registered investment company and no principal underwriter of a registered investment company may publicly offer an investment company’s shares unless the investment company meets the applicable minimum capital requirements. See Section 14(a) of the Investment Company Act. This capital must be provided with a bona fide investment purpose, without any present intention to dispose of the investment, and must not be loaned or advanced to the investment company by its promoters.
The activities of investment companies generally are not regulated by the states. States may, however, require investment companies to file notices with them and pay filing or registration fees. Information about state securities laws is available from state securities regulators. See North American Securities Administrators Association.
Modified: December 21, 2004
1 Small Entity Compliance Guide. The Small Business Regulatory Enforcement Fairness Act of 1996 (“SBREFA”), Pub. L. No. 104-121 (1996), requires federal rulemaking agencies, including the Commission, to publish “small entity compliance guides” to assist small entities in complying with the agencies’ rules. The Commission has designated this Package as a small entity compliance guide. See 17 C.F.R. § 202.8(e) (2004).