Investment Company Act of 1950 Flashcards
Investment Company Act of 1940
Subjects “investment companies” to an intense degree of federal oversight, even though they are business associations under the law.
IC Act - §3(a)(1)(c)
A company is an IC if it is in the business of owning or holding “investment securities” (all securities except govt securities) having a value exceeding 40% of its total assets.
IC Act - §3(c)(1) & 3(c)(7)
Hedge Fund Exemption – Exempts companies with 100 or fewer shareholders and companies whose shareholders are qualified purchasers with high net worth and are not making or proposing to make a public offering.
What are the regulatory advantages of being a hedge fund?
1) Not subject to IC Act’s severe restriction on leveraging, diversification and liquidity 2) avoid restrictions on performance feed 3) avoid disclosure requirements
Why are hedge funds exempted from the IC Act?
IC Act is a New Deal statute that was meant to protect retail investors from questionable practices by investment companies. Since hedge funds base their business model on attracting high net worth individuals which we equate with sophistication, there is not the same concerns of investor protection.
What is the focus of the ‘40 Act?
Disclosure – Need to disclose: 1) Fund performance 2) Fees and expenses 3) Identity of individuals primarily responsible for management of fund’s portfolio 4) Riskiness of portfolio
What is a money market mutual fund?
A fund that invests mainly in short term safe obligations, operating as the functional equivalent of a bank deposit account, except not FDIC insured. However in the 2008 crisis, one MMMF “broke the buck,” which called into question how safe these investments are if there is a “run on the fund.” Later, a floating NAV was introduced to help moderate large fluctuations in the market.
What are mutual funds?
Mutual funds are formed as corporations or business trusts under state law, and must be operated for the benefit of their shareholders, however, MF are unique b/c they are organized and operated by people (IA) whose primary loyalty and pecuniary interest lie outside the enterprise.
Who are investment advisers?
This person usually 1) organizes the MF 2) is responsible for its day to day operations 3) provides the seed money, officers, employees, and office space and 4) usually selects the first BoD.
Investment Advisors Act of 1940
Regulates investment advisors who advise on value of securities and wisdom of specific investments. Only applies to people who give investment advice for compensation.
IC Act - §2(a)(9)
Control – the power to exercise a controlling influence over the management or policies of a company, unless the power is the result of an official position within the company.
IC Act - §2(a)(19)
Interested person of another person – Any affiliated person, any member of the immediate family of any natural affiliated person, any interested person of any investment advisor or of a principal underwriter, etc;
IC Act - §10
a) requires 40% of directors to be disinterested, not tied in with the investment advisor. b) registered IC may not use a broker or underwriter who is an affiliated person. f) may not buy securities in a deal where the fund advisor is a principal underwriter.
IC Act - §17
Transactions of Certain Affiliated Persons and Underwriters – a) Unlawful for affiliated persons to receive compensation for selling anything to the fund, to purchase anything from the fund or to borrow money from the fund.
IC Act - §48
Liability of Controlling Persons – Unlawful for any person to cause to be done any act or thing through another person which would be unlawful for such person to do himself under this title.
