What is The Investment Company Act of 1940?
Considered one of the most important pieces of regulation governing the stock market, the Investment Company Act of 1940 is a law that Congress passed to define and regulate mutual funds and closed-end funds, as well as hedge funds, private equity funds, and holding companies. Enforced by the Investment Management division at the SEC, it is intended to mitigate and eliminate the conditions which adversely affect the national public interest and the interest of investors.
The Investment Company Act of 1940, along with the Investment Advisers Act of 1940, was established in response to the Stock Market Crash of 1929 and the ensuing Great Depression. The Investment Company Act’s purpose was to build investor confidence in investment companies, which were relatively new at that time, by reducing conflicts of interest. It was also intended to protect the public interest by requiring investment companies disclose key information concerning their financial health, structure, investment policies and objectives using Form N-SAR.
Under this Act, investment companies with more than 100 investors are required to register with the SEC. They are also required to have a board of directors, with 75% of board members being independent. Additionally, the Act requires mutual funds to limit the use of leverage and maintain a certain amount of cash that will cover investors who want to sell their shares at any time.
With the advent of the Dodd-Frank Act of 2010, the Investment Company Act of 1940 received various updates including new regulations around mutual and hedge funds. That said, a number of hedge funds are able to exempt themselves from the Investment Company Act based on Sections 3(c)(1) and 3(c)(7).
The SEC does not supervise or make specific judgments on the investments an investment company chooses to make. Certain commodity pools as well as managed future funds do not fall under the Act’s jurisdiction.
Prospectus
A prospectus is the foundation of every fund/product and an essential element of the investment company industry. It all begins with the creation, filing, distribution and webhosting, which leads to all other investment company compliance requirements and filings.
Oftentimes, a prospectus, containing SEC approved content, such as investment objectives, fee table structure, strategies, risks and other regulatory disclosure already exists and can serve as a starting point for new offering or annual update. Using an existing prospectus can streamline SEC review when the Commission staff is aware that an existing fund or annuity product is being used as a template, allowing the staff to focus review on new disclosures.
Starting from a clean slate may be necessary when a fund or products with similar content doesn’t already exist. When starting from scratch, having legal counsel and strong service partners you can rely on is crucial. Trusted partners are key to a successful launch and meeting ongoing compliance obligations, such as Rule 498 for funds and Rule 498A for variable products. Knowledge of the process to meet the complexities of style development, content creation, SEC filing, print, and distribution are where relationships prove vital.
Support for all form types is crucial to ensure you meet ’40 Act regulatory disclosure compliance requirements for new launches and annual prospectus updates to minimize compliance risk. Important decisions, such as choosing a workflow to manage document disclosure, either utilizing a SaaS platform or full-service solution, will help maximize efficiencies, as well as having an understanding of SEC iXBRL and iXBRL tagging requirements.
Tailored Shareholder Reports
With the completion of the May 31, 2025, period end shareholder reports, a year has passed since Open-End funds were first required to create and distribute Tailored Shareholder Reports (TSR). Although the initial months were a bit rocky, the industry and service providers have adjusted and appear to have settled in.
Creating templates, producing SEC compliant iXBRL, and generating output were among the early challenges. Managing the transition to the new document type on top of the meeting deadlines during the busy June 30th cycle added to the pressure.
Although TSR production has stabilized, creating and filing the necessary content within the N-CSR, such as Items 7 to 11, still depends on internal and auditor review. While the N-CSR doesn’t need to file with the SEC until 10 days after the TSR mailing date, SEC rules require funds to post the TSR and Items 7 to 11 to their website no later than 60 days after the period end. This raises the question: will funds be able to file the N-CSR within 60 days from the period end, and if not, will they choose to post Items 7 to 11 prior to SEC filing? In the latter scenario, financial information would be accessible before the EDGAR filing.
Proxy Statements
Although Open-End Funds and Variable Products are not required to prepare and distribute proxy statements annually, Closed-End Funds are still obligated to do so. Recent industry discussions have focused on the elimination of the annual proxy requirement, but it remains to be seen how this will proceed.
Web Hosting
The SEC’s web hosting requirements, to be in compliance with rules such as 498, 498A and Tailored Shareholder Reports, utilize a layered disclosure framework. The incorporation of the requirements into multiple rules over the years has added an additional layer of regulatory compliance complexity.
Meeting the required timelines for annual and periodic updates such as supplements and shareholder reports requires issuers to provide public facing websites for document access. In most cases, documents must be available for ordering and must allow navigation between documents, in compliance with the Commission’s mouse-click rules.
Examples include:
- Mutual Fund Summary Prospectus (Open-End Funds and ETFs) (Rule 498)
- Variable Product Summary Prospectus (Variable Annuity, Variable Life) (Rule 498A)
- Optional Internet Availability of Investment Company Shareholder Reports (Closed-End Funds only) (Rule 30e-3)
- Tailored Shareholder Reports
- Registration for Index-Linked Annuities (RILA) and Registered Market Value Adjustment Annuities (RILA/MVA) (similar to Rule 498A)
- Internet Availability of Proxy Materials (Notice equals Access) (Closed End Funds – web hosting requirement without layered disclosure)
ADA Compliance
Investment companies should also consider website and document accessibility in compliance with the Americans with Disabilities Act (ADA). Although ADA falls under the jurisdiction of the Department of Labor and is not an SEC requirement, the Commission referenced ADA in the TSR adopting release, stating that accessibility is an important issue for investors and funds are required to comply with all applicable accessibility-related requirements under the ADA.
Toppan Merrill is ready to help
Toppan Merrill carefully follows SEC rulemaking and disclosure requirements for mutual funds. Purpose-built platform solutions help you manage the SEC requirements from end to end.
If you have questions about SEC rules or would like assistance, the experts at Toppan Merrill can help. We also offer a range of additional resources so filers have the knowledge required to meet their SEC disclosure requirements. Contact us today!
