Investment Company Act of 1940 USA

The Investment Company Act of 1940 is an act of Congress. It was passed as a United States Public Law (PL-768) on August 22, 1940, and is codified at 15 U.S.C. § 80a-1 through 15 U.S.C. § 80a-64.

Following the founding of the mutual fund in 1924, investors welcomed the innovation with open arms and invested in this new investment vehicle heavily. Five and a half years later, the Wall Street Crash of 1929 occurred in the stock market, followed shortly thereafter by the United States entry into the Great Depression. In response to this crisis, the United States Congress wrote into law the Securities Act of 1933 and the Securities E

Investment companies were still in their infancy in 1940. In order to instill investors' confidence in these companies and to protect the public interest from this new type of security, Congress passed the Investment Company Act. The new law set separate standards by which investment companies should be regulated. The act defined and regulated investment companies, including mutual funds (which were virtually undefined prior to 1940).

The act's purpose, as stated in the bill, is "to mitigate and... eliminate the conditions... which adversely affect the national public interest and the interest of investors." Specifically, the act regulated conflicts of interest in investment companies and securities exchanges. It protected the public primarily by legally requiring disclosure of material details about the investment company. The act also placed some restrictions on mutual fund activities such as short selling shares. However, the act did not create provisions for the U.S. Securities and Exchange Commission (SEC) to make specific judgments about or even supervise an investment company's actual investment decisions. The act required investment companies to publicly disclose information about their own financial health.

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