Investment company
The examples and perspective in this US-centric article may not represent a worldwide view of the subject. (March 2022) |
An investment company is a financial institution principally engaged in holding, managing and investing securities. These companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under the Investment Company Act of 1940. Investment companies invest money on behalf of their clients who, in return, share in the profits and losses.
Investment companies are designed for long-term investment, not short-term trading.
Investment companies do not include brokerage companies, insurance companies, or banks.
In
- Open-End Management Investment Companies (mutual funds)
- Face amount certificates companies: very rare
- Closed-End Management Investment Companies (closed-end funds)
- UITs (unit investment trusts): only issue redeemable units
- Exchange-traded funds (ETFs)
In general, each of these investment companies must register under the Securities Act of 1933 and the Investment Company Act of 1940.[2] A fourth and lesser-known type of investment company under the Investment Company Act of 1940 is a Face-Amount Certificate Company.
Investment companies should not be confused with investment platforms such as eToro, Robinhood, Fidelity and E-Trade, which are digital services or tools that enable investors to access and manage various financial instruments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), options, futures, cryptocurrencies, and real estate.[3]
A major type of company not covered under the
Investment companies that choose to register under the Investment Company Act of 1940, or any investment fund that is subject to similar regulation in another jurisdiction are considered regulated funds. This provides certain protections and oversight for investors. Regulated funds normally have restrictions on the types and amounts of investments the fund manager can make. Typically, regulated funds may only invest in listed securities and no more than 5% of the fund may be invested in a single security. The majority of investment companies are mutual funds, both in terms of number of funds and assets under management.[5]
Regulated funds
The International Investment Funds Association defines regulated funds as open-end collective investment vehicles that are subject to substantive regulation. Open-end funds allow investors to purchase new shares or redeem existing shares on demand.
In the United States, regulated funds include not only open-end mutual funds and exchange-traded funds, but also unit investment trusts and closed-end funds.
In Europe, regulated funds encompass
In many countries, regulated funds may also include institutional funds limited to non-retail investors, funds offering principal guarantees, and open-end real estate funds investing directly in property assets.[5]
History
The first investment trusts were established in Europe in the late 1700s by a Dutch trader who wanted to enable small investors to pool their funds and diversify. This is where the idea of investment companies originated, as stated by
The 1929 stock market crash and Great Depression temporarily hampered investment funds. But new securities regulations in the 1930s like the 1933 Securities Act restored investor confidence. A number of innovations then led to steady growth in investment company assets and accounts over the decades.[7]
Securities legislation
The Investment Company Act of 1940
The Investment Company Act of 1940 regulates the structure and operations of investment companies. It requires registration and disclosure for companies with over 100 investors. The act governs investment company capital, custody of assets, transactions with affiliates, and fund board duties.[7]
The Investment Advisers Act of 1940
The Investment Advisers Act of 1940 regulates investment advisers to registered funds and other large advisers. It establishes registration, recordkeeping, reporting and other requirements for advisers.[7]
The Securities Exchange Act of 1934
The Securities Exchange Act of 1934 regulates trading, buying and selling of securities including investment company shares. It governs broker-dealers who sell fund shares. In 1938, it authorized the creation of self-regulatory organizations like FINRA to oversee broker-dealers.[7]
The Securities Act of 1933
See also
References
- ^ "Investment Companies". U.S. Securities and Exchange Commission (SEC). Retrieved 2006-04-11.
- ^ Lemke, Lins and Smith, Regulation of Investment Companies, §4.01 (Matthew Bender, 2016 ed.).
- ISBN 978-1-4503-8476-6.
- ^ "Investment Clubs and the SEC", sec.gov, Modified January 16, 2013.
- ^ a b c "Investment company Fact Book" (PDF). Investment Company Institute. 2023. This article incorporates text from this source, which is available under the CC BY 4.0 license.
- ^ Rouwenhorst, K. Geert (2004). The Origins of Mutual Funds. Yale School of Management - International Center for Finance.
- ^ a b c d e "How US-Registered Investment Companies Operate and the Core Principles Underlying Their Regulation" (PDF). Investment Company Institute. May 2022.