The ‘40 Act, along with the Securities Act of 1933, and the Securities Exchange Act of 1934, have formed the foundation for regulation in the investment industry in the US. The ‘40 Act defines investment companies and stipulates how they are to represent themselves and disclose information about the funds they sell to the public.
There had been a lack of regulation up to that point on large pooled investment companies which operated with a lack of transparency and could change the fund strategy and management without any notification to the investors.
Needless to say, there was a rash of bad behavior on the part of fraudulent and irresponsible fund managers, and Congress passed this act under their authority in interstate commerce in the interest of the public good.
Not only could the lack of regulation hurt the investors in one fund, but it could damage the national economy. The Act regulated face amount certificate companies, unit investment trusts, and investment management companies.
The latter is the only thriving today, and the most common example of a management company is a mutual fund. Each mutual fund is technically a company, whose assets are almost entirely securities, and shareholders participate in the gains and losses of that portfolio.
The Dodd-Frank Act of 2010 updated some of the regulations to be more applicable today. Funds that are classified in a way that subjects them to the laws of this legislation are sometimes called ‘40 Act Funds. Most hedge funds and some ETFs, such as certain commodity ETFs, are not in this category for different reasons.
Hedge funds are typically not offered to the general public, and commodity ETFs fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC).
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