The Investment Company Act of 1940

The Investment Company Act of 1940, commonly known as the 40 Act, regulates entities that engage primarily in the business of investing, reinvesting, and trading in securities. The most common form of such an investment company is a mutual fund.

The 40 Act is administered and enforced by the Securities and Exchange Commission (SEC). Its primary goal is to ensure that investment companies act in the interest of investors. Its related goal is to minimize conflicts of interest that can arise in the creation, sale, and ongoing administration of securities.

Among its various provisions, the 40 Act requires investment companies to:

• register with the SEC;
• appoint and maintain a board of directors for each separate investment fund, where 75% of such directors are independent or not affiliated with the fund’s activities; and
• register offerings of securities with the SEC.

The 40 Act also requires investment companies to disclose to investors important information relevant to an investment decision, including:

• the financial holdings of the investment company;
• the investment policies of the investment company;
• the background of the company’s management; and
• material risks to the investor from investing in the securities.

While the 40 Act is designed to project investors, it does not permit the SEC to directly supervise investment decisions or judge the merits of any investments.

Among some of the most common violations of the 40 Act are as follows:

• incorrect valuations of the securities in an investment fund;
• so-called “portfolio pumping” whereby portfolio managers drive up the value of the fund by buying up holdings at the end of a quarter or year;
• so-called “window dressing” whereby portfolio managers buy or sell securities at the end of a quarterly period with the intent to incorrectly value a fund and provide misleading information about the composition of its assets; and
• omission or misstatement of material risks or other information relevant to the purchase of a security.

Whistleblowers can play an important role in helping the SEC identify and prosecute violations of the 40 Act or other provisions of federal securities laws. Whistleblowers can, however, experience challenges as cases proceed through the enforcement process, which can often be lengthy and complicated. This requires experienced SEC whistleblower lawyers to provide strategic advice, support, and a watchful eye.

Attorneys Scott Silver and David R. Chase are nationally recognized securities lawyers. They have extensive experience representing SEC whistleblowers.

If you think you qualify as a whistleblower for the SEC, contact us at 1-800-975-4345. You can also reach out online.