Investment Company Act of 1940
The U.S. law that regulates mutual funds, ETFs, and other pooled investment vehicles.
What is Investment Company Act?
The Investment Company Act of 1940 (ICA) regulates the organization and operations of companies that engage primarily in investing, reinvesting, or trading in securities and offer their own securities to the public. It establishes requirements for registration, disclosure of financial condition and investment policies, and governance standards for mutual funds, closed-end funds, exchange-traded funds (ETFs), and money market funds. The Act requires investment companies to provide detailed prospectuses, limits leverage and affiliated transactions, imposes fiduciary duties on fund directors, and mandates that a majority of directors be independent of the investment adviser. The SEC administers the Act and grants exemptions that have enabled modern fund structures including ETFs.
Example
When Vanguard launches a new index mutual fund, it must register the fund under the Investment Company Act as an open-end management investment company. This requires filing a registration statement with the SEC, publishing a prospectus disclosing fees, risks, and investment objectives, and maintaining a board with at least 40% independent directors. Vanguard's Total Stock Market Index Fund, with over $1.6 trillion in assets, is one of the largest funds regulated under the Act.