March 11, 2021

Investment Company Act of 1940

Investment Company Act of 1940

Private Investment Companies Under Section 3(c)(1) of the Investment Company Act of 1940
      Thomas P. Lemke and Gerald T. Lins, 44(2): 401–38 (Feb. 1989)
This Article discusses a topic of recurring interest to securities practitioners: the ability of private investment vehicles to avoid registration and regulation under the Investment Company Act of 1940.

Regulation of Series Investment Companies Under the Investment Company Act of 1940
      Joseph R. Fleming, 44(4): 1179–1205 (Aug. 1989)
This Article follows the development of SEC regulation of series investment companies, including particular disclosure practices, and identifies areas that need SEC interpretive guidance or congressional action. By focusing on the rationale underlying SEC interpretations involving series companies, the Article attempts to present an analysis that will assist in discerning how these companies mesh with the framework of the 1940 Act.

Reorganizing Insurance Company Separate Accounts Under Federal Securities Laws
      Stephen E. Roth, Susan S. Krawczyk, and David S. Goldstein, 46(2): 537–621 (Feb. 1991)
Insurance company separate accounts are pooled investment vehicles used to fund variable annuity contracts and variable life insurance policies. Recently, consistent with similar developments and trends in the investment industry generally, many insurers have reorganized their separate accounts registered as investment companies under the Investment Company Act of 1940. This Article discusses the nature and structure of these separate accounts and examines the complex issues under the federal securities laws raised by separate account reorganizations.

Eligible Foreign Custodians and the Investment Company Act of 1940
      Thomas S. Harman, 46(4): 1377–90 (Aug. 1991)
This Article reviews the evolution of rule 17f-5, the SEC's rule governing the use of foreign custodians by registered investment companies. It discusses the eligibility and substantive provisions of the rule, "no-action" letters related to the rule, and exemptive relief sought by those not qualifying under the rule.

Kamen v. Kemper Financial Services, Inc.: The Scope of the Demand Requirement in Shareholder Derivative Actions Under the Investment Company Act of 1940
      Christopher M. Hoffmann, 47(3): 1333–54 (May 1992)
In Kamen v. Kemper Financial Services, Inc., 500 U.S. 90 (1991), the Supreme Court held that federal courts must apply state law in deciding whether demand is excusable in a derivative action under the Investment Company Act. This Note examines Kamen's impact on the role of state law in federal remedial schemes, particularly in the corporate context. It also scrutinizes the Court's reasoning and the practical and doctrinal impact of its decision.

Organization of a Mutual Fund
      Victoria E. Schonfeld and Thomas M.J. Kerwin, 49(1): 107–61 (Nov. 1993)
This Article addresses some of the fundamental legal and business considerations that arise in connection with the organization of an open-end registered investment company, known as a mutual fund. The Article highlights the concerns of the fund's sponsor (usually its investment adviser or distributor) in structuring and distributing the mutual fund. It also addresses issues faced by the fund's directors and officers and the entities that provide management and other services to the fund.

Certain Legal Aspects of Secondary Market Municipal Derivative Products
      George G. Wolf, Gary A. Hermann, and Adam W. Glass, 49(4): 1629–89 (Aug. 1994)
Secondary market synthetic securities, which tailor the cash flows on an existing security to meet the needs of a particular market or even a particular investor, are an emerging force in the financial markets. Efforts to create synthetic tax-exempt municipal securities must retain this feature. Although certain types of municipal derivatives may be structured to retain the municipal obligation's exemption from registration under federal securities laws, other synthetic tax-exempt securities will require an independent basis for exemption from the Securities Act and the Investment Company Act. Synthetic securities targeted for sale to money market and other mutual funds must meet additional requirements. This Article explores the essential federal tax and securities aspects of synthetic municipal securities.

Reorganizations of Investment Companies
      Michael L. Sapir and James A Bernstein, 50(3): 817–77 (May 1995)
Over the past decade, the tremendous growth and maturation of the mutual fund industry has been accompanied by considerable consolidation and transactional activity. This Article provides a general overview of investment company reorganizations under federal and state laws and reviews the numerous disclosure requirements and legal and regulatory constraints to which a mutual fund reorganization is subject. The Article is designed to guide the practitioner through the regulatory labyrinth from board consideration to preparation of filing to closing the transaction.

Mutual Fund and Variable Insurance Products Performance Advertising
      Clifford E. Kirsch, Wendell M. Faria, and W. Thomas Conner, 50(3): 925–93 (May 1995)
The investment company industry has grown dramatically in recent years. Investment company assets have grown at an annual rate of 23.1%–doubling every four years since 1980–and now stand at $2.4 trillion. Mutual funds, the most popular form of investment company, account for 86% of this $2.4 trillion. Variable annuities and variable life insurance policies have also grown very popular. Advertising by the issuers of these investment companies, their sponsors, and their underwriters has played a crucial role in the growth of these products. These funds face a common problem, namely, that, because they offer similar types of products and services, they must differentiate themselves in order to hold a place in the market. Many funds have attempted to achieve differentiation through performance advertising. The SEC, specifically through rule 432 of the Securities Act, has permitted investment companies to advertise performance data since 1979. Overall, rule 482 has been effective in regulating historical performance data; however, the rule has been less effective in situations when competitive pressures have caused funds to engage in structural changes. This Article presents a detailed analysis of the regulation of mutual fund and variable insurance products advertising, with an emphasis on the regulation of performance advertising.

Report on Section 3(c)(1) of the Investment Company Act of 1940 and Proposals to Create an Exception for Qualified Purchasers
      Task Force on Hedge Funds of the committee on Federal Regulation of Securities, 51(3): 773–94 (May 1996)
This Report presents a critical inquiry into the so-called 100-person exception found in section 3(c)(1) of the Investment Company Act. It examines the exception's background and provides an analysis of the principal issues relative to the exception as well as various legislative proposals. The Task Force recommends that criteria be established for a new exemption from registration for defined sophisticated purchasers.

Fund Director's Guidebook
      Task Force on the Fund Director's Guidebook, 52(1): 229–82 (Nov. 1996)
The Guidebook is intended for use by directors of investment companies registered under the Investment Company Act of 1940. It should be useful to directors of both open-end investment companies (typically referred to as mutual funds) and closed-end funds. Inspired in part by the Corporate Director's Guidebook , this Guidebook summarizes or incorporates relevant information from the Corporate Director's Guidebook and supplements that information with specific guidance on matters arising under the 1940 Act and other applicable law. See committee on Corporate Laws, Corporate Director's Guidebook, 33 BUS. LAW. 1591 (1978); committee on Corporate Laws, Corporate Director's Guidebook–1994 Edition, 49 BUS. LAW. 1243 (1994).

Internet Incubators: How to Invest in the New Economy Without Becoming an Investment Company
      Meredith M. Brown, Michael P. Harrell, and William D. Regner, 56(1): 273 (Nov. 2000)
A number of firms have sought to participate in the growth of the new economy by forming "incubators"-organizations that foster startup companies and help them grow into viable businesses. Incubators, which often hold minority equity stakes in the companies they nurture, may find themselves bumping up against the restrictions of the Investment Company Act of 1940. This Article discusses possible methods of organizing and operating an incubation business in a way that avoids becoming an investment company subject to regulation under the Investment Company Act.

Fund Director's Guidebook
      Task Force on Fund Director's Guidebook of the committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association, 59(1): 201–76 (Nov. 2003)

Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
     Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.

In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.

This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

Soft Dollars, Hard Choices: Reconciling U.S. and EU Policies on Sell-Side Research
     Paul G. Mahoney, 75(3): 2173-2200 (Summer 2020)
Investors use research provided by broker-dealers, also known as sell-side research, to help formulate trading ideas and strategies. Investors normally pay for sell-side research through brokerage commissions. Recent European Union regulations require some institutional investment managers to unbundle, or pay separately for, research and trade execution. Unbundling might subject a U.S. broker-dealer to regulation under the Investment Advisers Act of 1940, significantly affecting the broker’s business practices.

Business Development Companies: Venture Capital for Retail Investors
     A. Joseph Warburton, 76(1): 59-108 (Winter 2020-2021)
Business development companies (“BDCs”) offer retail investors the allure of becoming venture capitalists, funding emerging enterprises with the help of professional asset managers. BDCs are investment companies that finance businesses traditionally locked out of conventional capital markets. Nearly forty years old, the BDC has remained virtually unexplored by academic researchers.