Investment Company Act of 1940 PDF: Exemptions and Amendments

The full, current text of the Investment Company Act of 1940 is available as a free PDF from the U.S. Government Publishing Office at GovInfo.gov, maintained in the Compilation of Acts collection and updated through Public Law 119-27 (July 18, 2025).¹ The same text is codified in Title 15 of the United States Code beginning at 15 U.S.C. § 80a-1. The statute is the primary federal law governing pooled investment vehicles in the United States, including mutual funds, closed-end funds, exchange-traded funds, and unit investment trusts, and it requires those companies to register with the Securities and Exchange Commission and follow detailed rules on governance, capital structure, disclosure, and dealings with affiliated parties.

Where to Download the PDF

The official compilation is hosted by the U.S. Government Publishing Office and is the version to use if you need the statute with all amendments folded in. It incorporates every change through the GENIUS Act signed in July 2025.¹ If you prefer the codified version, the statute lives in Title 15 of the U.S. Code and can be pulled section-by-section from the Office of the Law Revision Counsel’s website. The SEC’s Statutes and Regulations page also links to the Act alongside the other federal securities laws and provides a short overview.²

What the Statute Regulates

Section 3 of the Act (15 U.S.C. § 80a-3) defines an “investment company.” An issuer qualifies if it meets any one of three tests: it is primarily engaged (or holds itself out as primarily engaged) in investing, reinvesting, or trading in securities; it is in the business of issuing face-amount certificates of the installment type; or it is engaged in investing and owns “investment securities” that exceed 40 percent of its total assets, excluding government securities and cash.³

Section 4 sorts investment companies into three categories: face-amount certificate companies, unit investment trusts, and management companies. Management companies split further into open-end companies (mutual funds, which issue redeemable shares) and closed-end companies (which issue a fixed number of shares that trade on exchanges). Exchange-traded funds are structured as either open-end management companies or unit investment trusts.⁴

Section 3 also carves out entities whose primary business is not investing, including banks, insurance companies, broker-dealers, and charitable organizations, even if their asset mix would otherwise trip the 40 percent threshold.³

Who Is Exempt: Private Funds Under 3(c)(1) and 3(c)(7)

Hedge funds, private equity funds, and venture capital funds typically stay outside the Act by relying on one of two exclusions in Section 3(c) that remove them from the definition of an investment company entirely.⁵

Section 3(c)(1) excludes an issuer whose outstanding securities are beneficially owned by no more than 100 persons, provided it is not making a public offering. A “qualifying venture capital fund” may have up to 250 beneficial owners, subject to a cap of $12 million in aggregate capital contributions and uncalled committed capital.³ A look-through rule applies when another investment company owns 10 percent or more of the issuer’s voting securities: that company’s own shareholders are then counted individually rather than as one owner.

Section 3(c)(7) excludes an issuer whose outstanding securities are owned exclusively by “qualified purchasers” and that does not make a public offering. Qualified purchasers face a higher bar than accredited investors. Individuals and family-owned businesses must hold at least $5 million in investments, and other entities must own and invest at least $25 million.³ There is no statutory ceiling on the number of qualified purchasers, though a fund with 2,000 or more holders of record would trigger reporting obligations under the Securities Exchange Act of 1934.⁶

Funds relying on either exclusion escape the Act’s registration, prospectus, and ongoing disclosure regimes, which gives them more room on leverage, derivatives, and concentrated positions. They still answer to the antifraud provisions of the federal securities laws.⁵

Core Requirements for Registered Funds

Registration and Disclosure

The Act requires investment companies with more than 100 investors to register with the SEC, and a new fund must have at least $100,000 in seed capital before distributing shares to the public. Registered funds file a registration statement and prospectus describing their investment objectives, strategies, risks, fees, and expenses. They also provide annual and semiannual shareholder reports and file periodic forms including Form N-PORT (portfolio holdings), Form N-CEN (census information), and Form N-PX (proxy voting records).⁴

One boundary worth stating: the SEC does not supervise fund investment decisions and does not pass on the merits of a fund’s investments. The framework rests on disclosure, structural protections, and prohibitions on specific conflicts.²

Board Composition

The Act requires that at least 40 percent of an investment company’s board be independent of the fund’s adviser, sponsor, and other key affiliates.⁷ A 2004 SEC rule pushes higher for funds relying on certain exemptive rules, requiring independent directors to hold at least 75 percent of the board seats and the board chair to be independent as well.⁸ Independent directors are principally responsible for reviewing advisory contracts, fees, and other conflict-laden decisions. Funds must also maintain written compliance policies and appoint a chief compliance officer who reports directly to the board at least annually.⁴

Affiliated Transactions

Section 17 (15 U.S.C. § 80a-17) sharply limits dealings between a registered fund and its affiliated persons, promoters, and principal underwriters. Those parties generally cannot sell securities or property to the fund, buy securities or property from the fund, or borrow from the fund while acting as a principal.⁹ Joint transactions on terms less favorable to the fund than to other participants are barred, and affiliated brokers face caps on the commissions they may receive on fund trades. The SEC can grant case-by-case exemptions when a transaction is reasonable, fair, does not involve overreaching, and is consistent with the fund’s stated policies and the purposes of the Act. Directors, officers, and advisers cannot be shielded by charter or contract from liability for willful misfeasance, bad faith, gross negligence, or reckless disregard of duties, and portfolio securities must be held in custody with a qualified bank or a member of a national securities exchange.

Leverage and Capital Structure

Section 18 restricts how funds may use borrowed money and senior securities, and it draws different lines by fund type.¹⁰

Closed-end funds may issue senior debt only if they maintain at least 300 percent asset coverage right after issuance, and senior preferred stock requires 200 percent coverage. A closed-end fund is generally limited to one class of debt and one class of preferred stock.
Open-end funds (mutual funds) cannot issue senior securities at all, except that they may borrow from a bank so long as they keep at least 300 percent asset coverage. If coverage falls below that level, the fund has three days to reduce borrowings and restore compliance.

Preferred shareholders of closed-end funds have specific voting rights: they may elect two directors at all times, and they can elect a majority of the board if dividends remain unpaid for two full years.¹¹

Forward Pricing

Open-end mutual funds must redeem shares at the next computed net asset value. NAV is calculated by taking the total market value of the fund’s assets, subtracting liabilities, and dividing by the shares outstanding.⁴ Rule 22c-1, adopted in 1968, requires “forward pricing,” meaning purchase and redemption orders receive the next NAV computed after the fund receives the order, not a previously established price.¹² Most funds calculate NAV at 4:00 p.m. Eastern time, at the close of the New York Stock Exchange.

Fund-of-Funds Limits

Section 12(d)(1) caps how much one investment company can invest in another. The statutory limits are 3 percent of the acquired fund’s voting stock, 5 percent of the acquiring fund’s total assets in any single acquired fund, and 10 percent of the acquiring fund’s total assets across all acquired funds.¹³ Congress imposed these limits to prevent pyramiding and duplicative fees. In October 2020 the SEC adopted Rule 12d1-4, which lets registered funds and business development companies exceed the limits under conditions that include prohibitions on control, mirror-voting requirements above certain thresholds, and adviser findings that fees will not be duplicated. Private funds cannot use Rule 12d1-4 and remain bound by the original statutory limits unless they obtain individual exemptive relief.¹⁴

Shareholder Rights

Fund shareholders elect directors and must approve material changes to the investment advisory contract. A fund’s management fee cannot be increased without majority shareholder approval.⁴ The Act bars funds from buying securities on margin and imposes liquidity requirements so that a fund can meet redemption requests without being forced to sell illiquid holdings at distressed prices.⁷

How It Differs From the Investment Advisers Act

The Investment Company Act and the Investment Advisers Act of 1940 were enacted on the same day and are frequently confused. They cover different things. The Investment Company Act regulates the pooled vehicles themselves (mutual funds, closed-end funds, ETFs, unit investment trusts) and focuses on structure, governance, and operations. The Investment Advisers Act regulates the people and firms that give investment advice for compensation, imposing fiduciary duties and registration requirements on those professionals.² One law governs the product; the other governs the adviser who manages it.

Amendments Reflected in the Current PDF

National Securities Markets Improvement Act of 1996

NSMIA, enacted October 11, 1996, preempted state registration for “covered securities,” including those issued by registered investment companies.¹⁵ It also authorized funds of funds within the same fund group, established flexible registration allowing funds to register an indefinite amount of securities with annual fee payments, and required the SEC to weigh the effects of any rulemaking on efficiency, competition, and capital formation.

Dodd-Frank Act of 2010

Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed July 21, 2010, eliminated the private adviser exemption that had let advisers with fewer than 15 clients avoid SEC registration by treating each fund as a single client. Advisers to hedge funds and private equity funds became subject to registration, oversight, and examination. Dodd-Frank raised the threshold for mandatory SEC registration from $25 million to $100 million in assets under management, moving oversight of mid-sized advisers to state regulators. Roughly 3,200 of 11,500 previously SEC-registered advisers shifted to state registration. New exemptions were created for venture capital fund advisers, advisers managing less than $150 million in private fund assets in the United States, and certain foreign private advisers.¹⁶

GENIUS Act of 2025

The most recent amendment in the current PDF is the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act), Public Law 119-27, signed July 18, 2025.¹⁷ The GENIUS Act sets up a federal regulatory framework for “payment stablecoins,” digital assets designed to maintain a stable value pegged to a fixed amount of monetary value. For purposes of the Investment Company Act, a payment stablecoin issued by a “permitted payment stablecoin issuer” is not a security under federal securities laws, and issuers are not considered investment companies.¹ The bill passed the Senate 68-30 and the House 308-122.¹⁸

Recent SEC Rules Under the Act

Rule 18f-4 on Derivatives

In October 2020 the SEC adopted Rule 18f-4, replacing a decades-old asset-segregation approach to fund derivatives with a risk-based framework built around Value-at-Risk (VaR) limits. Funds generally must adopt a written derivatives risk management program overseen by a board-approved derivatives risk manager, comply with VaR-based leverage limits tested at least daily, and run weekly stress testing and backtesting. The relative VaR test caps a fund’s VaR at 200 percent of a designated reference portfolio’s VaR; the absolute VaR test caps it at 20 percent of net assets. Funds whose derivatives exposure stays under 10 percent of net assets qualify as “limited derivatives users” and are exempt from the full program, though they still need risk management policies.¹⁹

Names Rule Amendments

In September 2023 the SEC amended Rule 35d-1, the “Names Rule,” to curb fund names that mislead investors about actual investments and risks. Funds whose names suggest a particular investment focus must adopt a policy of investing at least 80 percent of assets consistent with that focus, review the portfolio quarterly, and correct deviations within 90 days.²⁰ In March 2025 the SEC extended the compliance deadlines: fund groups with $1 billion or more in net assets must comply by June 11, 2026, and smaller fund groups by December 11, 2026.²¹

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GovInfo. Investment Company Act of 1940 Compilation
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Investment Company Institute. Frequently Asked Questions About Closed-End Funds
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