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Finance

What is a Registered Investment Company?

By K.M. Doyle
Updated May 16, 2024
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A registered investment company is an investment company that is registered in the United States with the Securities and Exchange Commission (SEC). The requirements for registration are governed by the Investment Company Act of 1940. Once an investment company in the United States has at least $30 million US Dollars (USD) in assets under management, it must register with the SEC to become a registered investment company. Companies with $25 million USD in assets under management can register, but they are not required to do so until their assets under management reach the $30 million USD threshold. Smaller companies can register with their state securities commission.

In response to the stock market crash of 1929 which precipitated the Great Depression, the U.S. Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These two laws governed the way that securities were bought and sold, but did not regulate the companies that traded them on behalf of individual investors. This led to the Investment Company Act of 1940 which was designed to protect investors from unscrupulous advisors, and to standardize the requirements for companies that offered mutual funds and other investment products.

The Investment Company Act of 1940 defines how a registered investment company can charge for its services, the documents it must file with the SEC, and its fiduciary responsibility to its clients. Investment companies are those companies who provide mutual funds, which are also called open-ended funds, as well as closed-end funds and unit investment trusts. The Investment Company Act of 1940 specifically defines the parameters of income distribution, fee structure and diversification of assets for a registered investment company. Companies which do not abide by these regulations risk losing their status as registered investment companies.

Certain types of companies are excluded from the regulations of the Investment Company Act of 1940, and therefore are not required to be registered investment companies. These include private investment funds with fewer than 100 investors. Hedge funds often fall into this category and therefore are usually not required to be registered with the SEC as registered investment companies. Investment clubs typically do not need to register with the SEC unless they offer their own investment products and have more than 100 members. For this reason, investment clubs tend to keep their memberships relatively small so that they are not required to register. Companies with their headquarters outside the United States tend not to register as the requirements for foreign companies are somewhat onerous.

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Discussion Comments

By backdraft — On Jun 28, 2011

I have to come down somewhere in between you guys. Sometimes regulations hurt the economy, sometimes they help the economy. I think that any sensible economist would tell you as much.

The simple fact is that we live in a hyper technical globalized world in which economies and markets are so complicated and far reaching that it is next to impossible to make broad statements about how they should be run. If there was ever something to not be didactic about it is economics, it effects too many people to be stubborn. If a policy works, keep it up, if it doesn't get rid of it. It is just that simple.

By ZsaZsa56 — On Jun 27, 2011

@Ivan83 - The only negative forces at work are the government themselves. I have always believed in a perfectly free market which is free of any and all government regulation. When the government begins to tell companies how they can operate they are effectively picking winners and losers. This does nothing but exacerbate the problems already in the economy.

Take the example of the registered investment company. They are required to register because in the past huckster investors have acted unscrupulously. But now that investment companies are all registered, any real problems in their investment strategy or their management structure are obscured behind this false badge of registration. This regulation does nothing but obscure market forces which would weed out the bad companies on their own. Sure a few people might fall prey to schemes, but over the long run fewer people would be negatively effected if we just let the market take care of problems organically.

By Ivan83 — On Jun 26, 2011

This article is a fine example of why the economy requires at least a certain degree of regulation. Capitalism is a competitive system in which there is great potential for winning and great potential for losing. The stakes are high and this leads inevitably to a certain amount of unscrupulous behavior. Some believe that when you are dealing with finance the potential for misdeeds is especially high.

In a climate such as this it is necessary for the governess or some sort of other regulatory body to place restrictions on what businesses do and how they can behave. In the absence of registered investment companies, there would be a tremendous amount of uncertainty about who investors could trust with their money. It was a solution to a real problem. The problem has not gone away and we need to be constantly aware of how negative forces are working in our economic system.

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