ICA Management Objectives

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When the Investment Company Act was rolled out in 1940, it was rolled out with the intention of creating honesty and fairness in the invesment industry.

The goals of the act were to ensure:

1. Greater participation in management by security holders

2. Adequate and feasible capital structures

3. Full disclosure and sound principles relating to financial statements and accounting

4. Elimination of abuses in selling practices

The objectives of the act in the main are achieved by affirmative requirements or prohibitions. In other words, the industry is told: "This you must do," or "This you may not do."

One of the main goals was to create a degree of independence in management personnel by restricting investment bankers, brokers, commercial bankers, principal underwriters, etc., who may have a possible bias in the management of an investment company, to a minority of the board of directors. It also requires a majority of the board to be independent of the officers of the company. All this is directed toward avoiding the temptations for self-dealing.

The act limits the extent to which persons affiliated with management may become directors. In the event that neither the management organization nor an affiliate thereof serves as principal underwriter for the fund, six out of ten board members of a fund may be affiliated persons. This drops to four out of ten if the management and the principal underwriter are the same, or are affiliated with management; and in several other cases principally where, among other things, no sales charge is made on sales and the management fee of the fund is not more than one percent annually of average net assets, all of the fund directors but one may be affiliates of management.

A recent thoughtful study concludes that "in practice it is not the number of affiliated directors that effectuates the result intended by the statute, but their diligence and astuteness and the sense of responsibility of the management personnel.

Insider trading in the securities of investment companies is subject to the same regulation as that contained in the Securities and Exchange Act of 1934. This requires reporting of purchases and sales of equity securities by large shareholders and company officials, who cannot retain the profits from transactions in equity securities, which have been held less than six months.

The Investment Company Act enables the Securities and Exchange Commission to sue in the courts to prevent gross abuse of trust and gross misconduct and grossly unfair plans of reorganization of investment companies. It makes embezzlement of investment company funds a federal offense, and prevents investment bankers and other affiliated persons from using their investment companies to assist them in underwriting activities. The act also provides that an investment company may maintain its portfolio securities and other property in its own custody or in the custody of brokers, subject, however, to compliance with the Commission's regulations. Otherwise, portfolio securities must be maintained in the custody of a bank, which is the usual practice. The act also provides for bonding of employees having access to the company's assets.

The ICA gives much-welcomed reassurance to investors that corporations will not simply abscond with their money. It makes investment companies responsible for their actions, and it gives investors a means of restoring some of their wealth through lawsuits if the company disregards the law.

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