The ICA: Keeping Companies Honest

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The Investment Company Act oversees selling practices and requires investment companies to file registration statements and transmit reports containing prescribed information to their security holders.

The act authorizes the Securities and Exchange Commission to require registered investment companies to file periodic reports on a semiannual or quarterly basis so as to keep reasonably current the information included in the registration statement. The registration statement, which is the first step in the general scheme of regulation, contains information of the kind required in statements filed under the Securities Act of 1933 and the Securities and Exchange Act of 1934.

A recital of the policy of the registrant with respect to such matters as issuing senior securities, borrowing money, engaging in underwriting, making loans, or investing in real estate or commodities must be made; the policies outlined may not be altered without the consent of a majority of the company's holders of outstanding voting securities. Companies filing detailed registration statements must file annual reports within 120 days after the close of the fiscal year.

Dividend payments from other than certain types of income must be accompanied by a written statement indicating their source. Closed-end companies may not discriminate improperly in the repurchase of their outstanding securities. There are also other requirements to keep security holders informed.

The Commission's investigation disclosed numerous abuses in selling practices, particularly by open-end companies, periodic-payment plans, and face-amount certificate companies. To provide more adequate information, sales literature issued by face-amount certificate companies, open-end companies, and unit investment trusts (which would include most periodic-payment plans) must be filed with the Commission within ten days after use. In the case of Securities Act prospectuses of face-amount certificate companies and periodic-payment plans, the Commission is empowered by the act to rearrange the form and items of such documents and to require summaries of information which can be prominently displayed in the prospectus.

The Commission is empowered to correct selling practices of open-end companies, which may result in dilution of their shares or in unfair trading profit to insiders and dealers.

"Switching” of open-end investment company securities and those of unit investment trusts and of face-amount certificate companies on a basis permitting reloading is prohibited in the absence of an order or ruling by the Commission. The Investment Company Act also regulates the sales load that may be charged on periodic-payment-plan certificates and prescribes the form of trust indentures to be used and the charges, which may be made by trustees and sponsors of unit investment trusts, including those issuing periodic-payment-plan certificates.

A number of other important provisions are designed to eliminate temptations. Limitations and prohibitions are imposed on the eligibility and activity of persons affiliated with investment companies and on the transactions of such affiliated persons with those companies.

Persons convicted of certain crimes involving security transactions or enjoined from specific activities because of similar misconduct may not serve as officers or directors of, or perform certain other functions for, registered investment companies. With certain exceptions, the Investment Company Act prohibits an affiliated person, promoter, or principal underwriter to sell to, or buy or borrow property from, the investment company or any other company it controls. The Commission is empowered to seek an injunction against any person for gross misconduct or gross abuse of trust in respect to an investment company served by such person in any of certain designated capacities.

Without such an act, there is no telling how rampant abuse of the system could become in the United States. In a capitalistic society, the attitude often becomes one of the almighty dollar over everything else. Fortunately, the government foresaw this kind of temptation and has put a halt to the most egregious abuses.

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