Private Investment Companies under Section 3(c)(1) of the Investment Company Act of 1940
![handle is hein.journals/busl44 and id is 431 raw text is: Private Investment Companies Under Section
3(c)(1) of the Investment Company Act of 1940
By Thomas P. Lemke* and Gerald T. Lins**
INTRODUCTION
The Investment Company Act of 1940 (1940 Act)1 regulates pooled invest-
ment vehicles, such as mutual funds, closed-end funds, and unit investment
trusts. Given the liquid nature of their assets, investment companies were
particularly prone to manipulation, self-dealing, and other misfeasance prior to
the adoption of the 1940 Act.' For this reason, Congress set up the 1940 Act to
regulate the operations and structure of investment companies and to supple-
ment the existing disclosure requirements imposed on the offering of investment
company securities by the Securities Act of 1933 (1933 Act).' Congress
believed that disclosure and substantive regulation for investment companies
*Mr. Lemke is a member of the District of Columbia and New York bars and is of counsel with
Tew Jordon Schulte & Beasley in Washington, D.C. He was formerly Chief Counsel, Division of
Investment Management, Securities and Exchange Commission.
**Mr. Lins is a member of the California and Illinois bars and practices law with Gibson, Dunn &
Crutcher in Los Angeles. He was formerly a staff attorney in the Office of Chief Counsel, Division
of Investment Management, Securities and Exchange Commission.
The authors gratefully acknowledge the editorial assistance of Barry P. Barbash and Sydney H.
Mendelsohn in preparing this article.
Editor's note: Thomas R. Smith, Jr., and Larry Tondel, both members of the New York bar,
served as reviewers for this article.
1. 15 U.S.C. §§ 80a-1 to -52 (1982 & Supp. IV 1986).
2. See, e.g., L. Loss, Fundamentals of Securities Regulation 57 (1983) (The problems of the
industry flow from the very nature of the assets of investment companies. Because those assets are
usually liquid and readily negotiable, control of the companies' large funds ... offered many
opportunities for exploitation by unscrupulous management.).
3. 15 U.S.C. §§ 77a-77aa (1982 & Supp. IV 1986). At the Senate hearings on what eventually
became the 1940 Act, Commissioner Healy noted, Because of the peculiar character of investment
companies ... mere disclosure is inadequate as a remedy. Investment Trusts & Investment
Companies: Hearings on S. 3580 Before the Subcomm. on Securities and Exchange of the Senate
Comm. on Banking and Currency, 76th Cong., 3d Sess. 37, 38 (1940) [hereinafter Hearings on S.
3580]. See generally 15 U.S.C. § 80a-10 (regulating composition of an investment company's board
of directors), § 80a-12 (regulating functions and activities of investment companies), § 80a-15
(prescribing ninimum requirements for advisory and underwriting contracts), § 80a-17 (limiting
affiliated transactions), § 80a-18 (imposing limits on an investment company's capital structure).](ViewImageLocal?handle=hein.journals/busl44&div=32&collection=&method=preview&ext=.png&size=3)
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Private Investment Companies under Section 3(c)(1) of the Investment Company Act of 1940
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