Investment Company Act of 1940
The Investment Company Act of 1940 is an act of Congress that protects the public interest regarding mutual funds and investment companies. The new law set separate standards by which investment companies should be regulated. The act defined and regulated investment companies, including mutual funds (which were virtually undefined prior to 1940).
The act's purpose, as stated in the bill, is "to mitigate and... eliminate the conditions... which adversely affect the national public interest and the interest of investors." Specifically, the act regulated conflicts of interest in investment companies and securities exchanges. It protected the public primarily by legally requiring disclosure of material details about the investment company. The act also placed some restrictions on mutual fund activities such as short selling shares. However, the act did not create provisions for the Securities Exchange Commission to make specific judgments about or even supervise an investment company's actual investment decisions. Rather, the act required investment companies to publicly disclose information about their own financial health.