A mutual fund is a type of investment company. Funds are organized under several different federal laws and must also register with the state where the fund maintains its business. The purpose of the laws concerning the organization and registration of mutual funds is to protect investor money and provide open disclosure how a fund works.
Investment Company Act
The Investment Company Act of 1940 is the federal law that governs how a mutual fund is structured.The Act covers the disclosures a fund must provide to investors, the operational structure of a fund and the duties of a fund's board of directors. A primary purpose of the Act is to spell out how the assets of the fund are segregated for the benefit of a fund's shareholders and the assets are not handled by the fund's investment managers.
A mutual fund must be organized as either a corporation or business trust. This business entity is set up in the home state of the mutual fund. The mutual fund will have a board of directors or trustees, depending on whether the fund is a corporation or trust. A mutual fund is a company like any other registered corporation such as Wal-Mart or IBM. Shareholders in a fund have ownership rights like the shareholders of any corporation. A mutual fund is one type of investment company, officially referred to as an open-end fund.
A mutual fund typically has no employees of its own. The fund consists of the fund's investment portfolio and the board of directors. The board contracts with outside companies to handle the mutual fund functions such as investment management, accounting, custody of securities and investor services. Typically a mutual fund sponsor such as a family of mutual funds or large investment firm will establish the mutual fund corporation and provide the outside services required for the fund to function.
The sales of mutual fund shares must follow the rules of the Securities Act of 1933. This law covers the disclosures required for the issue or sale of shares, including mutual fund shares. The information the Act requires be disclosed to investors is provided in a mutual fund's prospectus. The prospectus covers a fund's investment objectives, the risks of investing in the fund and the costs and fees involved in buying and owning fund shares.
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