Fund compliance

Registered funds

Composition of Board

At least 40% of a registered investment company’s directors must be independent. The 1940 Act requires independent directors to annually evaluate and approve the fund’s advisory contract, approve certain distribution plans and oversee fair valuation determinations, proxy voting, compliance, and fund disclosure.

Election of Directors

An investment company’s initial board of directors must be elected by the shareholders at an annual or special meeting. The board may fill vacancies occurring on the board, but at least two-thirds of the board must be elected by shareholders.

Custody of Assets

Most investment companies use a bank custodian, under a custody agreement that typically is far more elaborate than that used for other bank clients.

Fidelity Bonding

A registered fund must have and maintain a fidelity bond against larceny and embezzlement. The bond must cover each officer and employee of the fund who, either singly or jointly with others, may have access to the fund’s securities or funds.

Standards of Conduct and Code of Ethics

Every registered investment company, its adviser, and its principal underwriter must adopt a written code of ethics. The code of ethics is designed to prevent conflicts of interest that can arise when investment company personnel trade for their own accounts, particularly portfolio managers.

Recordkeeping Obligations

The 1940 Act imposes a number of recordkeeping requirements on funds, advisers and principal underwriters.

Anti-Money Laundering

The USA PATRIOT Act of 2001 expanded existing anti-money laundering legislation by imposing new and far-reaching obligations on a broad range of financial institutions, including investment companies. Registered investment companies must adopt policies and procedures reasonably designed to detect and deter money laundering and the financing of terrorism.


Investment companies must file reports with the SEC and transmit reports to shareholders. These forms include:

  • Form N-SAR (Annual Report). This form contains approximately 130 disclosure items. Investment companies must file a Form N-SAR not more than 60 days after the close of the fiscal year, and another not more than 60 days after the close of the fiscal second quarter.
  • Form N-Q (Quarterly Report). An investment company must file a complete portfolio schedule as of the end of the first and third fiscal quarter on Form N-Q within 60 days after the end of the quarter.
  • Reports to Shareholders. Investment companies must transmit semi-annual and annual reports to shareholders. Each report must be mailed within 60 days after the close of the period for that it is being made. An investment company must file a report with the SEC on Form N-CSR within 10 days after transmitting an annual or semi-annual report to shareholders.

Privacy Notices

Funds and advisers are generally prohibited from providing personal information about a customer to a third party unless they provide the customer with an initial and annual “privacy notice” giving him or her the opportunity to withhold consent to the sharing of the information.

Private funds

A private fund must monitor its number of shareholders to ensure that it does not become subject to a registration requirement.