ICI floats '40 Act revamp to support middle-class wealth creation

The Investment Company Institute is calling on the Securities and Exchange Commission to update the Investment Company Act of 1940, arguing that the decades-old regulatory framework has not kept pace with market changes and technological advancements.

ICI unveiled its proposed reforms in a white paper titled "Reimagining the 1940 Act: Key Recommendations for Innovation and Investor Protection" during its Investment Management Conference in California.

The organization contends that updating the law could expand retail investors’ access to private markets, strengthen closed-end funds, and reduce regulatory costs while maintaining investor protections.

In a statement published Monday, ICI President and CEO Eric J. Pan highlighted mutual funds' 100-year history, and how they have "helped create a pathway to the middle class for millions of Americans.”

“To ensure continued success for these products and the investors they serve, the SEC should update the 1940 Act regulatory framework,” Pan said.

ICI argued that the '40 Act – which governs mutual funds, exchange traded funds, and closed-end funds – is long overdue for an update as it has not undergone a comprehensive review in more than 30 years.

The institute believes that modernization would better align regulations with the current investment landscape, particularly as ETFs have grown significantly and advances in mobile technology have transformed investor communications.

Among other recommendations, ICI’s blueprint – prepared over three years through research and collaboration with fund managers, legal experts, and other industry stakeholders – called on the SEC to let providers offer both mutual fund and ETF share classes for new and existing funds.

"Permitting a single fund to offer both mutual fund and ETF share classes would promote efficiency and economies of scale and provide optionality for fund investors," the proposal read in part.

It also urged the regulator to expand permissible asset classes for semi-transparent ETFs, and streamlining shareholder approval processes. ICI also advocates for making electronic delivery of information the default option and giving fund boards greater flexibility in appointing independent directors.

The proposed reforms also addressed closed-end funds, asking the SEC to provide them with additional tools to counter activist investors and to expand their ability to invest in private market assets while safeguarding retail investors.

"Private funds have grown enormously in number and variety in the past two decades, but ordinary investors have been unable to participate in them," the proposal read. "The SEC should allow closed-end funds that are offered to retail investors to invest in private funds, subject to board oversight, limitations on leverage and transactions with affiliates, and other provisions of the 1940 Act."