The Investment Company Act's Definition of "Security" and the Myth of Equivalence

Abstract:     
This article addresses a fundamental issue under the Investment Company Act, the federal statute governing mutual funds and other investment companies: the scope of the Act's definition of "security." Currently the SEC construes the definition as encompassing commercial instruments (such as commercial notes, bank instruments, and derivatives structured as notes), even though the similarly-worded definition of "security" in the Securities Exchange Act of 1934 is construed as excluding such instruments. Although the SEC's construction is seemingly counter-intuitive (i.e., the same words are construed differently in related statutes), it is also of fundamental importance in terms of the ability of the SEC to regulate money market funds and other pooled investment vehicles that hold significant portfolios of commercial instruments. Another law review article recently argued that the SEC has abused its discretion in the way that it construes the term for purposes of the Investment Company Act and that, in fact, the definitions across statutes should be construed as "equivalent." See C. Steven Bradford, "Expanding the Investment Company Act: The SEC's Manipulation of the Definition of Security," 60 Ohio St. L. Rev. 995 (1999). This article explains why the SEC's approach is more sound both as a matter of statutory construction and as a matter of policy.

Number of Pages in PDF File: 71

Keywords: mutual funds, securities law, security, statutory definition, SEC, Securities and Exchange Commission, money market funds, commercial paper

JEL Classification: G20, G21, G23, G29, G38, K22, K23

Accepted Paper Series