Wonder

Research Outline

Prepared for Suneet W. | Delivered April 29, 2020

US Act 40 Funds

Goals

To determine the number of funds that are regulated by the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (Act 40 Funds) and how many assets under management (in US dollars) these funds have. Out of these funds, those that are in distress and are poorly managed and hold illiquid securities (securities of private companies) should be identified and highlighted.

Early Findings

The Investment Company Act of 1940 Most funds, or investment companies as they are legally referred to, are regulated under the Investment Company Act of 1940.
 In fact, all funds registered with the Securities and Exchange Commission (SEC) must comply with the Investment Company Act of 1940, as it is one of the two primary acts of Congress that regulates investment companies, in addition to the Securities Act of 1933. However, certain investment companies may be exempted from registration, either because they do not fall under the definition of an "investment company" or because they request an exemption under sections 3(c)(1) or 3(c)7 of the Investment Company Act of 1940.
The Number of Act 40 FundsThe SEC's EDGAR database has a list of all active investment companies that are registered with the SEC, and of the funds that the companies manage. This list has been provided in the Act 40 Funds tab of the attached spreadsheet.
There are 2,242 registered investment companies in that list, and the companies manage a total of 44,895 funds. Therefore, there are 44,895 different Act 40 Funds in the US.
Types of Investment CompaniesThe SEC classifies investment companies into three broad categories: 1. open-end companies (mutual funds and ETFs); 2. closed-end companies (closed-end funds); and 3. unit investment trusts (UITs).
These companies are then further broken down into six sub-categories, according to their organizational type: 30 (open-end mutual fund), 31 (insurance separate account organized as an open-end fund), 32 (variable annuity separate account organized as a unit investment trust), 33 (variable life separate account organized as a unit investment trust), 55 (closed-end fund), and 75 (non-insurance unit investment trust).
Funds Required to Sell Illiquid Securities The 15% illiquid investment limit is set forth in SEC's rule 22e-4. 
However, not all Act 40 Funds are actually required to sell illiquid securities and rebalance their portfolio in the event that the value of illiquid securities exceeds 15% of the portfolio. In fact, this rule (and, therefore, the illiquid investment limit) only applies to open-end investment companies — those classified as having a type 30 organization.
Filtering the spreadsheet to only show type 30 investment companies shows that there are 1,567 investment companies managing 41,340 funds that have to rebalance their portfolio if the value of illiquid securities in it exceeds 15% of the total.
The names of all those 1,567 investment companies are listed in the Type 30 Investment Companies tab of the spreadsheet.
Funds Holding Illiquid SecuritiesDue to time constraints, only one fund holding illiquid assets has been identified. It is the Hartford Capital Appreciation HLS Fund, Series IA fund (ticker: HIACX). This fund has been marked in green in the Act 40 Funds tab of the spreadsheet.
The Hartford Capital Appreciation HLS Fund, Series IA fund is managed by Hartford Series Fund Inc., a division of Hartford Funds Management Group, Inc. Hartford Funds Management Group, Inc. is an affiliate of Wellington Management Company LLP.
The portfolio managers for HIACX are Gregg R. Thomas and Tom S. Simon.
The illiquid securities HIACX currently holds include 16,619 shares of Airbnb Inc., 85,350 shares of Social Finance, Inc. (SoFi), and 29,504 shares of Magic Leap, Inc.