Securities Lawyer's Deskbook
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The
Investment Company Act of 1940





Section 9 -- Ineligibility of Certain Affiliated Persons and Underwriters


  1. Persons deemed ineligible for service with investment companies, etc.; investment adviser. It shall be unlawful for any of the following persons to serve or act in the capacity of employee, officer, director, member of an advisory board, investment adviser, or depositor of any registered investment company, or principal underwriter for any registered open-end company, registered unit investment trust, or registered face-amount certificate company:

    1. any person who within 10 years has been convicted of any felony or misdemeanor involving the purchase or sale of any security or arising out of such person's conduct as an underwriter, broker, dealer, investment adviser, municipal securities dealer, government securities broker, government securities dealer, bank, transfer agent, credit rating agency, or entity or person required to be registered under the Commodity Exchange Act [7 USCS § § 1 et seq.], or as an affiliated person, salesman, or employee of any investment company, bank, insurance company, or entity or person required to be registered under the Commodity Exchange Act [7 USCS § § 1 et seq.];

    2. any person who, by reason of any misconduct, is permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction from acting as an underwriter, broker, dealer, investment adviser, municipal securities dealer, government securities broker, government securities dealer, bank, transfer agent, credit rating agency, or entity or person required to be registered under the Commodity Exchange Act [7 USCS § § 1 et seq.], or as an affiliated person, salesman, or employee of any investment company, bank, insurance company, or entity or person required to be registered under the Commodity Exchange Act [7 USCS § § 1 et seq.], or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security; or

    3. a company any affiliated person of which is ineligible, by reason of paragraph (1) or (2), to serve or act in the foregoing capacities.

    For the purposes of paragraphs (1), (2), and (3) of this subsection, the term "investment adviser" shall include an investment adviser as defined in title II of this Act [15 USCS § § 80b-1 et seq.].

  2. Certain persons serving investment companies; administrative action of Commission. The Commission may, after notice and opportunity for hearing, by order prohibit, conditionally or unconditionally, either permanently or for such period of time as it in its discretion shall deem appropriate in the public interest, any person from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, if such person--

    1. has willfully made or caused to be made in any registration statement, application or report filed with the Commission under this title any statement which was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, or has omitted to state in any such registration statement, application, or report any material fact which was required to be stated therein;

    2. has willfully violated any provision of the Securities Act of 1933, or of the Securities Exchange Act of 1934, or of title II of this Act [15 USCS § § 80b-1 et seq.], or of this title, or of the Commodity Exchange Act [7 USCS § § 1 et seq.], or of any rule or regulation under any of such statutes;

    3. has willfully aided, abetted, counseled, commanded, induced, or procured the violation by any other person of the Securities Act of 1933, or of the Securities Exchange Act of 1934, or of title II of this Act [15 USCS § § 80b-1 et seq.], or of this title, or of the Commodity Exchange Act [7 USCS § § 1 et seq.], or of any rule or regulation under any of such statutes;

    4. has been found by a foreign financial regulatory authority to have--

      1. made or caused to be made in any application for registration or report required to be filed with a foreign securities authority, or in any proceeding before a foreign securities authority with respect to registration, any statement that was at the time and in light of the circumstances under which it was made false or misleading with respect to any material fact, or has omitted to state in any application or report to a foreign securities authority any material fact that is required to be stated therein;

      2. violated any foreign statute or regulation regarding transactions in securities or contracts of sale of a commodity for future delivery traded on or subject to the rules of a contract market or any board of trade;

      3. aided, abetted, counseled, commanded, induced, or procured the violation by any other person of any foreign statute or regulation regarding transactions in securities or contracts of sale of a commodity for future delivery traded on or subject to the rules of a contract market or any board of trade;

    5. within 10 years has been convicted by a foreign court of competent jurisdiction of a crime, however denominated by the laws of the relevant foreign government, that is substantially equivalent to an offense set forth in paragraph (1) of subsection (a); or

    6. by reason of any misconduct, is temporarily or permanently enjoined by any foreign court of competent jurisdiction from acting in any of the capacities, set forth in paragraph (2) of subsection (a), or a substantially equivalent foreign capacity, or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security.

  3. Application of ineligible person for exemption. Any person who is ineligible, by reason of subsection (a), to serve or act in the capacities enumerated in that subsection, may file with the Commission an application for an exemption from the provisions of that subsection. The Commission shall by order grant such application, either unconditionally or on an appropriate temporary or other conditional basis, if it is established that the prohibitions of subsection (a), as applied to such person, are unduly or disproportionately severe or that the conduct of such person has been such as not to make it against the public interest or protection of investors to grant such application.

  4. Money penalties in administrative proceedings.

    1. Authority of Commission. In any proceeding instituted pursuant to subsection (b) against any person, the Commission may impose a civil penalty if it finds, on the record after notice and opportunity for hearing, that such person--

      1. has willfully violated any provision of the Securities Act of 1933 [15 USCS § § 77a et seq.], the Securities Exchange Act of 1934 [15 USCS § § 78a et seq.], the Investment Advisers Act of 1940 [15 USCS § § 80b-1 et seq.], or this title [15 USCS § § 80a-1 et seq.], or the rules or regulations thereunder;

      2. has willfully aided, abetted, counseled, commanded, induced, or procured such a violation by any other person; or

      3. has willfully made or caused to be made in any registration statement, application, or report required to be filed with the Commission under this title, any statement which was, at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such registration statement, application, or report any material fact which was required to be stated therein;

      and that such penalty is in the public interest.

    2. Maximum amount of penalty.

      1. First tier. The maximum amount of penalty for each act or omission described in paragraph (1) shall be $ 5,000 for a natural person or $ 50,000 for any other person.

      2. Second tier. Notwithstanding subparagraph (A), the maximum amount of penalty for each such act or omission shall be $ 50,000 for a natural person or $ 250,000 for any other person if the act or omission described in paragraph (1) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.

      3. Third tier. Notwithstanding subparagraphs (A) and (B), the maximum amount of penalty for each such act or omission shall be $ 100,000 for a natural person or $ 500,000 for any other person if--

        1. the act or omission described in paragraph (1) involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; and

        2. such act or omission directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons or resulted in substantial pecuniary gain to the person who committed the act or omission.

    3. Determination of public interest. In considering under this section whether a penalty is in the public interest, the Commission may consider--

      1. whether the act or omission for which such penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement;

      2. the harm to other persons resulting either directly or indirectly from such act or omission;

      3. the extent to which any person was unjustly enriched, taking into account any restitution made to persons injured by such behavior;

      4. whether such person previously has been found by the Commission, another appropriate regulatory agency, or a self-regulatory organization to have violated the Federal securities laws, State securities laws, or the rules of a self-regulatory organization, has been enjoined by a court of competent jurisdiction from violations of such laws or rules, or has been convicted by a court of competent jurisdiction of violations of such laws or of any felony or misdemeanor described in section 203(e)(2) of the Investment Advisers Act of 1940 [15 USCS § 80b-3(e)(2)];

      5. the need to deter such person and other persons from committing such acts or omissions; and

      6. such other matters as justice may require.

    4. Evidence concerning ability to pay. In any proceeding in which the Commission may impose a penalty under this section, a respondent may present evidence of the respondent's ability to pay such penalty. The Commission may, in its discretion, consider such evidence in determining whether such penalty is in the public interest. Such evidence may relate to the extent of such person's ability to continue in business and the collectability of a penalty, taking into account any other claims of the United States or third parties upon such person's assets and the amount of such person's assets.

  5. Authority to enter an order requiring an accounting and disgorgement. In any proceeding in which the Commission may impose a penalty under this section, the Commission may enter an order requiring accounting and disgorgement, including reasonable interest. The Commission is authorized to adopt rules, regulations, and orders concerning payments to investors, rates of interest, periods of accrual, and such other matters as it deems appropriate to implement this subsection.

  6. Cease-and-desist proceedings.

    1. Authority of the Commission. If the Commission finds, after notice and opportunity for hearing, that any person is violating, has violated, or is about to violate any provision of this title, or any rule or regulation thereunder, the Commission may publish its findings and enter an order requiring such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation, to cease and desist from committing or causing such violation and any future violation of the same provision, rule, or regulation. Such order may, in addition to requiring a person to cease and desist from committing or causing a violation, require such person to comply, or to take steps to effect compliance, with such provision, rule, or regulation, upon such terms and conditions and within such time as the Commission may specify in such order. Any such order may, as the Commission deems appropriate, require future compliance or steps to effect future compliance, either permanently or for such period of time as the Commission may specify, with such provision, rule, or regulation with respect to any security, any issuer, or any other person.

    2. Hearing. The notice instituting proceedings pursuant to paragraph (1) shall fix a hearing date not earlier than 30 days nor later than 60 days after service of the notice unless an earlier or a later date is set by the Commission with the consent of any respondent so served.

    3. Temporary order.

      1. In general. Whenever the Commission determines that the alleged violation or threatened violation specified in the notice instituting proceedings pursuant to paragraph (1), or the continuation thereof, is likely to result in significant dissipation or conversion of assets, significant harm to investors, or substantial harm to the public interest, including, but not limited to, losses to the Securities Investor Protection Corporation, prior to the completion of the proceeding, the Commission may enter a temporary order requiring the respondent to cease and desist from the violation or threatened violation and to take such action to prevent the violation or threatened violation and to prevent dissipation or conversion of assets, significant harm to investors, or substantial harm to the public interest as the Commission deems appropriate pending completion of such proceedings. Such an order shall be entered only after notice and opportunity for a hearing, unless the Commission, notwithstanding section 40(a) of this title [15 USCS § 80a-39(a)], determines that notice and hearing prior to entry would be impracticable or contrary to the public interest. A temporary order shall become effective upon service upon the respondent and, unless set aside, limited, or suspended by the Commission or a court of competent jurisdiction, shall remain effective and enforceable pending the completion of the proceedings.

      2. Applicability. This paragraph shall apply only to a respondent that acts, or, at the time of the alleged misconduct acted, as a broker, dealer, investment adviser, investment company, municipal securities dealer, government securities broker, government securities dealer, or transfer agent, or is, or was at the time of the alleged misconduct, an associated person of, or a person seeking to become associated with, any of the foregoing.

    4. Review of temporary orders.

      1. Commission review. At any time after the respondent has been served with a temporary cease-and-desist order pursuant to paragraph (3), the respondent may apply to the Commission to have the order set aside, limited, or suspended. If the respondent has been served with a temporary cease-and-desist order entered without a prior Commission hearing, the respondent may, within 10 days after the date on which the order was served, request a hearing on such application and the Commission shall hold a hearing and render a decision on such application at the earliest possible time.

      2. Judicial review. Within--

        1. 10 days after the date the respondent was served with a temporary cease-and-desist order entered with a prior Commission hearing, or

        2. 10 days after the Commission renders a decision on an application and hearing under subparagraph (A), with respect to any temporary cease-and-desist order entered without a prior Commission hearing,

        the respondent may apply to the United States district court for the district in which the respondent resides or has its principal place of business, or for the District of Columbia, for an order setting aside, limiting, or suspending the effectiveness or enforcement of the order, and the court shall have jurisdiction to enter such an order. A respondent served with a temporary cease-and-desist order entered without a prior Commission hearing may not apply to the court except after hearing and decision by the Commission on the respondent's application under subparagraph (A) of this paragraph.

      3. No automatic stay of temporary order. The commencement of proceedings under subparagraph (B) of this paragraph shall not, unless specifically ordered by the court, operate as a stay of the Commission's order.

      4. Exclusive review. Section 43 of this title [15 USCS § 80a-42] shall not apply to a temporary order entered pursuant to this section.

    5. Authority to enter an order requiring an accounting and disgorgement. In any cease-and-desist proceeding under subsection (f)(1), the Commission may enter an order requiring accounting and disgorgement, including reasonable interest. The Commission is authorized to adopt rules, regulations, and orders concerning payments to investors, rates of interest, periods of accrual, and such other matters as it deems appropriate to implement this subsection.

  7. Corporate or other trustees performing functions of investment advisers. For the purposes of this section, the term "investment adviser" includes a corporate or other trustee performing the functions of an investment adviser.


Legislative History


Aug. 22, 1940, ch 686, Title I, § 9, 54 Stat. 805; Dec. 14, 1970, P.L. 91-547, § 4, 84 Stat. 1415; June 4, 1975, P.L. 94-29, § 28(6), 89 Stat. 166; Oct. 28, 1986, P.L. 99-571, Title I, § 102(l), 100 Stat. 3220; Dec. 4, 1987, P.L. 100-181, Title VI, § 609, 101 Stat. 1261; Oct. 15, 1990, P.L. 101-429, Title III, § 301, 104 Stat. 941; Nov. 15, 1990, P.L. 101-550, Title II, § 205(a), 104 Stat. 2718; Nov. 12, 1999, P.L. 106-102, Title II, Subtitle B, § 222, 113 Stat. 1401; Sept. 29, 2006, P.L. 109-291, § 4(b)(2)(B), 120 Stat. 1337.

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