Audit and Accounting Guide: Investment Companies

Chapter 4 Capital Accounts

4.01 This chapter deals primarily with operations, controls, and accounting and auditing matters affecting the capital accounts of open-end investment companies and also contains material relevant to nonregistered products. Among the regulations and limitations that affect the accounting for capital stock transactions of open-end investment companies are the following:

•     Rules 2a-4, 22c-1, and 12b-1 of the Investment Company Act of 1940 (the 1940 Act)

•     Financial Industry Regulatory Authority (FINRA) limits on sales charges

•     Load structures and arrangements for reduced sales charges as established in fund prospectuses

•     Rule 18f-3 of the 1940 Act and exemptive orders in effect for individual fund complexes relating to multiple classes of shares

•     State Blue Sky laws

Most issuances and repurchases of shares of closed-end investment companies can be accounted for and audited similarly to other commercial entities.

Operations and Controls

Distributors¹

4.02 As stated in chapter 1, “Overview of the Investment Company Industry,” of this guide, many open-end investment companies enter into agreements with a separate distributor (also called an underwriter) under which the distributor obtains the exclusive right, as either principal or agent for the fund, to deal in fund shares as a wholesaler, reselling the shares to independent dealers or through its own sales network. Commonly, the distributor is an affiliate of the fund sponsor. ...