Why the Investment Company Act of 1940 Is Gaining New Attention as an Alternative to ETF Bureaucracy

Unlocking the quiet power of the ’40 Act as modern asset managers seek flexible, SEC-compliant alternatives to traditional ETFs.

A 1940s Framework for a 2025 Problem

In an era dominated by digital assets, tokenized real-world assets, and algorithm-driven funds, many financial innovators are finding themselves constrained by the traditional ETF structure. But there’s an underutilized regulatory route gaining traction: the Investment Company Act of 1940. Originally written to clean up Wall Street abuses of the Great Depression, this framework is now being reimagined as a stealthy yet effective channel for fund issuers looking to sidestep the slow grind of ETF bureaucracy.

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ETF Bureaucracy: The Bottleneck of Innovation

Launching a new exchange-traded fund (ETF) isn’t as simple as listing on the New York Stock Exchange and calling it a day. ETF sponsors must navigate a labyrinth of SEC oversight, including filing with both the Division of Investment Management and the Division of Trading and Markets. Many fund providers must also request exemptive relief from certain parts of the Investment Company Act itself — a process that can take months or even years.

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Moreover, while ETFs offer intraday liquidity and broad retail exposure, the regulatory burden can be stifling, particularly for firms experimenting with frontier assets like cryptocurrencies, private equity, or AI-curated portfolios.

The 1940 Act Route: A Quieter, Smarter Option

Originally designed to govern mutual funds and closed-end investment companies, the Investment Company Act of 1940 has built-in investor protections that include:

• Mandatory board oversight
• Limits on leverage
• Daily NAV reporting
• Transparency and accountability
• Restrictions on affiliated transactions

These protections, while sometimes viewed as restrictive, can serve as regulatory credibility enhancers for emerging asset classes. And unlike ETFs, certain structures under the 1940 Act — such as closed-end funds and interval funds — allow managers to bypass the more onerous aspects of ETF registration while still gaining SEC oversight and investor trust.

Crypto, Tokenization & Alternative Assets: The New Frontier

The SEC’s historically reluctant stance on spot crypto ETFs has already pushed asset managers to think creatively. Grayscale’s Bitcoin Trust (GBTC), for example, began as a closed-end trust before its legal battle to convert into a full ETF. Other firms are launching interval funds under the 1940 Act that hold tokenized real estate, private credit, or even venture equity.

As blockchain-native asset managers explore the landscape, many see the 1940 Act as a regulatory wrapper that provides legitimacy without sacrificing innovation.

For example:

• Web3 asset pools structured as interval funds
• DAO-managed fund strategies seeking SEC compliance
• Tokenized portfolios gated for accredited or semi-qualified investors under Reg D/Reg A+

Benefits Over ETFs for Modern Fund Sponsors

ETF Model	1940 Act Closed-End / Interval Fund Model
Long SEC approval timeline	Faster route with fewer regulatory choke points
Daily liquidity via exchanges	Periodic liquidity can stabilize portfolios
Heavy compliance on market making	No need for authorized participants (APs)
Often restricted to vanilla assets	Broader access to alt assets and private deals
Exemptive relief required	Often exempt if compliant with 1940 Act rules

These structures allow for greater experimentation with things like tokenized real-world assets (RWAs), non-correlated hedge fund strategies, or even retail-facing AI-curated portfolios — all while staying within a tested regulatory framework.

Drawbacks to Consider

Of course, no route is perfect. The 1940 Act comes with its own limitations:

• Liquidity constraints: Especially in interval funds, where redemptions may only occur quarterly.
• Less visibility: These products don’t enjoy the same daily trading volume or media coverage as ETFs.
• Accredited investor gating: Some versions are not open to retail investors.

Still, for fund sponsors who prioritize strategic flexibility, regulatory clarity, and first-mover advantage, the tradeoff can be worth it.

Conclusion: A Forgotten Path Made Relevant Again

In an age where financial innovation often runs ahead of regulation, the Investment Company Act of 1940 is proving itself to be more than a dusty relic of the past. It is a quiet enabler — a legally rigorous yet creatively flexible alternative to ETF channels. For managers navigating tokenized assets, AI portfolios, or hybrid fund structures, it may be the smartest detour yet.

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