The Investment Company Act of 1940 requires that investment companies limit the percentage of interested...

The Investment Company Act of 1940 includes governance requirements intended to protect fund shareholders by ensuring a meaningful degree of board independence. Limiting the percentage of “interested persons” on a fund’s board reduces the likelihood that the board will be dominated by individuals with material ties to the fund’s adviser, underwriter, or other service providers. The purpose is to mitigate conflicts of interest, which is why choice C is correct. An independent board is better positioned to oversee critical areas such as advisory contract approvals, fee reasonableness, compliance, and potential self-dealing risks.

Choice A (insider trading) is not the primary target of this board composition requirement. While good governance may indirectly discourage misuse of information, insider trading concerns are addressed through broader securities laws and compliance controls. Choice B (money laundering) is addressed through AML programs and customer identification procedures at financial institutions and broker-dealers, not primarily through investment company board independence rules. Choice D (market manipulation) is also not the core focus of board independence; manipulation is addressed through trading and anti-fraud rules and market regulation rather than investment company board composition.

The SIE commonly tests the concept that investment companies are structured to protect investors through transparency, fiduciary oversight, and independent governance. By ensuring that a substantial portion of directors are “uninterested,” the Act helps prevent the adviser or affiliated parties from unduly influencing decisions that directly affect shareholder outcomes—particularly fees, expense arrangements, and conflicts between the fund’s interests and the adviser’s profit motive.