Chapter 17 Mutual Funds: Structure and Regulation RQ Flashcards
Calculate the management expense ratio (MER) for a fund with aggregate fees and expenses payable during the year of $5,000,000 and an average net asset value for the year of $250 million.
A. 0.2%.
B. 1.3%.
C. 2.0%.
D. 4%.
C. 2.0%.
The management expense ratio (MER) represents the total of all management fees and other expenses charged to a fund, expressed as a percentage of the fund’s average net asset value for the year. MER is calculated as [Aggregate Fees and Expenses Payable During the Year/Average Net Asset Value for the Year] × 100. In this example, ($5,000,000/$250,000,000) x 100 = 2%.
An investor purchases $10,000 of a mutual fund with a 4% front-end load. Calculate the actual amount invested.
A. $9,600.
B. $9,960.
C. $10,000
D. $10,417.
A. $9,600.
A front-end load is payable to the distributor at the time of purchase. It is usually expressed as a percentage of the purchase price or NAVPS. A $10,000 investment in a mutual fund with a 4% front-end load means that $400 (4% × $10,000) goes to the distributor by way of compensation while the remaining $9,600 is actually invested.
Ms. Smythe decides to redeem her investment in A2Z Mutual Fund, a back-end load fund that calculates charges based on NAVPS at the time of redemption, in the 4th year. Her investment has grown from $10,000 to $12,800. Based on the redemption schedule provided, calculate the sales charges and the amount she will receive.
If Redeemed in Year 1 2 3 4 5 6 7
Commission Charge 6% 5% 4% 3% 2% 1% 0%
A. $300 in sales charges, receive $13,100.
B. $384 in sales charges, receive $10,384.
C. $384 in sales charges, receive $12,416.
D. $512 in sales charges, receive $12,288.
C. $384 in sales charges, receive $12,416.
The sales charge for redemptions in the 4th year is 3% of the value of the fund units held. Since Ms. Smythe’s investment is now valued at $12,800, she will have to pay: $12,800 x 3% = $384. This means that, after redemption charges, she will receive: $12,800 - $384 = $12,416.
Identify where in the simplified prospectus an investor can locate information about mutual funds in general.
A. Part A.
B. Part B.
C. Introductory statement.
D. Annual Information Form.
A. Part A.
National Instrument 81-101 has ensured that the information in a simplified prospectus must be in plain language and set up in a specific format so that it is easier for the investor to find the information. The simplified prospectus consists of two sections: Part A, provides introductory information about the mutual fund, general information about mutual funds and information applicable to the mutual funds managed by the mutual fund organization; and Part B contains specific information about the mutual fund. An introductory statement is included that describes the purpose of the prospectus and identifies other information documents that must be made available to investors, including the Annual Information Form.
Identify how redemption fees are charged for deferred sales charge funds.
A. Flat fee is charged at redemption.
B. Fee is “bundled” as part of the annual management fee.
C. Fee is deducted at purchase and refunded after one year’s holding period.
D. Fee is charged at redemption that declines as the holding time increases.
D. Fee is charged at redemption that declines as the holding time increases.
Deferred charges are applied at redemption to either the original contribution or the net asset value at redemption. In most cases, the fee on a deferred charge basis declines as the holding period increases. After some specified holding period, the charge might decline to zero.
Calculate the redemption price for a mutual fund with a NAVPS of $18 and a 2% back-end load calculated on the NAVPS at the time of redemption.
A. $17.64.
B. $17.80.
C. $18.00.
D. $18.36.
A. $17.64.
For a fund with a back-end load (deferred sales charge), the redemption price = NAVPS - (NAPVS x sales percentage). In this case, the redemption price = $18 - ($18 x .02) or $17.64.
Select the justification for trailer fees paid to a client’s mutual fund sales representative.
A. Encourages investors to stay in a fund.
B. Reduces the overall fees paid by an investor.
C. Compensates the representative for providing ongoing advice to the investor.
D. Compensates the representative for initially selling the fund.
C. Compensates the representative for providing ongoing advice to the investor.
Trailer fees are paid on an ongoing basis, usually as long as the investor holds the fund, to the representative. The justification for these fees is to compensate the representative for the ongoing investment advice being provided to the investor.
Indicate the expenses that are included in the Management Expense Ratio (MER).
A. Trailer fees.
B. Custodial fees.
C. Trading costs.
D. Switching and sales fees.
B. Custodial fees.
The MER represents the total of all management and other expenses, such as custodial fees, audit fees, legal fees, information expenses, charged to the fund, and expressed as a percentage of the fund’s total assets.
Li-Jun’s IA emails her with details of a new mutual fund investment. Her IA states that she will send the fund facts before the purchase, advises Li-Jun that the purchase will be made at the current market price, and that she has negotiated a discount on the usual front-end load charge. She also asks if Li-Jun would like a copy of the firm’s latest sales communication with fund performance statistics. Determine the part of the email that would be an unacceptable sales practice.
A. Stating purchase will be made at current market price.
B. Sending fund facts before the purchase.
C. Giving the client a discount on the front-end load charge.
D. Offering a firm sales communication with performance statistics.
A. Stating purchase will be made at current market price.
There are a number of sales practices which are clearly unacceptable to regulators. In this example, Li-Jun’s IA has quoted a future price: When an investor places an order to buy or sell a mutual fund, the price per unit or share that he or she will be paying or receiving is not known. This is because the purchase or sale price is based on the net asset value on the next regular valuation date. Depending on the time of day in which the order is entered, the NAVPS may be priced at the end of the current business day or at the close of business on the next business day. It is mandatory to send the fund facts pre-purchase, as well as offering to send a firm communication with performance statistics, and IAs are allowed to negotiate load charge reductions on fund purchases.
What is the name of the mutual fund industry’s distribution side SRO?
A. Office of Consumer Affairs.
B. Office of the Superintendent of Financial Institutions.
C. Mutual Fund Dealers Association.
D. Investment Industry Regulatory Organization of Canada.
C. Mutual Fund Dealers Association.
The Mutual Fund Dealers Association (MFDA) is the mutual fund industry’s SRO for the distribution side of the mutual fund industry. The MFDA does not regulate the funds themselves as that responsibility remains with the securities commissions but does regulate how the funds are sold. The MFDA is not responsible for regulating the activities of mutual fund dealers who are already members of another SRO. For example, IIROC members selling mutual fund products will continue to be regulated by IIROC.
What is the maximum percentage of the net assets of a fund that can be invested in derivatives, except for those mutual funds that are exempt from the regulation?
A. 0%.
B. 10%.
C. 25%.
D. 50%.
B. 10%.
National Instrument 81-102 allows that 10% is the maximum percentage of the net assets of a fund that can be invested in derivatives. Hedge funds are exempted from these rules. Another exception is commodity pools, which are permitted to use derivatives in a leveraged manner for speculation.
Calculate the offering price for a fund with a Net Asset Value Per Share of $17.50 and a front-end load of 4.5%.
A. $16.71.
B. $17.50.
C. $18.28.
D. $18.32.
Most mutual funds report their Net Asset Value Per Share (NAVPS) in the financial press. However, this is not the “real price” you pay if the fund has a front-end load. Unlike equities, where you pay the price on the market plus a commission as determined by a broker, with mutual funds that have a front-end sales charge, you pay a price that includes the NAVPS plus the sales charge. Your purchase price will always be higher than the NAVPS. In this example, you would calculate the offering price by dividing the NAVPS of $17.50 by (100%-4.5%), the sales charge, for a result of $18.32. Working backwards, if the offering price is $18,32, for every $18.32 that you invest, the fund will take 4.5%, or approximately $0.82 ($18.32 x 4.5%). The remaining $17.50 would be invested in the fund itself.
Karl is discussing with his IA that he may need to access 20% of his portfolio if a potential business opportunity arises in the next 2 months. His IA reviews his portfolio and suggests that certain of his managed product investments may be a problem if the need for funds arise. Identify the disadvantage of managed products that Karl’s IA is concerned about.
A. High fees.
B. Liquidity constraints.
C. Volatility of returns.
D. Lack of transparency.
B. Liquidity constraints.
Some managed products prevent investors from accessing their funds until a specified time or only when certain conditions are met.
Identify the group or individual that is responsible for calculating the NAVPS for mutual funds.
A. Distributor.
B. Custodian.
C. Fund manager.
D. Directors and trustees.
C. Fund manager.
Fund managers have the responsibility for calculating the fund’s NAVPS, as well as preparing the fund’s fund facts documents, simplified prospectus, and reports.
Choose the assumption regarding the type of mutual funds that are distributed by financial institutions (FIs) that the relevant rules and regulations are based upon.
A. In-house mutual funds.
B. No-load mutual funds.
C. Third-party mutual funds.
D. Third-party sponsored mutual funds.
A. In-house mutual funds.
Rules regarding the distribution of mutual funds by a FI are based on the assumption that the FI will distribute only in-house mutual fund securities. In other words, the securities sold through the FI must be issued by a mutual fund sponsored by the FI (or by the FI’s subsidiary or affiliated dealer).
