Chapter 2-Regulation & Structure

Question 1

Tax-exempt or tax-free mutual funds must…

Answer 1

have 80% of assets in tax-free securities; 80% of income must be tax-free

Question 2

“Balanced” mutual funds

Answer 2

Must have at least 25% in fixed income investments (preferred stocks, government bonds, municipal bonds, annuities, other dividend bearing stocks)

Question 3

“Money market” mutual funds

Answer 3

Must comply with Rule 2A-7 regarding maturity, quality and diversification

Question 4

If a mutual fund mentions a certain type of security,

Answer 4

80% of fund must be that type of security

Question 5

A mutual fund with a specific country in the name should have …

Answer 5

80% of securities must be from that country (economically rated)

Question 6

A mutual fund’s maturity date must be based on …

Answer 6

SEC dollar-weighted average maturity (WAM). Can be no more than 60 days to maturity as of 10/2024.

Question 7

Shareholders of mutual funds may be asked to vote on things like …

Answer 7

1. Changes in sales charges (ie from no load to load)
2. Changes in advisory fees (ie from flat management fee to performance based fee)
3. Changes in investment policy (ie expanding holdings from Japanese to more pacific rim holdings)
4. Changes to name of mutual fund
5. Mergers & other structural changes

Question 8

What is included in a mutual fund’s prospectus?

Answer 8

1. An explanation of fund’s goals & objectives
2. A description of the fund’s strategy
3. Types of risks

Question 9

The SEC requires ___ fund fees to be summarized in a mutual fund’s prospectus.

Answer 9

All

Question 10

What 3rd party maintains information about shareholder accounts as well as the calculation and distribution of dividends?

Answer 10

Transfer agent

Question 11

A fund’s SAI (statement of additional information) includes
1) history-when the fund started and if it has ____
2) description, investments & ___-goes into more depth than prospectus
3) the names of ____ & their ____ from the fund, board member ____ of the fund, etc.
4) control persons & major shareholders who own ____ of shares
5) more depth on the ____ by the plan
6) _____ managers
7) Brokerage practices and how much brokers have earned from trades ______
8)______ of shares offered
9) More details on purchase, redemption and share ___
10) fund taxation-how the fund ensures ____ is maintained
11) Underwriters and their earnings from ___
12) Performance calculations-___ return formulas used and ____ yields for bonds
13) Recent ____ statements

Answer 11

1) changed its name
2) risks
3) board members; compensation; ownership
4) 5% or more
5) fees charged
6) Portfolio
7) the past 3 years
8) Types
9) pricing
10) pass-through tax status
11) past 3 years
12) total; 30-day
13) financial

Question 12

A fund’s shareholder report includes ___.

Answer 12

a percentage breakdown of different asset categories owned

Question 13

A fund’s shareholder report includes the following:
1) __ information
2) __ information (usually showing how $__ would perform)
3) Certain ___
4) Graphical representation of ___
5) Material __ changes
6) Changes if any to fund ___.

Answer 13

1) Expense
2) Performance; $10K
3) statistics
4) investments that the fund owns
5) fund
6) accountants

Question 14

Practice exam question:
Total return figures are net of expenses but do not normally show ___

Answer 14

the impact of front-end loads or any redemption fees.

Question 15

By 2018’s end, more than ___ was invested in open-end funds (____ in ETFs) with __ of households owning shares of at least one fund.

Answer 15

$22 trillion; $3.4 trillion; half

Question 16

Brokers are required to find ___ investments for their clients. Most arbitration cases against brokers are based on claims of lack of ___.

Answer 16

suitability; suitability.

Question 17

The 1996 National Securities Markets Improvement Act declared 1) Funds must only comply with ___registration requirements 2) that __ cannot regulate how funds operate 3) that the SEC alone regulates ____

Answer 17

1) SEC
2) states
3) prospectuses, shareholder reports, etc.

Question 18

Roughly ___ of all IRA assets are invested in mutual funds compared to ___ of assets in defined contribution plans.

Answer 18

47%; 57%

Question 19

Exchange-traded Funds (ETFs) are sold as shares through a brokerage firm. the price per share can change _____.
P. 41 of textbook says the first ETF began in ___.

Answer 19

every few seconds.
1995

Question 20

5 SEC commissioners are ____ and serve staggered ___ terms with no more than ___ being from the same party at a time.

Answer 20

President; 5-year; 3

Question 21

As of early 2018, US investment companies managed ___ in assets for ___ US investors (24% of households’ financial assets).
Worldwide, mutual funds manage $________.

Answer 21

over $22.5 trillion; 93 million; 49 trillion

Question 22

Practice question:
A fund is either ___ or___ when it comes to structure.

Answer 22

a trust; incorporated

Question 23

An industry survey showed independents comprised __ of all board seats for nearly ___ of companies

Answer 23

75%; 90%

Question 24

Practice question:
What fund document is described as “part narrative, part grocery list, and part accounting ledger?”

Answer 24

Shareholder report

Question 25

The SEC requires every fund company to prepare and issue a/an ___ shareholder report.

Answer 25

semiannual and annual

Question 26

Mutual funds and ETFs who lend out securities can earn their fund investors an additional ___

Answer 26

.1% … according to page 63

Question 27

Mutual funds determine ___ on the Record Date

Answer 27

the “shareholders of record” who are entitled to distributions on this date

Question 28

The ex-dividend or ex-distribution date normally falls ___. The fund NAV ____and market movements that day may ____.

Answer 28

1 business day after the record date.
falls by the amount of distribution; affect NAV

Question 29

The reinvestment date is normally the same as the ____. Distributions are ___ for shareholders who chose such an option.

Answer 29

“ex” date.
reinvested at NAV in full and/or fractional shares

Question 30

On a mutual fund’s Payment Date, ____ anywhere from a few days to several weeks following the record date.

Answer 30

distributions are paid to those did not elect reinvestment; these distributions are made