Chapter 3

Question 1

Investment Company Act of 1940

Answer 1

provides for SEC regulation of investment companies and their activities

Question 2

Hurdle rate

Answer 2

hedge fund is the minimum performance required before the incentive rate kicks in

Question 3

How many types of investment company

Answer 3

3
Face amount certificate companies
Management investment companies
UIT

Must have at least 100k net worth

DOES NOT include holding companies

Question 4

FAC is what

Answer 4

contract between issuer and investor where issuer guarantees payment of a stated sum at some point in the future - can be lump sum or periodic installments

Only thing we need to know is that it is a type of investment company

ALSO THEY DON’T USE NAV

Question 5

Management investment company

Answer 5

Most common investment company

Open end cannot:
- purchase on margin or short
- acquire more than 3% of outstanding voting securities of another investment company
- participate on joint basis trading (I.e. account with someone else)

Closed end

Question 6

BOD

Answer 6

Cannot exceed 60% of interested persons of the investment company, meaning at least 40% have to be non interested - no connection to fund ( maybe they own some shares which is normal )

Question 7

Changes in investment policy

Answer 7

for BOD to make changes to following, majority vote on outstanding shares is required
- change in subclassification - i.e open to closed, diversififed to non diversified
- any change in fundamental policy and investment objective
- changing nature of busienss if it isn’t going to be an investment co/

Question 8

Majority vote to approve

Answer 8

investment company w/ investment advisor contract

Describes
- all compensation to be paid
- approved annually by BOD and majority if renewed after first 2 years
- terminated any time 60 days notice

Question 9

Affiliated person
control person

Answer 9

5% or more outstanding shares & can vote
25%

Question 10

Reports

Answer 10

Annual financial reports w/ SEC
Shareholders sent annual reports SEMI annually

Question 11

NAV and POP

Answer 11

POP is NAV + Sales Charges
Sales charge can’t be more than 8.5%

Question 12

Forward pricing

Answer 12

Priced at the NEXT NAV close price @ 4pm

Question 13

Open end fund sales charge

Answer 13

A - front end - diff between POP & NAV (breakpoints)
B - back end loads - contingent deffered sales load - 12b & charged when an investor REDEEMS shares. It is reduced annually by a percentage, encouraging investor to keep it longer. Drops to 0 after 6-8 years, and then converted to class A charges with lower expense ratio’s
C - asset based fee, asset based sales charge, - 12b-1 - this allows them to collect a fee for promotion or sales related activites in connection with distribution of shares - typically .5 of assets not to exceed .75% - if the fee exceeds 25%, fund CANNOT USE NO LOAD, ok for under 25%

Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don’t have a front-end load but do have a higher asset-based sales charge. Class R shares can have a 12b-1 charge as high as 0.60%, more than Class A, but less than Classes B and C.

12b-1 fees are ONLY used for marketing and distribution purposes, not for fund portfolio management

Question 14

Expense ratio of 1.7%

Answer 14

is $1.70 in expenses for every $100 of invested assets

Question 15

class C 12b-1 requirements

Answer 15

• approved by majority vote of outstanding shares
• BOD approval, & reapproved annually by BOD, & of directors who are non interested parties (outside directors)
• terminated at any time by majority vote of BOD who are non interested or majority vote shareholders

Question 16

Rights of accumulation

Answer 16

permits an investor to aggregate shared owned in related accounts in sum or all of the funds in the fund family to recieve breakpoints with no time limit

Question 17

Breakpoints

Answer 17

Only used for persons - married couples, minor children, parents, and corporations - NOT investment clubs

Question 18

senior securities

Answer 18

Stocks & bonds

Question 19

Affiliated persons may not

Answer 19

have any dealings with the investment company (outside of contractual obligations and the purchase or redemption of shares of the investment company), such as buying securities, furniture, real estate, or other property from the company or selling such property to the company.

Question 20

A unit investment trust (UIT) has no board of directors; rather, it has

Answer 20

a board of trustees

Question 21

two basic types of REITs

Answer 21

equity REIT is the one that owns property (equity). Rental income is received from the users of those properties

mortgage REIT is based off mortgages (debt)

Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond. A stock offers the possibility of income through dividends and a bond through interest. But, it is only the stock (equity) where there is a real potential for capital gain.

Question 22

Termination advisory contract

Answer 22

No investment advisory contract may be entered into that does not provide for termination with no more than 60 days’ notice in writing

Question 23

A mutual fund’s expense ratio is found by dividing its expenses by its

Answer 23

average annual net assets.

Question 24

A sector fund is one where the assets are

Answer 24

Sector funds (specialized funds) target at least 25% of their investments toward a specific industry or geographical location.

Question 25

In order to qualify as a REIT,

Answer 25

At least 75% of the assets must be invested in real estate–related assets, cash, and U.S. government securities. A REIT must distribute at least 90% of its taxable income to investors