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SIE > Chapter 4 Features of Investment Companies > Flashcards

Chapter 4 Features of Investment Companies Flashcards

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SIE Exam flashcards
1
Q

Investment Company Act of 1940

A

Defines an investment company
- Has 40% of its total assets held in investment securities
-$100,000 in net assets
-100 or More investors

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2
Q

Management Companies

A

Organized as a corporation, operates under the direction of a board of directors, and issues shares of undivided interest to investors.
- Portfolio manager

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3
Q

Close end Management Company

A

Single primary offering to raise capital
-publicly traded funds traded in secondary market.

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4
Q

Open End Management Company

A

is commonly known as mutual funds.
- Common Stock offering only
- Unlimited - continuous Primary Offering
- Every share must be sold by prospectus
- Redeemable Security
- Referred to as a mutual funds
- Pricing based on NAV and POP
- Full or fractional shares may be purchase

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5
Q

What is a Diversified Investment Company as defined by the Investment Company Act of 1940?

A

“75-5-10” Rule
75% of Total assets must be invested so that no more than 5% of its total assets are invested in the securities of any one corporation.
Investments will not cause the fund to own more than 10% of the voting stock of any one corporation

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6
Q

Investment Advisor

A

The firm is responsible for managing the fund’s investment portfolio and conforming to the investment objective established.

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7
Q

Investment Advisor Fee

A

Is based on a percentage of total assets under management
- The fee is paid regardless of overall profit/loss

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8
Q

Custodians

A

An organization or individual that safeguards the cash and securities owned by the fun. Collects interest and dividend payments from issuers and makes or receives payments.
- Trust companies or commercial banks

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9
Q

Transfer Agent

A

Performs all recordkeeping and customer service functions for the fund, and keeps track of the number of shares owned by each investor.

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10
Q

Expense Fund

A

Operating expenses of the fund
- Board of directors stipends
- Investment adviser management fees - largest components
- Custodial services
- Transfer agent fee

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11
Q

Expense Ratio

A

Fund Expenses / Average Net Assets = Expense Ratio

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12
Q

What is the underwriter?

A

FINRA member / Distributor
- Earn compensation as a part of the sales charge for marketing and selling the fund

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13
Q

How is retail communication handled?

A

All retail communication used by registered broker-dealers is subject to FIRNRA filing and review
- Communication is based on FINRA dealing and good faith

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14
Q

Investment objective of the Fund

A
  • Objective is stated in the prospectus
  • ## Determined by the board of directors
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15
Q

Prohibited Activities for Mutual Funds

A
  • Buying on Margin
  • Selling on Margin
  • Selling an uncovered (naked) Options contract
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16
Q

What is covered call writing?

A

Options strategy
- When the funds holds common stock and then the fund sells a call against the common stock.

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17
Q

What is NAV?

A

Is the fundamental value of the fund.
- Calculated at the end of the day.

NET ASSET VALUE = NET ASSETS / NUMBER OF SHARES OUTSTANDING

18
Q

What is POP

A

The price the customer pays when purchasing the shares of a mutual fund.
- The POP will change on a day-to-day basis

19
Q

What is a Sales Charge (Sales Load)?

A

Primary compensation paid to the underwriter and broker dealers for marketing, advertising, and selling fund shares to the public.
- POP cannot exceed the NAV by 8.5%

20
Q

12b-1 Asset based Distribution Fee

A

These are the asset based fees and are permitted if the fund has adopted a 12b-1 plan authorizing their payment
- Marketing, advertising, and other costs of distributing fund shares
- Advertising includes the printing and mailing of prospectuses and sales literature to new investors

21
Q

Front-End Load (Class A Shares)

A

Sales charge is assessed at the time of purchase
- Often have lower annual expenses and 12b-1 fees compared to other classes
- Receives the full redemption value

22
Q

Back-End Load (Class B Shares)

A

Assess a back-end sales charge giving investors the ability to have their entire amount invested immediately into the fund. (The longer you are invested the lower the sales charge)
Back-End Load = Contingent deferred sales Charge: only charged if the customer fails to stay invested in the fund for a prescribed minimum period of time.

23
Q

What is conversion Privilege?

A

Class B shares are converted to class A shares once the CDSC drops to zero

24
Q

Level Load ( Class C Shares)

A

Pays a fixed amount (%) per year.
- 1% fee + 12b-1 fees
- Suitable for investors with very short horizons
- Cannot convert to class A Shares

25
Q

No-Load

A

No sales charge because the investment company is the distributor. NAV=POP
- Can assess a 12b-1 fee no greater than 25 basis points a year

26
Q

Reduced Sales Charges

A

This is an incentive to investors who purchase Class A shares
- May be required to make minimum purchase
- Larger the investment, same fund family = Lower Sales Charge

27
Q

What must a fund offer to charge the maximum 8.5% sales charge?

A

-Rights of Accumulation
- Breakpoints

28
Q

Breakpoints

A
  • Only for class A Shares
  • Can be attained by adding the total amount invested in the fund family
  • By Reaching the breakpoint dollar limit, an investor is entitled to a lower sales charge for future purchases
  • Must be disclosed at the time of sale
29
Q

Break Points Sale Violation

A

When a registered representative purposely makes a sale just below the breakpoint to earn a higher sales load
- PROHIBITIED BY SEC AND FINRA

30
Q

Letter of Intent (I-OWE-YOU)

A

This allows the investor to combine an initial investment with a future investment and immediately qualify for a reduced sales charge on the initial investment.
- 13 MONTH LIFE
- Can backdate up to 90 days
- New money only

31
Q

Rights of Accumulation (ROA)

A

Allows an investor to add their existing account balances with their additional purchases to qualify for breakpoints on any new money invested.
- Must be offered for at least 10 years

32
Q

How can you make exchanges (Net Transactions) within the same fund family?

A

The investor will purchase the new fund shares at NAV without paying sales charge assuming a sales charge was assessed on the previous fund owned.
- For taxes purposes, exchanges are treated as sales

33
Q

Reinstatement Privilege

A

Allows mutual funds to make it easy for people to replace money that they have previously withdrawn without incurring a sales charge.
- Withdrawn money must be replaced promptly (30 days) to qualify and on an infrequent basis.

34
Q

Prospectus

A
  • Is a comprehensive risk disclosure document that provides potential investors with the information deemed by the regulators as necessary to making an informed purchasing decision
  • Contains funds objectives, investment policies, restrictions, and disclose all costs and fees.
  • Mutual funds update their prospectuses every 16 months
35
Q

Summary Prospectus / Mutual fund policies

A

Is an abridged form of the statutory prospectus
- Includes an application to open a new account and is an offer to sell

Must include:
1) The funds investment objective
2) Fees and expenses
3) Investment risks and performance information
4) Investment advisors and portfolio managers
5) Information on buying and selling shares
6) Tax information
7) Details on financial intermediary compensation

36
Q

What are the annual and semiannual reports?

A

are financial reports cards for the fund that contain information like that found in the prospectus. For up to 6 months
- audited annual report to SEC
- audited disclosure documents

37
Q

What is an nonqualified opinion?

A

Its states the auditor agrees with financial information.

38
Q

What is qualified opinion?

A

Auditor disagrees with some or all financial reporting.

39
Q

What is the Statement of Additional Information?

A

Supplementary information for prospectus.

40
Q

What are the Mutual Fund advantages?

A
  • Professional Portfolio Manager
  • Diversification
  • Minimum Investment
  • Safekeeping of Portfolio Securities
  • Reduced Sales Charge
  • Exchange Privilege
  • Reinvestment
  • Reinstatement
  • Liquidity
  • Systematic Purchase and Withdrawal Plans
41
Q

What is the Right to Receive Dividends?

A
  • Declared by the board of directors
  • is a share in profit from the fund.
  • Earnings from fund of securities held.

SIE (12 decks)

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