Chapter 8 Study Notes Flashcards
Face-Amount Certificate Company
These companies issue installment-type certificates that pay a stated amount at the completion of the plan. Face-amount certificates are not an important product
today.
Unit Investment Trust (UIT)
This type of investment company is established under an indenture
or similar instrument. Unit investment trusts issue only redeemable securities, each of which
represents an undivided interest in a specific portfolio of securities. The portfolio remains fixed for
the life of the trust, so there is no need for day-to-day management of the portfolio. A board of
trustees oversees the operation of the trust, but does not provide active management.
Management Company
These companies hold a portfolio of securities on behalf of investors. The
portfolio is managed by an investment adviser that follows an investment strategy which is
consistent with the objectives of that particular investment company. Management companies are
further divided into two sub-classifications—closed-end investment companies and open-end
investment companies. Today, open-end investment companies, also referred to as mutual funds,
are the most important type of investment company. Mutual fund shares always remain in the
primary market and cannot be purchased on margin.
Hedge Funds
Hedge funds are private investment pools for wealthy, sophisticated investors that, unlike mutual
funds, are not required to register with the SEC. Most hedge funds share a number of characteristics.
They are organized as limited partnerships or limited liability companies and, as such, are permitted to
pass through both income and losses to investors.
Hedge funds may use strategies that mutual funds may not and are generally considered to be
riskier investments. They have the flexibility to sell stocks short, trade in futures and commodities,
or switch all of their assets into cash if the needs arises.
Mutual Fund Structure
Board of Directors – Supervises the overall operations of the fund
Custodian – Holds the cash and securities of the fund and may perform clerical functions, including
acting as transfer agent, registrar, or dividend disbursing agent
Distributors (wholesaler or underwriter) – Manage the sales effort and recruit other broker-dealers
to help sell fund shares (may receive a discount on customer orders). The distributor also sets the
public offering price.
Investment Adviser or Manager – Manages the fund’s portfolio of securities. The contract between
the investment company and the investment adviser must detail the compensation being paid to the
adviser and must be approved twice per year by either the board of directors or the shareholders. The
contract may be cancelled without penalty with 60 days’ notice.
Prospectus Aged Material Rule
A prospectus that is in use for nine or more months
after the effective date may not contain material that is more than 16 months old. Since mutual
funds are continuously issuing new shares, they must update their registration statements and
prospectuses periodically to include their most recent financial statements. Most mutual funds do
this once per year.
Prospectus
Mandatory Summary Information
In an effort to improve the readability of the traditional prospectus, the SEC now requires mutual
fund companies to list summary information at the front of their standard (long form or statutory)
prospectus. This information must be presented in a concise, plain English format and in the
following standardized order:
Investment objectives and goals
Costs (including a fee table)
Principal investment strategies, risks, and past performance
Background information on management
Purchase and sale procedures
Tax information
Financial intermediary compensation
Mutual Fund Profiles
Under SEC Rule 498, mutual funds are permitted to create a summary prospectus (profile) that
includes the same information that is now required in the summary section of the traditional
prospectus. An investor may purchase shares based on this document alone, but must be made
aware of other information that is available to potential buyers. On the cover page of the profile, the
fund must list an Internet address where additional documents are available free of charge. These
additional documents include:
The statutory (full) prospectus
The Statement of Additional Information
The most recent annual and semiannual reports
All of these above referenced Internet documents must be readable on a computer screen and must
be able to be printed into a paper format.
Omitting Prospectuses
SEC Rule 482 permits investment companies to use advertisements that
meet specific conditions by technically classifying them as prospectuses. Because these
advertisements may include ONLY information that is contained in the prospectus, but are not
required to include everything that must be in the prospectus, they are called omitting
prospectuses.
An omitting prospectus advertisement must conspicuously state where investors may obtain a
prospectus containing more complete information about the investment company, which they
should read carefully before investing. It may NOT contain an application to invest.
Yield calculations for funds other than money-market funds
Yield calculations for funds other than money-market funds must be based on
a 30-day (or one-month) period and must be accompanied by an equally prominent disclosure of
total return. The 30-day yield is completed by dividing the net investment income per share by the
NAV on the last day of the period. This income is annualized by assuming that the amount of
income is generated each month over a one-year period and is compounded semiannually. The ad
must state the length of the base period and the day it ends. A tax-equivalent yield must be
accompanied by a disclosure of the tax rate assumed in the calculation.
Distribution of Fund Shares
Sponsor
As described earlier, the sponsor (distributor) of the fund is its principal underwriter.
The sponsor (sometimes referred to as the wholesaler) assumes the responsibility for selling the
fund’s shares to the public.
Distribution of Fund Shares
Dealers
The dealer purchases the shares from the sponsor at a discount from the public offering
price to fill an investor’s order. Dealers must have a signed selling agreement with the sponsor in
order to sell the mutual fund and must be FINRA members to receive a discount or concession.
public offering price (POP) or ask price.
net asset value plus the sales charge (SC).
Net Asset Value Per Share
Total Net Assets divided by the Number of Shares Outstanding
Sales Charges
Note that sales charges are
not negotiable. All firms must honor the pricing that is found in the prospectus. Individual brokerdealers
and their RRs may not compete for mutual fund sales based on price.
