Chapter 9 Flashcards
What are the different types of investment companies?
Face-amount certificate co. FACC
Unit Investment Trust UIT
Management Investment Co. (mutual fund) MIC
What is a face amount certificate company?
Face-amount certificate co. FACC
fixed amount of money at fixed date
What is a unit investment trust? What are the different kinds?
investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time
-Fixed UIT: invest in large block of gov & muni debt
-Non-fixed UIT: invest in mutual fund
Passive. Must maintain secondary market
What is a Management Investment Co.? What are the different kinds?
Mutual fund.
-open end: issues new shares to new investors. must be redeemable (no secondary market). common equity only. fractional shares possible.
-closed end: fixed nb of shares. traded on exchange or OTC.
actively managed
How do you calculate the public offering price of a mutual fund?
PO Price = NAV + Sales Charge
Who distributes mutual funds? What kind of compensation do they receive?
MF itself: directly, no-load / at NAV to Investor
Sponsor Underwriter, who receives Sales Charge
Selling Group Member (BD for ex.) at discount from POP. SGM will then sell to investors at POP
What is a no-load mutual fund? What kind of fees can be charged?
No-load: no SC (but may charge redemption fee)
What are Exchange traded notes? What is the risk? Benefit?
debt. maturity payment (no coupon / interest payments) based on performance of underlying.
unsecured. carry credit risk of bank or BD
ETN investors are not subject to short-term capital gains taxes
What is a diversified fund?
75%… must be investment in secs of other issuers
5%… single sec limit
10%… single co. voting stock limit
What are the registration requirements for an investment company? Do requirements need to be met at the moment of registration?
Co. that makes investments
Co. that has > 40% assets invested in secs other than US gov
Net worth > $100k
> 100 shareholders
Clearly defined objectives
Can register without requirements, but needs to meet them < 90 d
What are the restrictions surrounding investment companies? (loans, ratios, activities, exemptions)
Once registered:
-Can’t lend money to employees
-Asset to debt ratio: > 3:1
-Can’t do bank, BD, M&A stuff
Exempt: BDs, underwriters, banks, REITs, mortage co…
What are the components of an investment company?
Board of directors
-hires other 3 groups, defines objectives, do not manage investments
-serve 1-5 y. can be reelected
-majority non-interested persons
-a bond must cover the IC employees for negligence
Investment Adviser
-comp. based on assets, not just profits
-annual approval of board necessary
Custodian bank
TA
-issuance, cancellation and redemption of fund shares
What is the anti-reciprocal rule for mutual funds?
-Selection of BD solely based on merit, not $ amount sold
-RR can’t share in commission rev
-BD can’t leverage sales to earn higher fees on execution biz
-BD can’t recommend MICs based on how high commission for BD is for each
What are Money Market Funds? Avg/max maturity? What is NAV for MMFs? How are investors paid? Rating? Single issuer max?
-invests in debt securities < 13m maturity.
-avg maturity must be < 90 d
-NAV = $1 . no load.
-interest earned daily and credited monthly
-5% in single issuer sec max
-95% in top 2 ratings
What is a mutual funds net asset value? How often is it updated? What makes it increase or decrease?
updated daily
NAV = assets - liabilities
increases/decreases with value of securities, investment income received (up), distributions made (down)
How do you calculate the sales charge % of a mutual fund? What are the maximum sales charges for open-ended or closed ended mutual funds?
max 8.5% of POP
no SC for closed end
SC% = (POP - NAV) / POP
POP = NAV / (1 - SC%)
What is the difference between a front end load and a back end load? Which is more suitable for long-term investors? And for large investments?
Front end load: SC paid at moment of share purchase (A shares)
Back end load: SC paid at moment of share redemption (B shares). Usually more suitable for LT investors (fees decrease with years in fund). No breakpoint sales charge reduction BSCR (large investments in B shares are red flag for BS violation)
What are 12B-1 fees? Who has the power to set them and remove them? What are the limits?
Charged by MFs: asset-based distribution fee (commissions to sales agents etc.)
must be voted by boards & current shareholders. can be removed by non-interested board & current shareholders.
No load fund: fee < 25 bps. Other funds: < 75 bps
What does a mutual fund need to provide if they have a sales charge of 8.5%? What is the sales charge limit if they don’t?
-breakpoint SC reductions
-rights of accumulation
-automatic reinvestment of dividends and cap gains
If not: 6.5% limit
If service fee to BD paid: 7.25%
What happens if a mutual fund charges a service fee in excess of 25 basis points?
FINRA members prohibited from selling
What case should an investor sign a letter of intent in the context of mutual funds?
Investor can get a BSCR if LOI signed. Has 13 months to increase investment to required amount.
Can be backdated 90 d
What is a Breakpoint sales violation?
RR recommends amount just below breakpoint
Spreads over different families of funds
What is a Right of accumulation?
takes into account previous investment for BSCR calc
What is Combination privilege?
takes into account investments in other funds of same family (at same AM) for BSCR calc
What is Conversion / exchange privilege?
waiver of SC if investor switches funds within family of funds / AM
What is the 30-day emergency withdrawal? What are the implications for sales charges?
investor can reinvest at NAV < 30 d
usually one-time privilege
If MIC shares redeemed < 7 biz days, SC earned by BD/RR is returned to fund
How is the current yield of a mutual fund calculated?
Current yield = annual income / POP
What is a Voluntary accumulation plan?
schedule to invest regularly
What are Bond mutual fund volatility ratings?
sensitivity of NAV of BMF to interest rates & economic conditions
What are Floating rate bank loan funds?
Funds that invest in bank loans and enable sophisticated investors to hedge interest rate risk. Contain increased liquidity risk, credit risk and call risk.
What are Structured Retail Products? What are the communication and distribution requirements for member firms wanting to sell them?
Proprietary products. Complicated payout.
Members who create retail communications relating to SRPs must file with FINRA < 10 biz days of first use.
Members must “Know Your Distributor”
What are REITs?
Equity security. Invests in RE.
There are also mortgage REITs and hybrid REITs (mortgages + RE)
Can be organized as Corp.
How can a REIT avoid paying taxes at the corporate level?
75% income from RE
90% taxable income to shareholders
95% of income from RE activities
What are the requirements for Non-traded REITs? (fees, filings, what must BD provide to investors?)
commissions & expenses < 10%
Must file 10-Ks & 10-Qs
BD must provide investors with valuation < 18 m of closing of offering
What is a NAV REIT?
investor can redeem at NAV calculated by sponsor daily, w or m
What are Collateralized Mortgage Obligations?
-MBS issued by Fannie, Freddie, BDs and private finance co.
-Tranches of different maturity schedules
-Pools of residential RE mortgages
-Monthly interest and principal payments
-Standard CMO advertisement template created by FINRA
