Chapter 9 - Investment Companies and Other Products Flashcards
How investment companies are organized
An investment company is organized as either a corporation or as a trust.
Securities Act of 1933
Requires the investment company to register with the SEC and to give all purchasers a prospectus.
Investment Company Act of 1940
Authorize the SEC to regulate UITs and manage investment companies (closed-end and open-end) plus variable products. Sets forth guidelines on how investment companies must operate.
Open-end mutual funds
An open-end company offers new shares to any investor who wants to invest. This is known as a continuous primary offering.
The capitalization of the open-end fund is unlimited and may raise as much money as investors are willing to put in.
There is no secondary market for open-end mutual fund shares.
Full and fractional shares.
NAV + SC = POP
Closed-end mutual funds
A closed-end fund offers common shares to investors through an initial public offering.
Its capitalization is limited to the number of authorized shares that have been approved for sale.
Shares of the closed-end fund will trade in the secondary market in investor-to-investor transactions on an exchange or over-the-counter the.
Full shares only.
Exchange Traded Funds (ETFs)
Is an equity security represents an ownership interest in a basket or portfolio of underlying securities. Many are designed to track the performance of an underlying index, such as the S&P 500 or the Dow Jones industrial average.
Exchange-Traded Notes (ETNs)
Sometimes known as equity blank notes or index link notes.
Base maturity payment on the performance of an underlying security or a group of securities such as an index. They do not make coupon or interest payments to investors during the time the investor owns the ETN.
Diversified mutual fund (75-5-10)
Must meet 75-5-10 test:
75% of the funds assets must be invested in securities of other issue or’s. Cash and cash equivalents are counted as part of the 75%.
The investment company may not invest more than 5% of its assets in any one company.
The investment company may not own more than 10% of any companies outstanding voting stock.
Registration requirements with the SEC
To register with SEC, a company must have:
- Minimum net worth of $100,000
- At least 100 shareholders
- Clearly define investment objectives
Note: an investment company may be allowed to register without having 100 shareholders and without a net worth of $100,000 if it can meet these requirements within 90 days.
Investment Companies are prohibited from:
An investment company is prohibited from:
- Taking over or controlling other companies
- Acting as a bank or a savings and loan
- Receiving commission for executing orders or for acting as a broker
- Continuing to operate with less than 100 shareholders or less than $100,000 net worth
Investment Company components
Investment companies have several different groups that serve specialized functions. They are:
- The board of directors
- The investment adviser
- The custodian bank
- The transfer agent
Investment company board of directors
Overseas the company’s president and other officers who run the day-to-day operations of the company.
Defines the investment objectives.
Hires the investment advisor, custodian bank, and transfer agent.
Determines what type of funds to offer such as growth or income.
All directors must serve a minimum of one year and may not serve more than five years without being reelected. The investment company act of 1940 requires that at least a majority of the board be non-interested persons.
Investment company investment adviser
Hired by the company’s Board of Directors, the investment advisor is a company, not a person.
The investment advisor must determine the tax consequences of distributions to shareholders and ensure that the fund’s investment strategies are in line with the stated investment objectives.
Investment company custodian bank
The custodian bank, or the exchange member broker dealer that has been hired by the investment company, physically holds all of the fund’s cash and securities.
Investment company transfer agent
The transfer agent for the investment company handles the issuance, cancellation, and redemption of fund shares.
Distribution of mutual fund shares
Most beautiful fonts do not sell their own shares directly to investors. The distribution of shares is the responsibility of the underwriter, also known as the sponsor or distributor. They receive a fee in the form of a sales charge for the shares it distributes.
Net Asset Value + Sales Charge = Public Offering Price
(NAV + SC = POP)
Mutual Fund Prospectus
The prospectus is the fund’s full disclosure document.
A summary prospectus that contains past performance data is known as an advertising prospectus.
A mutual fund prospectus:
- Should be updated every 12 months
- Must be updated every 13 months
- May be used by a representative for up to 16 months
- Should be discarded after 16 months
Mutual Fund audit report and update
Audit report: annually
Update report: semiannual
Money Market Funds guidelines
The prospectus must clearly state on its cover that the fund is not insured or guaranteed by the US government.
Securities in the portfolio may have a maximum maturity of 13 months.
The average maturity for securities in the portfolio may not exceed 90 days.
No more than 5% of the funds assets may be invested in any one issuer’s debt securities.
NAV calculation
NAV = Assets - Liabilities
NAV per share:
Total NAV / total # of shares
Changes in NAV
NAV will increase if:
- The value of the securities in the portfolio increases
- The portfolio receives investment income, such as interest payments from bonds
NAV will decrease if:
- The value of the securities in the portfolio falls
- The fun distribute dividends or capital gains
NAV will not change if:
- Investor purchases and redemptions
- Portfolio purchases and sales of securities
- Sales charges
12B-1 fees
To start and continue a 12B-1 fee, three votes must initially approve the fee annually re-approve it. The three votes are:
- A majority vote of the board of directors
- A majority vote of the non-interested board of directors
- A majority vote of the outstanding shares
To terminate, only 2 votes are required:
- How majority vote of the non-interested board of directors
- How majority vote of the outstanding shares
All fees are reviewed quarterly.
Sales charge % calculation
(POP - NAV)
SC% = ——————
POP
POP calculation
NAV
POP = ——————-
(100% - SC%)
Breakpoint Sales
A breakpoint sale is a violation committed by a registered representative who is trying to earn a larger commission by recommending the purchase of mutual fund shares in a dollar amount that is just below the breakpoint, which would allow the investor to qualify for a reduced sales charge.
A breakpoint violation may also be considered to have been committed if a representative spreads out a large sum of money over different families of fonts.
Combination privileges allow an investor to combine the simultaneous purchase of two different portfolios to reach a breakpoint sales charge reduction.
Mutual Fund current yield calculation
Annual income / POP = current yield
The higher the yield, the more income the phone produces for every dollar invested.
DCA: Average cost vs average price
total dollars invested
Average Cost = ————————————-
total # of shares invested
total of share prices
Average Price = ———————————–
number of purchases
Real Estate Investment Trust (REIT)
Organize for the specific purpose of buying, developing, or managing a portfolio of real estate.
A REIT will not pay taxes at the corporate level as long as:
- It receives 75% of its income from real estate
- It distributes at least 90% of its taxable income to shareholders
- At least 95% of its income is derived from real estate activities
