Investment Companies

Question 1

Which sources of REIT income are counted towards the 75% test required by Subchapter M?

I	 	Property rentals
II	 	Interest from mortgages
III	 	Capital gains on property sales
IV	 	Real estate tax refunds
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Answer 1

To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, gains on property sales, income from foreclosed properties, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered - any resulting tax refund is income to the REIT).

Question 2

REITs are NOT permitted to distribute which of the following to their shareholders?

I	 	Income
II	 	Dividends
III	 	Capital Gains
IV	 	Capital Losses
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Answer 2

REITs cannot distribute capital losses to shareholders - they can only distribute capital gains. REITs cannot distribute “income” as such. Any net income must be distributed to shareholders as a dividend.

Question 3

A mutilated security is considered a good delivery if validated by:

A customer who bought the stock
B customer who sold the stock
C contra broker
D issuer
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Answer 3

A mutilated security is a “good delivery” if it is accompanied by a letter of validation from the issuer or transfer agent. It is not acceptable to have the customer or delivering broker tell you that the mutilated security is “OK.”

Question 4

Interdealer transactions in which of the following are reported through ACT?
I NASDAQ Global Market Stocks
II NASDAQ Capital Market stocks
III Listed issues traded in the Third Market
IV OTC Bulletin Board Stocks

A I and II only
B III and IV only
C I, II, III
D I, II, III, IV

Answer 4

D
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The “TRF” is the Trade Reporting Facility that is operated by the ACT system. Initially, the system was used for NASDAQ only. When NASDAQ became a registered stock exchange in late 2006, separate “TRFs” were created using ACT, which allowed NASDAQ to sell its Network C Tape (each exchange sells its tape - it’s a big source of revenue for the exchange). The TRFs run by ACT include:

NASDAQ TRF (reporting trades of NASDAQ stocks to the Network C Tape);
NYSE TRF (reporting Third Market trades of NYSE listed issues to the NYSE Network A Tape. The NYSE feeds the trades that take place on its trading floor to this tape on its own);
ORF (the Over-The-Counter Reporting Facility) which reports trades OTCBB and Pink Sheet issues;
TRACS (Trade Reporting and Compliance Service) which reports trades of NYSE, NYSE American (AMEX) and NASDAQ stocks that take place on ECNs that are not linked into an exchange. TRACS feeds the trade into the appropriate Network A, B or C Tape.