Investment Companies Flashcards
Investment Company Act of 1940
Face Amount Certificate Company
Unit Investment Trust
Management Company
Face Amount Certificate Company
Pay a fixed monthly amount to the investment company
- Invests in high quality, US Government Debt, AAA Municipal issues, and corporate debt
- promises a guaranteed rate of return
Management Company
- an investment company organized as a corporation issuing stock
Open End
- Mutual Fund/ Redeemable
- NON-Negotiable, cannot be traded
- Redeemable with the issuer
- DO NOT TRADE IN SECONDARY MARKET
Closed-End
- Publicly Traded/ Not Redeemable
- Negotiable
- Traded on Exchange
Unit Investment Trust
- Rather than set up as a corporation, set up under a trust indenture
- Issue shares of beneficial interest
- represent an undivided interest in units of specified securities
Fixed Unit Investment Trust
- a fixed portfolio of securities selected by the trust sponsor, then transferred into the trust and sold to investors
- bond trusts, broadly diversified fixed bond portfolio
- units of $1,000
Unit
an investor buys a “unit”- interest in trust
-
Non-Fixed UIT
structure for a variable annuity contract.
- Invests in mutual fund shares instead of a unit (indirectly buying mutual fund shares)
Accumulation Unit Non-Fixed UIT
- Interest in a separate account
- tied to the Net Asset Value of the mutual fund held in the separate account
- amount of annuity received is tied to the performance of the underlying security
Fund Sponsor
Underwriter
Public Offering Price
Net Asset Value per share + Sales Charge
Selling Group
Acts as an agent, selling for the sponsor
Investment Advisor
Manages the fund an earns a management fee based on % of AUM
Diversified Fund 75-5-10
- 75% of assets invested in securities
- max of 5% invested in any one issuer
- max holding of 10% voting securities in one issuer
Growth Fund
Invests in equity securities of rapidly growing companies to achieve capital gains
Growth and Income
- Invests in blue-chip funds, earning both dividend income and growth potential
Income Fund
Invests in fixed income securities such as preferred stock and bonds for current income
Income Fund Examples
Us Govt Securities Fund Preferred Stock Fund Municipal bond fund Corporate bund fund Money market securities fund
Target Date Fund
Starts with more aggresive allocation and moves to safer securities with a fixed date in mind
No Load
- no sales charge
- can buy at NAV
- Sold directly by Mutual Fund Sponsors
- all money market funds are considered no loads
Sales Charge Percentage
Ask- Bid/ Ask
NAV on mutual funds is the
BID
When a customer buys a mutual fund, the customer pays
-PUBLIC OFFERING PRICE, THE ASK PRICE
PUBLIC OFFERING PRICE on mutual funds is the
ASK PRICE
Maximum POP Computation
Ask Price= Bid Price/ 100 - Sales Charge
Contingent Deferred Sales Charge
Sales charge only if the customer redeems her shares before a stated time period has elapsed
ex
5% sales charge if redeemed in 1 year
4% sales charge if redeemed in 2 years
In Order to charge the 8 1/2 percentage sales charge the firm must offer
Rights of Accumulation
Letter of Intent
Breakpoint
Breakpoint
Reduced Sales Charge
Rights of Accumulation
- allows the existing holding in the fund to count towards a breakpoint
- based upon current market value, not original cost, if fund shares have appreciated this growth may move the customer into a lower bracket
Letter of Intent
If a customer does not have enough money immediately to qualify for a breakpoint but intends to buy enough of the fund to qualify for a breakpoint within a 13 month period, then the customer can sign a Letter of Intent.
- shares are held in escrow until the LOI is complete
- ASSET APPRECIATION DOES NOT COUNT FOR THE LOI, MUST PAY FULL AMOUNT STATED IN THE LOI
Switching between Family of funds
If a customer decides to liquidate the John Hancock Bond fund and use it to buy the John Hancock Growth fund, the switch is made at NAV and no sales charge is imposed
- however considered a sale, so capital gains/losses is taxable
12b-1
may charge its existing shareholders for the cost of soliciting new investment to the fund. The “cost” of soliciting new investments also includes compensation to registered representatives selling the fund shares.
-max is .75%
when you see an advertisement on TV, probably being paid from 12-b1 fees
CLASS A SHARES
- 1-time up-front sales charge and no, or very low, annual 12b-1 fees.
- most suitable for long term investment and large dollar clients
Class B Shares
- have no up-front sales charge, but they do have a CDSC - Contingent Deferred Sales Charge, that is imposed if the customer redeems early.
- Typically, the charge is reduced by 1% per year of holding investments in the fund and declines to “0” after the 5th year. These funds also impose an annual 12b-1 fee.
- most suitable for the intermediate term investor
Class C Shares
- No Sales charge but a very high annual 12b-1
- suitable for short term investor
Fixed Dollar
A fixed dollar amount is paid periodically;
FINRA prohibits the following practices
- Breakpoint sales
- Trading Mutual Fund Shares
- Inappropriate recommendation of Class B Shares
- Late Trading
- Market timing
Breakpoint sale
- the practice of not making a customer aware that he or she is close to making a breakpoint
- customer should be aware so they have the option of an LOI
ETF
shares of ownership in portfolios of common stock that track the performance of a specific index
What type of fund is an ETF?
- The majority of ETFs are registered as open-end because they allow the creation of additional shares
- however, act and trade as a closed-end fund
Characteristics of an ETF
- Continuously priced
- Purchased without a sales charge
- Can be purchased on margin/ sold short
- Tax-efficient
- Must be delivered a prospectuc
QQQ trades on
NASDAQ
SPDRS and DIA trade on
AMEX
Leveraged ETF
- uses borrowing and options to leverage results
- For example, a 200% leveraged ETF (2X) should move 2 times as fast as the reference index, in the same market direction.
Inverse ETF
- moves opposite in price to the movement of the reference index. It is also called a “short” ETF because it is similar to taking a short position.
Equity Inverse ETF
- would be expected to rise in price when stock prices are falling, and fall in price when stock prices are rising.
Bond Inverse ETF
- rise in price when interest rates are rising (because it is taking short bond positions and bond prices fall when market interest rates rise); AND fall in price when interest rates are falling.
A leveraged inverse ETF
200% leveraged inverse ETF should move 2 times as fast as the reference index, but in the opposite market direction.
Hedge Fund
- lightly regulated, wealthy investors( min. $1,000,000 investments)
- aggressive investment strategies including short selling and speculating in currencies, commodities, and futures.
- exempt from securities regulation since the general public cannot invest, except for the anti-fraud rules.
- completely illiquid investments
2 and 20
2% annual management fee plus 20% of asset appreciation
Funds of Hedge Funds
- registered investment company under the 1940 Act that makes investments in differing hedge funds.
- registered as closed-end funds
- illiquid investments.
- tax-inefficient vehicles because most gains are short term, not long term
Shareholders receive financial statements
- semi-annually
- must include the income statement, balance sheet, and all the listings of all holdings in the portfolio
Expense Ratio
- The more efficient, the lower fee.
= total expense/ total net assets
Management Fee
- the largest expense of running a mutual fund.
- Actively managed funds have much higher management fees than passively managed index funds.
Subchapter M
- distributes at least 90% of NII to shareholders
- pays no tax on income that is distributed to shareholders, tax liability is that of shareholders
-shareholders receive Net Investment Income as a dividend distribution; and receive capital gains as a capital gains distribution, and include this on their individual tax returns.
Ex-Date
- set by the BOD for mutual funds
- set by the exchange for closed-end funds
- set at the business day following the payable date.
Dividends received from a mutual fund are taxable
- Federal level, unless the securities that are the source of the dividends are exempt from Federal tax (e.g., municipals).
Shareholder Rights
- Vote for the Board of Directors;
- Vote for the Investment Adviser;
- Vote to change the investment objective of the fund;
- Receive financial statements from the fund.
% of Board Directors that must be non-interested
40%
Units of FIXED UITs are
reedemable at NAV at any time
Accumulation account
- holds bonds until a trust account is created
Expense Ratios on Fixed UITS
-usually low, no management or brokerage fee
Municipal trusts are insured by
AMBAC
REIT
- similar to closed-end funds
- invest in Real Estate
- registered and trade on stock exchanges
- Registered under SEC act of 1933
Percentage of REIT’s assets that must be invested in real estate or mortgages
- 75%
REITs and margin
- can be bought on margin and sold short, liquid
Equit REIT dividends
- Net income > borrowing costs = income for shareholders
- do not receive lower tax rate
Investments of REITs
- apartment houses, office buildings, shopping centers and hotels
- income comes from large group of smaller rentals, so if one defaults, it isnt that much
Equity REITS and stock movements
- move opposite
- stock prices are flat or negative, investors shift to alternative non-financial investments such as real estate
Equity REITS and capital gains
- long term capital gains can be achieved if the property appreciates
Mortgage REIT
- Invest mainly in mortgages and construction loans
- interest rate earned on these loans should exceed the borrowing costs equaling the income for shareholders
- highly leveraged
- invest in CMOs, can be safe to risky
REIT to be regulated under Subchapter M of the Internal Revenue Code
rents, mortgage interest earned, 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
REIT must distribute at least ___ of Net Investment Income to shareholders.
90%
- if it fails to invest this, ALL income is taxable
REITs and Pass throughs
- can pass on capital gains 1 time per year, but not capital losses
REITS and RELPs
- REITS are exchange-traded like any other stock, liquid, only distribute capital gains NOT capital losses
- RELPs are illiquid, can be traded but with great difficulty, can pass on BOTH capital gains and capital losses
Business Development Company
- trades like any stock, SEC registered
- invests in privately-held start-up companies
- means not reliable cash flow, risky! however can offer a superior return
- same tax rules as REITs
Venture Capital Fund
- limited partnerships that also invest in privately-held start-up companies, however, only available to the very accredited investors
- minimum investment of $1 mil
- investors must agree to tie up investments for 10 years, so they ar ehighly illiquid and DO NOT TRADE, NOT REGISTERED
