Investment Companies - Management Companies Flashcards
A management company is established by the fund _____
sponsor - or underwriter
The sponsor must register the fund with the _____ and provide a ______
with the SEC and must provide a prospectus
In an open-end fund, each investor must receive the ______
prospectus
The POP for each mutual fund share is the ______
net asset value per share + a sales charge
Closed-end shares are issued with a _____ and then traded ______
issued with a prospectus, then are traded publicly (are negotiable)
The “investment adviser” to the fund receives a ______ and is typically under a _____ contract which then requires a ______ every year thereafter
receives a management fee, 2 year contract, then requires a shareholder vote
A diversified fund is defined as one with:
- 75% or more of its assets invested in securites
- a max of 5% invested in any one issue
- a max holding of 10% of voting securities in any one holding
To calculate Net Asset Value, all securities in the portfolio are _______
marked to market
If fund is “no-load”, then a customer does not have to pay a _______ to buy shares
sales commission
The maximum sales charge on mutual fund shares is ______ of the POP
8.5% of the POP (note however that it is in fact more than 8.5% of the NAV, since the POP includes the sales charge)
Sales charge percentage formula is:
= Ask-Bid/Ask
Under the Investment Company Act of 1940, a customer must be paid within _______ after redeeming mutual fund shares
7 days
Mutual funds can charge both _____ and _____ fees, but they cannot exceed _____ of the POP (as regulated by FINRA)
sales charge and redemption fees, but cannot exceed 8.5% of the POP
A “contingent deferred sales charge” incentivizes people to keep their money ______
in the fund for a specific amount of time
In order for a fund to charge the max 8.5%, they must offer:
- breakpoints
- letter of intent
- rights of accumulation
A breakpoint is:
a discount for a large dollar purchase; according to FINRA must be “fair and reasonable”
- breakpoints are applied to the ENTIRE purchase
An investment club (a bunch of investors grouped together) cannot take advantage of the _______
breakpoints
If an investor intends to buy more of a particular mutual fund’s shares, they can sign a ______ and get the breakpoint applied to their future purchases as well as prior purchases
- letter of intent; if they don’t fulfill their promise, then they pay the higher sales charge
A letter of intent can last for ____ plus the _____
13 months, plus the 90 day backdate period
Under a LOI, the shares purchased under the breakpoint are held in _____
escrow
Rights of accumulation mean that if you buy additional shares that put your total assets above a breakpoint, you pay the _____
lower breakpoint
FINRA requires that mutual funds offer ______ and that there is no _____ applied to reinvestment
must offer dividend reinvestment and cannot impose a sales charge for that
Fund distributions are taxable ______
in that year (whether reinvested or not)
You can switch funds in the same “family” for no sales charge, but it is still considered a ____ and gains are ____
sale and gains are taxed
Rule 12b-1 allows mutual funds to charge the cost of soliciting new investment to the _______
existing shareholders
Funds that elect 12b-1 can impose a max sales charge of _____ if they do not impose account maintenance charges, and ____ if they do impose account maintenance charges
7.25% if they do not, 6.25% if they do
The 12b-1 fee cannot exceed ____ of average annual net assets
.75%
Class A shares:
- impose higher up front sales charges
- typically have no annual 12b-1 fees
- best for long term investors
Class B shares:
- impose a contingent deferred sales charge
- impose higher 12b-1 fees
- best for intermediate term investors
Class C shares:
- no-load shares
- highest annual 12b-1 fee
- best for short term investors
Selling groups are _______ to discount mutual funds shares on their own, or sell them for ____ than the POP
not allowed to discount them on their own or sell them for more than the POP
Withdrawal plans are a way for investors to _____ of a mutual fund
cash out
Fixed dollar withdrawal plan:
- fixed dollar amount to be received periodically
Fixed shares withdrawal plan:
- specifies the number of shares to be redeemed periodically
Fixed percentage withdrawal plan:
- specifies fixed percentage of the total net assets invested to be redeemed periodically
Fixed period withdrawal plan:
- account is to be liquidated over a fixed time period
FINRA prohibits the following mutual fund practices:
- breakpoint sales
- trading mutual fund shares
- inappropriate recommendations for class B shares
- late trading
- market timing
“Closed-end” funds are used for portfolios in ______ securities
illiquid, such as munis or “third world” investments
Closed-end funds trade at a discount to the NAV when they are offering a ______ compared to the market
lower rate of return; or when there is uncertainty about their investments
Closed-end fund shares can be redeemed. T/F
FALSE - they cannot be redeemed, they may be sold
ETFs employ an _______ to keep the price at NAV
arbitrage feature
With an arbitrage feature, large institutional investors are allowed to _______
buy the fund shares at a discount, short the equivalent shares of stock in the underlying portfolio, then exchange the ETF shares for the underlying stock —> ie they stabilize the price and profit from the arbitrage opportunity
Because ETFs technically allow for more shares to be created (because of the arbitrage mechanism) they are technically _______
open-end funds, but are traded like closed-end funds
Advantages of ETFs are:
- continually priced during the day as the underlying holdings change in price (mutual funds only priced at close)
- purchased without a sales charge (although a commission typically applies
- ETFs can be purchased on margin
- ETFs can be sold short
- low expense ratios
- tax efficient, as they are not required to distribute gains annually
Purchasers of ETFs must be provided with either a _____ or a _______
prospectus or a product document
Under the 1940 act, management companies are required to send financial statements to shareholders __________
semi-annually; includes IS, BS, and a list of all holdings
If a fund distributes at least 90% of their net investment income to shareholders, they are regulated under subchapter __ and do not have to pay _____
subchapter M and do not have to pay taxes (the shareholders receive it as a pass-through and pay their income tax)
The tax code also imposes surcharges on funds that do not distribute at least _____ of Net Investment Income and ____ of capital gains to shareholders
97% of NII and 98% of capital gains
If an investor wishes to liquidate fund share, their cost basis is calculated as ____ plus ______
the original purchase price PLUS all reinvested distributions
Net capital gains can only be distributed ______
once a year; dividends can be distributed whenever the BOD decides
The current yield formula for a mutual fund =
= annual income / offering price
The current yield formula for a mutual fund AFTER the ex-date =
= annual income / (offering price + prior year distributions)
Shareholders in a management company have the right to:
- vote for the BOD
- vote for changes in investment style
- vote annually on the investment adviser
- receive annual and semi-annual reports
Under the 1940 act, the managers of the fund cannot exceed ____ of the board
60%
Minimum fund capital of _____ must be held by the sponsor to start the management company
$100,000
