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Series 7 > Investment Companies - Management Companies > Flashcards

Investment Companies - Management Companies Flashcards

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Series 7 Top-off Exam flashcards
1
Q

A management company is established by the fund _____

A

sponsor - or underwriter

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2
Q

The sponsor must register the fund with the _____ and provide a ______

A

with the SEC and must provide a prospectus

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3
Q

In an open-end fund, each investor must receive the ______

A

prospectus

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4
Q

The POP for each mutual fund share is the ______

A

net asset value per share + a sales charge

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5
Q

Closed-end shares are issued with a _____ and then traded ______

A

issued with a prospectus, then are traded publicly (are negotiable)

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6
Q

The “investment adviser” to the fund receives a ______ and is typically under a _____ contract which then requires a ______ every year thereafter

A

receives a management fee, 2 year contract, then requires a shareholder vote

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7
Q

A diversified fund is defined as one with:

A
  • 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
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8
Q

To calculate Net Asset Value, all securities in the portfolio are _______

A

marked to market

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9
Q

If fund is “no-load”, then a customer does not have to pay a _______ to buy shares

A

sales commission

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10
Q

The maximum sales charge on mutual fund shares is ______ of the POP

A

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)

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11
Q

Sales charge percentage formula is:

A

= Ask-Bid/Ask

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12
Q

Under the Investment Company Act of 1940, a customer must be paid within _______ after redeeming mutual fund shares

A

7 days

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13
Q

Mutual funds can charge both _____ and _____ fees, but they cannot exceed _____ of the POP (as regulated by FINRA)

A

sales charge and redemption fees, but cannot exceed 8.5% of the POP

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14
Q

A “contingent deferred sales charge” incentivizes people to keep their money ______

A

in the fund for a specific amount of time

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15
Q

In order for a fund to charge the max 8.5%, they must offer:

A
  • breakpoints
  • letter of intent
  • rights of accumulation
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16
Q

A breakpoint is:

A

a discount for a large dollar purchase; according to FINRA must be “fair and reasonable”
- breakpoints are applied to the ENTIRE purchase

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17
Q

An investment club (a bunch of investors grouped together) cannot take advantage of the _______

A

breakpoints

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18
Q

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

A
  • letter of intent; if they don’t fulfill their promise, then they pay the higher sales charge
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19
Q

A letter of intent can last for ____ plus the _____

A

13 months, plus the 90 day backdate period

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20
Q

Under a LOI, the shares purchased under the breakpoint are held in _____

A

escrow

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21
Q

Rights of accumulation mean that if you buy additional shares that put your total assets above a breakpoint, you pay the _____

A

lower breakpoint

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22
Q

FINRA requires that mutual funds offer ______ and that there is no _____ applied to reinvestment

A

must offer dividend reinvestment and cannot impose a sales charge for that

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23
Q

Fund distributions are taxable ______

A

in that year (whether reinvested or not)

24
Q

You can switch funds in the same “family” for no sales charge, but it is still considered a ____ and gains are ____

A

sale and gains are taxed

25
Q

Rule 12b-1 allows mutual funds to charge the cost of soliciting new investment to the _______

A

existing shareholders

26
Q

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

A

7.25% if they do not, 6.25% if they do

27
Q

The 12b-1 fee cannot exceed ____ of average annual net assets

A

.75%

28
Q

Class A shares:

A
  • impose higher up front sales charges
  • typically have no annual 12b-1 fees
  • best for long term investors
29
Q

Class B shares:

A
  • impose a contingent deferred sales charge
  • impose higher 12b-1 fees
  • best for intermediate term investors
30
Q

Class C shares:

A
  • no-load shares
  • highest annual 12b-1 fee
  • best for short term investors
31
Q

Selling groups are _______ to discount mutual funds shares on their own, or sell them for ____ than the POP

A

not allowed to discount them on their own or sell them for more than the POP

32
Q

Withdrawal plans are a way for investors to _____ of a mutual fund

A

cash out

33
Q

Fixed dollar withdrawal plan:

A
  • fixed dollar amount to be received periodically
34
Q

Fixed shares withdrawal plan:

A
  • specifies the number of shares to be redeemed periodically
35
Q

Fixed percentage withdrawal plan:

A
  • specifies fixed percentage of the total net assets invested to be redeemed periodically
36
Q

Fixed period withdrawal plan:

A
  • account is to be liquidated over a fixed time period
37
Q

FINRA prohibits the following mutual fund practices:

A
  • breakpoint sales
  • trading mutual fund shares
  • inappropriate recommendations for class B shares
  • late trading
  • market timing
38
Q

“Closed-end” funds are used for portfolios in ______ securities

A

illiquid, such as munis or “third world” investments

39
Q

Closed-end funds trade at a discount to the NAV when they are offering a ______ compared to the market

A

lower rate of return; or when there is uncertainty about their investments

40
Q

Closed-end fund shares can be redeemed. T/F

A

FALSE - they cannot be redeemed, they may be sold

41
Q

ETFs employ an _______ to keep the price at NAV

A

arbitrage feature

42
Q

With an arbitrage feature, large institutional investors are allowed to _______

A

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

43
Q

Because ETFs technically allow for more shares to be created (because of the arbitrage mechanism) they are technically _______

A

open-end funds, but are traded like closed-end funds

44
Q

Advantages of ETFs are:

A
  • 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
45
Q

Purchasers of ETFs must be provided with either a _____ or a _______

A

prospectus or a product document

46
Q

Under the 1940 act, management companies are required to send financial statements to shareholders __________

A

semi-annually; includes IS, BS, and a list of all holdings

47
Q

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 _____

A

subchapter M and do not have to pay taxes (the shareholders receive it as a pass-through and pay their income tax)

48
Q

The tax code also imposes surcharges on funds that do not distribute at least _____ of Net Investment Income and ____ of capital gains to shareholders

A

97% of NII and 98% of capital gains

49
Q

If an investor wishes to liquidate fund share, their cost basis is calculated as ____ plus ______

A

the original purchase price PLUS all reinvested distributions

50
Q

Net capital gains can only be distributed ______

A

once a year; dividends can be distributed whenever the BOD decides

51
Q

The current yield formula for a mutual fund =

A

= annual income / offering price

52
Q

The current yield formula for a mutual fund AFTER the ex-date =

A

= annual income / (offering price + prior year distributions)

53
Q

Shareholders in a management company have the right to:

A
  • vote for the BOD
  • vote for changes in investment style
  • vote annually on the investment adviser
  • receive annual and semi-annual reports
54
Q

Under the 1940 act, the managers of the fund cannot exceed ____ of the board

A

60%

55
Q

Minimum fund capital of _____ must be held by the sponsor to start the management company

A

$100,000

Series 7 (34 decks)

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