Investment Companies Part 2 Flashcards by Jason Lewis

What are the three classes of mutual funds with sales charges?

Class A (front end)
Class B back end
Class C level load

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When is the sales charge collected for a class A share?

When customer purchases share

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What determines the sales charge of class A and in what format is it determined?

How much money is invested, Breakpoint schedules

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There are ___ (higher/lower) sales charges when investors purchase (more/less)

lower,more

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What does a letter of intent do for customers’ sales charges in mutual fund shares purchases?

Letter of intents allow customers to pledge additional deposit in order to make it into a higher volume schedule to get a lower sales charge

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How long does an investor have to deliver the pledged money from the letter of intent?

13 months

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What does it mean if a letter of intent is backdated?

The investor can use deposits from up to 3 months to include in their bracket to get them lower sales charge.

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How does backdating a Letter of intent for mutual funds affect the deadline they have to deliver the pledged money?

The usual 13 months is subtracted by however much they backdate.

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How is an escrow account used in Letter of Intent pledges?

Financial firms keep a percentage of shares delivered as collateral in an escrow account so they can liquidate enough shares to pay for the higher sales charge if the customer doesn’t meet the deadline

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Cann LOIs be met by asset appreciation?

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What are rights of accumulation in Share Class A?

A customer can accumulate funds to into their mutual fund portfolio to bring them into a lower sales charge bracket over time.

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What are financial firms required to disclose about Sales Charge Schedules ?

If they are close to the breakpoint

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What is the breakpoint sale violation?

When a customer is not informed about a close breakpoint so that the firm can charge the higher sales charge

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What is household funds in breakpoint scheduling?

When families add their purchases together for lower breakpoints

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Are investment clubs granted breakpoints, what is their sales charge?

No breakpoints, highest sales charge

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What is combination privelage in breakpoint scheduling?

If an investor purchases multiple different fund types of the same company, the purchases can be added together for lower breakpoint.

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What type of investor are Class A shares must stuitable for?

Long-term investors with large amounts to invest

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What is a Contingent Deferred Sales Charge?

Back-end loads

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When do Class B shares assses their sales charge?

When an investor sells their shares

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How is sales charge and years of ownership related for Class B Shares?

The longer you own the shares the less sales charge at selling

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What happens to Class B shares once the cDSC period ends?

They are converted to Class A shares

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What type of investor are class B share suitable for?

Intermediate to long-term investors with smaller amounts

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Whats the difference between amount of money and term-ness for Class A and Class B investors.?

Class A: long term, large amounts
Class B: long-term small amount

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Why is a long-term investor with a large amount of money better of paying a front-end load?

Because 12b1 fees

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When are 12b1 fees paid?

Anually

What are the 12b1 fees for class A?

.25%

What are the 12b1 fees for class b?

what is the most significant expense for class C shares?

12b-1 fees

What is the purpose of 12b1 fees?

Aims to lower a fund's overall expenses by bringing more investors into the fund.

What is the purpose for growing a fund's assets?

Lowering a fund's expenses on a per-investor basis

What are the two types of 12b-1 fees?

1.Distribution Fee 2. Service fees

What do distribution fees pay for (two things)?

1. marketing and promotional services 2. Payments to brokers that place customers into these funds

What/who do service fees pay?

Pay representatives to answer questions and discuss attributes of these funds

What is the maximum service fee?

.25%

What is the maximum distribution fee?

.75%

What are the 12b-1 fee tiers for class a, class b, and class c shares

class A: low or no fees class b: moderate fees class c: maximum fees

What is the highest 12b-1 fee to be considered no-load?

.25%

What type of investor are class c shares suitable for?

short term investors

How frequently are 12b1 fees assessed quarterly as opposed to how they are expressed?

Quarterly; expressed percentage anually

How long do you have to hold some Class C shares to avoid backend sales charge?

1 year

What is the maximum fund load if also charging maximum 12b-1 fees? What is the maximum elsewise

7.25%; 8.5%

What cannot be used to fulfill a LOI for mutual fund shares breakpoint schedule.

Share Appreciation

How long can a mutual fund purchase LOI be backdated?

90 days

What type of individual can add their purchases together to attain a better breakpoint?

Investors living in the same household

What does the exchange privilege allow investors to do?

Exchange out of one fund into another within the same fund family without an imposed sales charge

What is the sales charged based upon in right of accumulation?

The initial amount invested plus the additional capital placed in the fund

what liquidation limit do class c shares with CDSCs impose?

if they are liquidated in less thana year, a sales charge is assessed

What class is Contingent Deferred Sales Charge associated with?

Class B

Does capital depreciation affect backdated breakpoints for how much future money you need to cover with an LOI?

What is subchapter M also known as?

conduit rule

What does Subchapter M allow for?

Allows funds to avoid taxation

What is required for a fund to avoid Subchapter M tax avoidance?

Must distribute at least 90 percent of their net investment income to shareholders to qualify

What three types of returns acquired on the securities of a fund's portfolio are distributed to shareholders yearly?

1. cash dividends from equity securities 2. interest income from debt securities 3. realized capital appreciation

What are funds that engage in Subchapter M called?

regulated funds

Who pays the tax on NII from Subchapter M funds?

The shareholder, not the fund

What benefit does a fund manager have for fusing Subchapter M?

The ability to pass-through taxable income to shareholders

what is NOT a component of a fund's Net investment income (NII) to reach the required amount for subchapter m?

unrealized gains

What market is a mutual fund always in?

primary market

how are closed funds offerings different than mutual funds?

closed funds work like all other securities mutual funds only primary market

Why are mutual funds only primary market?

Because you're always trading with the issuer

What must purchasers receive when sold a closed end fund in the primary market?

Prospectus

How does the NAV of closed end funds differ from mutual as a result of secondary market ?

The NAV doesn't neessarily determine the basis for transaction price because closed end shares also trade in secondary market where supply and demand exists. `

What determines the price of a Closed End Fund?

The Market Demand

When is a closed end fund trading at a discount?

When its NAV is higher than the market price

What what type of fee are closed end fund transactions subject to?

commissions

What are three fees or expenses associated with closed-end funds?

1. expense rations 2. commissions 3. management fees

Are closed-end funds redeemable or negotiable?

negotiable

What's the difference in how open and closed ended funds are capitalized "structured"

Open end: maintain a changing number of shares outstanding closed end: have a fixed amount of shares outstanding

Which fund can have a Market value Below NAV?

closed end

What type of securities are ETFs? Negotiable or redeemable?

Negotiable

In what market do ETFs trade?

secondary

What is ETF arbitrage?

Where institutional investors perform transactions with EFT issuers to manipulate market price back to NAV if it deviates?

What type of management company are ETF structured after?

Open end management companies

Three differences between ETFs and Mutual funds?

1. ETFs are negotiable while MF are redeemable 2. ETFs have lower expense ratios 3. ETFs are more tax efficient

What type of fee do ETFs charge?

Commission

What's the difference in when you can purchase shares between ETFs and Index Funds?

Index funds you can only purchase once per day ETFs can be purchased anytime

Can ETFs sell on margin?

yes

What ETF tracks the NASDAQ index?

Qubes

ETFs do ____ and Mutual Funds do ____ commision/sales charge

ETF : Commission Mutual FUnd: Sales Charge

What ETF tracks the Dow Jones?

DIAmonds

What does passive management involve?

It involves tracking an index instead of picking specific securities

Are ETFs usually utilized by investors seeking active or passive management?

Passive

How frequently are ETF NAV calculated and based on what?

Once per day based on closing market value

What ETF tracks the S and P 500?

Spyders

What is the goal of active management in terms of the market?

To Beat the market

What do actively managed ETFs allow for?

Allows fund manager to deviate from their benchmark index

Do Active ETFs have higher or lower expense ratios than Passive and why?

Higher because the research and asset management services come at a cost

What does an inverse ETF bet on?

Market fall of an index they track

What do leveraged ETFs provide?

Amplified gains and losses to their investors

What are the most common percentage leverages for ETF leverages?

200% and 300%

What are leveraged inverse ETFs?

They combine the two concepts

What do Active ETFs aim to do?

Aim to outperform the returns of a benchmark index

What is an investor doing when they purchase an ETN?

They loan money to a financial institution

What does the ETN represent?

The promise from an issuer to pay its investors the return of an index

What happens at the maturity date of an ETN?

The issuer must pay the index's return to the ETN holder

Are ETFs negotiasble or redeemable?

negotiable

When are ETNs taxable and why only then?

Only at sale or maturity because there is no ownership and dividends/capital gain

Are ETFs or ETNs more tax efficient and why?

ETFs because they are almost always passively managed

What risk are ETNs subject to that ETFs are not?

Default risk

Can ETNs be sold short?

yes

What risk to both ETF and ETN lack?

Liquidity risk

Between ETFs and ETNs, which one is a management company?

ETFs

What do UITs create?

Create fixed portfolios of securities

With whom are UITs required to be registered?

SEC

What are three things the UIT prospectus contains?

1. investment objective 2. investor fees 3. related risks

What is the issuer for a UIT called?

Trust sponsor

What is the role of the Trust Sponsor? (2)

To register the UIT and picks investements for portfolio

What three fees do UITs assess? and what fee do they not?

1. sales charge 2. C&D fees 3. Operating expenses Management Fees

WHat are the two options for investors of UITs?

1. hold the UIT to maturity 2. Redeem their units at their current NAV

What value does the payment received by the UIT when liquidated represent?

the NAV

What do "in-kind" UITs allow?

They send their investors at maturity the shares instead of liquidation

Can UITs trade in the secondary market?

Yes

Three similarities to UIT and Mutual Funds

1. Registered investment companies 2. PRospectus provides key disclosures 3. Redeemable with the issuer

UIT and Mutual FUnd differences

1. UITs may trade in the secondary market; MF only redeemable 2. UITs maintain fixed portfolios; MF portfolios are managed 3. UITs have no management fee; almost all MF do

Are UITs active or passively managed?

Passively