Investment Company Definitions

Question 1

Mutual Fund Sponsor or Distributor

Answer 1

Known as the fund’s underwriter. The underwriter has an exclusive agreement with the fund that allows it to purchase fund shares at the current asset value, which are then sold to the public. Fund shares may also be sold through the selling group which consists of broker/dealers who have a contract with the underwriter to sell the shares to the public.

Question 2

Affiliated Person

Answer 2

Any officer, director, partner or employee of the company. Also, an investment adviser representative or member of the company’s advisory board, and any person who owns at least 5% of the investment company’s voting stock. There are certain rules with respect to the percentage of affiliated persons comprising a fund’s board of directors.

Question 3

Face Amount Certificates

Answer 3

Debt certificates with predetermined interest rates

Question 4

Independent Information and Rating Services

Answer 4

Such as Morningstar and Lipper Analytical provide information and comparisons of mutual funds based on historical performance, risk vs. return analysis, fees and expenses, etc. In addition to information provided from mutual funds

Question 5

Redeemable Securities

Answer 5

Shares that cannot be sold in the open market. In other words, they are not negotiable but must be redeemed by the issuer.

Question 6

Investment Company

Answer 6

• As defined in Section 3 of the Investment Company Act, an investment company is an issuer in the business of investing, reinvesting, owning, holding or trading in securities. Investment companies fall into the following classifications: management companies, unit investment trusts, and face-amount certificate companies.
• Corporations or trusts in which investors are able to pool their funds for increased diversification and professional management.
• The Investment Company Act of 1940 requires all investment companies with 100 or more shareholders to register with the SEC.

Question 7

Load Funds

Answer 7

Purchased at the public offering price that is the next calculated NAV plus the sales charge. FINRA Conduct Rules limit the sales load to a maximum of 8 1/2%. In order to charge the maximum load, a fund must offer dividend and capital gain reinvestment at NAV, breakpoint discounts with a letter of intent and rights of accumulation.

Question 8

Contractual Plans

Answer 8

Some mutual funds sold under this. Shares sold under this plan are held in a trust for the investors. The investors are issued trust certificates, known as periodic payment plan certificates, which represent an undivided interest in a unit of securities purchased under the plan. New contractual plans are no longer being issued. For existing contractual plans, the maximum sales charge is 9% over the life of the plan.

Question 9

Interested Person

Answer 9

Any affiliated person, immediate family members of an affiliated person, the fund’s principal underwriter, or any person who has in the last 2 years acted as legal counsel or accountant for the fund.

Question 10

Advisory Board

Answer 10

A board that is elected or appointed and is distinct from the board of directors or board of trustees of an investment company. It is comprised of only persons who do not serve in any other company capacity. An advisory board has advisory functions with regard to investments, but does not have the power to determine whether any security or investment will be purchased or sold.

Question 11

Seperate Account

Answer 11

Since the contract holder bears the investment risks in variable contracts, the assets of the contract must be held in a separate account. The Investment Company Act of 1940 defines this separate account as an account established and maintained by the insurance company under which income, gains, and losses are credited to or charged against the account without regard to other income, gains, or losses of the insurance company.

Question 12

Open-end Mangement Company

Answer 12

Management company that offers for sale or has outstanding any redeemable security of which it is the issuer.

Issues shares on a continuous basis and must be in compliance with the Securities Act of 1933 at all times

A public offering of a mutual fund may not be made until the fund has assets under management (AUM) of $100,000.

Question 13

Closed-end management companies

Answer 13

• Usually capitalized through a one-time public offering of a fixed number of shares;
• After the initial public offering, the shares trade in the secondary market;
• The share price in the secondary market is determined by investor demand;
• Trading in shares may take place on an exchange or in the OTC market; and
• Do not redeem shares held by investors.

Shares may trade at a premium above or at a discount below their net asset value

Question 14

Expense Ratio

Answer 14

Important in evaluating a mutual fund’s operating efficiency. It is reported in the prospectus and is calculated by dividing the total expenses by the total net assets. Note that sales charges are not paid out of fund assets; therefore, they are not included in the expense ratio calculation.

Question 15

Investment Company Registration

Answer 15

• The registration statement and prospectus must clearly state the objective of the fund.
• The SEC must be provided with an annual report, and all shareholders must receive semiannual reports. These reports include current balance sheets, income statements, and lists of held securities, and recent portfolio changes.
• Investment companies must comply with SEC rules regarding proxy solicitation

Question 16

No Load Fund

Answer 16

Has no sales charge; therefore, shares are purchased at the next calculated NAV.

Question 17

Control

Answer 17

The power to exercise a controlling influence over the management or policies of a company, unless this power is solely the result of an official position with the company. A person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of accompany is presumed to control the company.

Question 18

Board of Directors

Answer 18

Establishes and implements a fund’s investment policies and appoints officers of the company. The board is elected by the shareholders. A minimum of 40% of board members must be unaffiliated with the fund. The remaining 60% can include employees of the fund’s underwriter, investment adviser, transfer agent, etc. However, if the fund has a 12b-1 fee or anything that may cause a conflict of interest, the majority of the board (51%) must be nonaffiliated.