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SIE Exam > Investment Company Securities > Flashcards

Investment Company Securities Flashcards

This deck focuses on the terminology and concepts relating to investment company products, including mutual funds, closed-end funds, UITs, and ETFs.

1
Q

Requires registration of persons who charge fees for providing investment advice

A

Investment Advisors Act of 1940

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2
Q

Defines and regulates investment companies, including mutual funds

A

Investment Company Act of 1940

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3
Q

Three types of Investment Companies defined by the Investment Company Act of 1940

A

Face Amount Certificate, Unit Investment Trust, Management Company

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4
Q

Management company shares that may trade at a price more or less than their net asset value

A

Closed-ended Investment companies

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5
Q

Three types of securities that closed-end companies can issue

A

Common shares, preferred shares and bonds

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6
Q

Type of management company that can issue shares continuously

A

Open-end

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7
Q

Type of management company that issues a fixed number of shares in a single offering

A

Closed-end

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8
Q

Type of management company that can issue only equity shares

A

Open-end

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9
Q

Type of management company that can issue both equity and debt

A

Closed-end

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10
Q

Type of management company shares that are redeemed by the issuer

A

Open-end

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11
Q

Type of management company shares that trade in the secondary market

A

Closed-end

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12
Q

The difference between the Public Offering Price and Net Asset Value

A

Sales load

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13
Q

Type of management company shares that are priced by formula

A

Open-end

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14
Q

Type of management company shares that are priced by supply and demand

A

Closed-end

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15
Q

An investment company which issues redeemable securities and is not actively managed

A

Unit investment trust

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16
Q

The price at which an investor purchases closed-end company shares

A

Ask price

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17
Q

Type of management company that offers shares through a continuous primary offering

A

Open-end

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18
Q

Number of days mutual fund shares must be held before they can be used as collateral in a margin account

A

30 days

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19
Q

The only type of securities that mutual funds can issue

A

Common shares

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20
Q

Securities legislation that defines and regulates investment companies

A

Investment Company Act of 1940

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21
Q

Maximum sales charge for mutual funds permitted by FINRA rules

A

8.5% of POP

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22
Q

Quantity purchase discounts that apply to individuals who purchase funds within the same fund family

A

Breakpoints

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23
Q

Document that allows an investor to receive a discounted sales charge on current and future funds invested within the same fund family

A

Letter of Intent

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24
Q

Maximum duration of a Letter of Intent

A

13 months

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25
Q

The maximum time allowed to backdate a Letter of Intent

A

90 days

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26
Q

Allows for reduction of sales charges on subsequent purchases based on combining additional purchases with prior share appreciation

A

Rights of accumulation

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27
Q

Maximum time limit for Rights of Accumulation

A

There are no time limits imposed on Rights of Accumulation

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28
Q

FINRA violation which involves encouraging a customer to purchase shares at a point below an available sales charge reduction

A

Breakpoint sale

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29
Q

Mutual fund share class with a front end sales load

A

Class A shares

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30
Q

Mutual fund share class with a back-end load and 12b-1 fees

A

Class B shares

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31
Q

Mutual fund share class with 12b-1 fees charged quarterly

A

Class C shares

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32
Q

The pricing concept that defines the purchase and redemption of mutual fund shares at the next calculated price

A

Forward pricing

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33
Q

Price at which open-end company shares are purchased

A

Public Offering Price (POP)

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34
Q

Price at which open-end company shares are redeemed

A

Net Asset Value (NAV)

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35
Q

An investment company fund with assets concentrated in a single industry

A

Specialized or sector fund

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36
Q

An investment company with no provision for redeeming outstanding shares

A

Closed-end

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37
Q

Three mutual fund trading practices that are disapproved by the SEC unless stringent disclosure and financial requirements are met

A

Purchasing securities on margin, selling securities short and participating in joint trading accounts

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38
Q

Performs customer service functions on behalf of the mutual fund

A

Transfer agent

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39
Q

Responsible for the safekeeping and segregation of a mutual fund’s securities

A

Custodian

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40
Q

Implements the investment strategy and invests on behalf of the mutual fund

A

Investment adviser

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41
Q

Defines the fund’s investment objectives and oversees the direction of the fund

A

Board of Directors

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42
Q

Also known as the sponsor or distributor, and is responsible for selling and marketing funds shares

A

Underwriter

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43
Q

Responsible for actively managing the portfolio of a management investment company

A

Investment adviser

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44
Q

Paid a fee by a mutual fund to perform administrative functions such as the safekeeping of securities and handling of distributions to investors

A

Custodian and transfer agent

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45
Q

Paid a fee by a mutual fund to sell the fund’s shares

A

Underwriter

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46
Q

Frequency that mutual funds must send financial reports to shareholders

A

Semi-annually

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47
Q

The type of interest an investor owns in a mutual fund portfolio

A

Undivided

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48
Q

Type of security typically held by mutual funds with growth objectives

A

Common stock

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49
Q

Three types of securities that are held by mutual funds with income objectives

A

Bonds, preferred stock, blue chip common stock

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50
Q

Type of mutual fund that is focused on generating capital gains, and tends to reinvest most earnings

A

Growth fund

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51
Q

Type of mutual fund with low portfolio turnover and low expenses that tracks market performance

A

Index fund

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52
Q

Type of mutual fund that authorizes the fund adviser to rebalance the percentage of holdings between cash and different investment categories

A

Asset allocation fund

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53
Q

Usually sold with no sales or liquidation fees

A

Money market funds

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54
Q

NAV of a single share of a money market fund

A

$1

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55
Q

Mutual fund that offers tax-exempt income to shareholders

A

Municipal bond fund

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56
Q

Type of mutual fund that is best suited to an investor seeking maximum safety

A

U.S. government bond fund

57
Q

Fund expenses/average net assets

A

Expense ratio

58
Q

The maximum amount of 12b-1 fee a no-load fund can charge

A

0.25%

59
Q

Fund’s NAV/Number of Shares Outstanding

A

NAV per share

60
Q

The impact on NAV per share when portfolio securities increase in value

A

Increase in NAV

61
Q

The impact on NAV per share when shares are sold or redeemed

A

No impact

62
Q

NAV + Sales Charge equals

A

POP

63
Q

Another name for a back-end load

A

Contingent deferred sales charge

64
Q

Disclosure document that must be provided to investors when variable annuities or mutual funds are sold

A

Prospectus

65
Q

An accounting measure used to determine the owner’s interest in the separate account when purchasing a variable annuity

A

Accumulation unit

66
Q

Letters of intent for mutual funds can be backdated for

A

90 days

67
Q

The most suitable mutual fund share class for a substantial fund investor with a long term perspective

A

Class A

68
Q

12b-1 fees

A

Annual fees paid by investors to cover a mutual fund’s marketing and distribution expenses. The maximum 12b-1 fee that a fund can charge is 1% of the fund’s average net assets, though if a fund wants to advertise itself as being no-load (not having a sales charge), then it cannot charge 12b-1 fees of more than 0.25% of the average net assets.

69
Q

actively managed fund

A

A mutual fund that has an investment adviser that actively manages the portfolio with the goal of exceeding the average returns of the market through security selection and trading activity.

70
Q

asset allocation fund

A

A mutual fund that combines stocks for growth, bonds for income, and cash or cash equivalents for safety and liquidity. Some of these types of funds maintain a set mix of these three target asset classes over time, while others will vary their investments based on economic and market conditions.

71
Q

automatic reinvestment privileges

A

Allow mutual fund investors to reinvest distributions into the fund at the NAV without having to pay any sales charges on these new purchases. Investors must still pay taxes on these distributions, however.

72
Q

bond fund

A

A mutual fund that invests in the debt securities of corporations or governments depending on its investment objectives. The overarching goal of these funds is to produce interest income for investors.

73
Q

breakpoint sale

A

A prohibited sales practice in which a registered representative tries to earn a higher commission by encouraging the sale of mutual fund shares at an amount just below the point where the sales charge is reduced.

74
Q

breakpoints

A

Discounts off the sales charge based on the amount of money invested within a mutual fund.

75
Q

Class A share

A

A type of mutual fund share that has a front-end sales charge, which investors pay when they buy into the fund. This share class tends to be the most economical for investors, as it offers breakpoints and has lower 12b-1 fees than other classes of shares.

76
Q

Class B share

A

A type of mutual fund share that has a back-end sales charge which investors pay if they redeem their shares within a specified number of years. This share class typically has higher 12b-1 fees than class A shares and does not offer breakpoints.

77
Q

Class C share

A

A type of mutual fund share that has a level-load sales charge. These shares typically have relatively high 12b-1 fees and do not offer breakpoints.

78
Q

closed-end funds

A

A type of management investment company that issues a fixed number of exchange- traded shares. Similar to mutual funds, these types of investment companies are actively managed and have a net asset value. However, because an active secondary market exists for these, share prices are based on supply and demand.

79
Q

combination fund

A

Also referred to as a growth and income fund, it is an equity mutual fund that includes some stock for growth and others that pay high dividends.

80
Q

combination purchases

A

Allow customers to aggregate their investments with the same mutual fund group in order to get reduced sales charges. Additionally, spouses and minor children can combine their investments in the same fund to receive breakpoints.

81
Q

contingent deferred sales charge

A

A back-end sales charge that investors pay when they redeem their mutual fund shares within a certain number of years. Generally, this fee will decrease each year the investor holds the shares.

82
Q

continuous primary offering

A

Mutual fund shares are offered through this process, in which there is no limit of shares the fund will issue. Instead, the fund will create brand new shares for any customer who wants to invest.

83
Q

corporate bond fund

A

A bond mutual fund that invests in debt securities issued by corporations, ranging from short-term to long-term maturities and from large, well-established firms to small companies. The interest income paid out by these funds is taxable at all levels.

84
Q

exchange-traded fund (ETF)

A

An exchange-traded investment company security that is designed to closely track the performance of a specific sector, benchmark, or index. The fund is not actively managed and typically only changes when the underlying benchmark it tracks changes.

85
Q

expense ratio

A

A calculation of a mutual fund’s expenses, including management fees and operating expenses, divided by the fund’s average annual net assets.

86
Q

face-amount certificate

A

A type of investment company that issues debt securities to its investors and is backed by interest on real property and other securities.

87
Q

forward pricing

A

This is the method by which mutual funds calculate the purchase and redemption price for shares. It is based on the next NAV calculation after the order is received.

88
Q

global fund

A

An equity mutual fund that invests in the stocks of companies from all over the world, potentially including US businesses as well.

89
Q

front-end sales charge

A

An upfront sales charge that an investor pays when purchasing mutual fund shares. This fee is added to the fund’s NAV in order to calculate the public offering price that inves-tors will pay for the shares.

90
Q

high-yield bond fund

A

Also referred to as a junk bond fund, this is a bond mutual fund that invests in below investment-grade debt. The greater credit risk for these funds results in higher yields than those of safer funds.

91
Q

growth fund

A

An equity mutual fund that invests in stocks of companies that are expected to appre-ciate at a faster rate than the market average. Stocks of these companies rarely pay dividends; instead earnings are reinvested further for research and development.

92
Q

income fund

A

An equity mutual fund that invests in dividend-paying companies including utility stocks, blue chip stocks, and preferred stocks.

93
Q

Investment Company Act of 1940

A

A federal legislation that defines and regulates investment companies, including face-amount certificates, unit investment trusts, and management companies.

94
Q

investment company

A

An entity that pools investors’ capital and professionally invests it into the securities market. Examples include face-amount certificates, unit investment trusts, and management companies.

95
Q

investment club

A

An account formed by a group of individuals who pool their capital to invest their money together.

96
Q

letter of intent (LOI)

A

A contract offered by a mutual fund that allows a purchaser to invest in installments and receive breakpoints. An LOI is good for up to 13 months and can be backdated 90 days. If the customer fails to meet the terms, the otherwise applicable sales charges will apply.

97
Q

late trading

A

A prohibited practice where mutual fund orders are received after the close of business and are filled at that day’s price rather than the next day’s price. This is a violation, as it could provide an information advantage for the investor receiving the shares since after-market close news could be considered. Orders are required to be priced at the next NAV calculation.

98
Q

management investment company

A

A type of investment company that actively manages a portfolio of securities to achieve a stated investment objective for investors. This is the most common type of investment company and includes both closed-end funds as well as mutual funds.

99
Q

management fee

A

The fee paid to the investment advisor who is responsible for actively managing the portfolio of a management investment company, such as a mutual fund or closed-end fund. It is typically the greatest expense of any management company.

100
Q

money market fund

A

A mutual fund that consists of money market securities, which are short-term debt instruments with maturities of one year or less. These funds are considered extremely safe and liquid.

101
Q

mutual fund

A

Also known as an open-end fund, it is a management investment company that makes a continuous offering of redeemable shares. The portfolio of the fund is actively managed to achieve a clearly defined investment objective. However, because the shares are redeemable, there is no secondary market trading; instead the shares can only be bought from and sold back to the fund.

102
Q

municipal bond fund

A

A mutual fund that invests in debt securities issued by municipalities. The interest income paid out by these funds is typically tax-exempt at the federal level and may also be tax-free at the state and local levels if the fund includes issues of a single state and is purchased by that state’s residents. Because of the tax benefits, these funds are most appropriate for high-net-worth investors.

103
Q

no-load fund

A

Mutual funds that are sold at their NAV, without any sales charges added. For these funds, the NAV and POP will be the same. These shares are typically purchased directly from the fund itself, rather than through an outside broker or sponsor.

104
Q

net asset value (NAV)

A

The value of a mutual fund, calculated by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding.
When a customer purchases a share, he pays the public offering price, which includes the NAV plus a sales charge. When a customer sells his shares back to the fund, he receives the NAV.

105
Q

public offering price (POP)

A
  1. The price paid to purchase a share of a mutual fund, which is calcu-lated as the NAV plus a sales charge.
  2. The price an investor pays when purchasing a new-issue security in an initial public offering.
106
Q

redeemable share

A

A security for which there is no secondary market; instead the shares are sold back to the issuer when an investor wants to sell. Both mutual funds and unit investment trusts issue redeemable shares.

107
Q

sales load

A

Also referred to as the sales charge, it is the fee an investor pays when buying a mutual fund share. To calculate the public offering price, the sales load is added to the NAV.

108
Q

sector fund

A

An equity mutual fund that invests in one specific area of industry, for example, technology or healthcare. These funds have less diversification and therefore the potential for more risk compared to companies that invest in a wider range of industries.

109
Q

selling dividends

A

A prohibited practice in which a registered representative sells a mutual fund to an investor right before the fund pays out a dividend. This is a violation because the dividend distribution creates a tax liability for the investor, as the investor must immediately pay taxes on the distribution.

110
Q

sponsor

A

The underwriter contracted by an investment company or limited partnership to help sell its shares.

111
Q

stock fund

A

A mutual fund that invests in equity securities of companies that align with its investment objectives. The goal of these funds is typically long-term growth through appreciation, although income from dividends is also available through some stock investments.

112
Q

summary prospectus

A

A condensed version of the longer, more detailed prospectus that reviews critical information for mutual fund investors. It includes the fund’s fee structure, investment objectives, trading strategies, as well as tax information.

113
Q

switching

A

A prohibited practice in which a registered representative moves a customer from one mutual fund to another that has similar objectives for no legitimate investment purpose while generating additional sales charges.

114
Q

unit investment trust (UIT)

A

An investment company that issues redeemable securities representing an undivided interest in a trust. As with mutual funds, no secondary market exists for these. However, unlike management companies, there is a fixed portfolio with no active management.

115
Q

US government bond fund

A

A bond mutual fund that invests primarily in bonds issued by the US Treasury or federal government. These funds offer a high level of safety, but therefore lower yields than other bond funds. The interest income paid out by these funds is tax-free at the state and local levels.

116
Q

What is a money market fund?

A

A money market fund is a mutual fund that invests in short term debt instruments with maturities of one year or less. Examples include Treasury bills and commercial paper.

117
Q

Money market funds fall under which regulatory acts?

A

Securities Act of 1933 and Investment Company Act of 1940

Since money market funds are mutual funds selling an investment product, albeit with very low risk, they do have to publish a prospectus and are regulated under the Acts of ‘33 and ‘40. They operate and are regulated just like regular mutual funds.

118
Q

What law governs how investment companies are regulated?

A

The Investment Company Act of 1940

119
Q

A Unit Investment Trust (UIT) is defined and regulated by the Investment Company Act of 1940. What is a UIT’s typical investment strategy?

A

A UIT will purchase a defined and fixed portfolio from a broad range of securities (often including stocks, bonds and munis) and has no restrictions on what kind of securities it can buy. Importantly, once the portfolio is created, it is fixed, meaning whatever is in the portfolio stays there. It is not actively managed.

120
Q

What are the fees that investors pay when they purchase UITs?

A

Similar to mutual funds, because UITs offer redeemable shares, investors pay sales charges when they purchase the units. They do not pay commissions as UITs are not exchange traded products.

121
Q

On what exchange can an investor sell their UIT?

A

None. There are no exchanges for UITs, they must be redeemed with the issuer.

122
Q

What types of management fees are UITs allowed to charge?

A

UITs are not allowed to charge any management fees since the UIT is fixed and there is no active buying and selling of securities.

123
Q

What are the benefits of a management investment company for investors?

A

In a management investment company, the investors’ funds are actively managed to acheive an investment objective. This means that the management company hires an investment adviser that will actively trade the portfolio to meet the fund’s goals.

124
Q

There are two types of management companies. What are they?

A

Open-end funds (aka mutual funds) and closed-end funds

125
Q

A closed-end fund trades most like what security?

A

Common stock. Similar to shares of a corporation, a closed-end fund have a one time initial public offering for shares that are actively traded on an exchange. Because the shares of a closed-end fund are exchange-traded, similar to common stock, the price of each share is based on supply and demand.

126
Q

An investor that is looking to buy an actively managed investment company security that trades throughout the day would most likely purchase which type of shares?

A

Closed-end funds would be most appropriate for investors as they combine active management with exchange-trading. Mutual funds also provide active management, but do not issue exchange-traded shares. Instead, the shares are only redeemable with the issuing investment company.

127
Q

What are the two key characteristics of a mutual fund?

A

Mutual funds, also referrred to as open-end funds, register a continuous offering of redeemable shares. This means that there is no secondary market for mutual funds, the shares are redeemable, meaning bought and sold directly with the mutual fund itself. Also, importantly, mutual funds are actively managed

128
Q

On what exchange do open-ended funds trade?

A

Mutual funds do not trade on a secondary market. Instead, the shares are reedeemed by the investor with the fund.

129
Q

One of the benefits of open-end investment companies is professional management. Who hires the manager?

A

Fund managers are generally hired by the board of directors of the investment company.

130
Q

Under the Investment Company Act of 1940, what percentage of a fund’s board of directors must be independent?

A

at least 40%

131
Q

What is the role of the custodian for a mutual fund?

A

The custodian bank serves administrative functions for the fund and safeguards the financial assets of the fund.

132
Q

A mutual fund investors decides to automatically reinvest dividends rather than take a cash distribution. Is this a taxable event?

A

Yes, mutual fund dividends are taxed when declared by the fund regardless if they are taken in cash or reinvested back into the fund.

133
Q

What are mutual expenses not covered in a 12b-1 fee?

A

Management expenses and trading fees

134
Q

How does an investor sell their mutual fund shares?

A

They redeem them directly with the fund

135
Q

Which types of investment companies are redeemable?

A

Mutual funds and unit investment trusts

136
Q

How are shares of mutual funds sold?

A

Shares of a mutual fund are redeemed with the fund that issued them.

137
Q

What is the formula for calculating the percentage sales charge of a mutual fund?

A

(POP - NAV)/POP

138
Q

What are two major differences between mutual funds and ETFs?

A

Mutual funds are actively managed and redeemable (meaning there is no secondary market). ETFs, on the other hand, are not actively managed and are exchange-traded.

139
Q

Describe the pricing of closed-ended funds

A

Because they are exchange-traded, closed-end funds may trade at a premium of discount to the NAV based on the supply and demand of the shares

SIE Exam (14 decks)

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