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
2
Q
Defines and regulates investment companies, including mutual funds
A
Investment Company Act of 1940
3
Q
Three types of Investment Companies defined by the Investment Company Act of 1940
A
Face Amount Certificate, Unit Investment Trust, Management Company
4
Q
Management company shares that may trade at a price more or less than their net asset value
A
Closed-ended Investment companies
5
Q
Three types of securities that closed-end companies can issue
A
Common shares, preferred shares and bonds
6
Q
Type of management company that can issue shares continuously
A
Open-end
7
Q
Type of management company that issues a fixed number of shares in a single offering
A
Closed-end
8
Q
Type of management company that can issue only equity shares
A
Open-end
9
Q
Type of management company that can issue both equity and debt
A
Closed-end
10
Q
Type of management company shares that are redeemed by the issuer
A
Open-end
11
Q
Type of management company shares that trade in the secondary market
A
Closed-end
12
Q
The difference between the Public Offering Price and Net Asset Value
A
Sales load
13
Q
Type of management company shares that are priced by formula
A
Open-end
14
Q
Type of management company shares that are priced by supply and demand
A
Closed-end
15
Q
An investment company which issues redeemable securities and is not actively managed
A
Unit investment trust
16
Q
The price at which an investor purchases closed-end company shares
A
Ask price
17
Q
Type of management company that offers shares through a continuous primary offering
A
Open-end
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
19
Q
The only type of securities that mutual funds can issue
A
Common shares
20
Q
Securities legislation that defines and regulates investment companies
A
Investment Company Act of 1940
21
Q
Maximum sales charge for mutual funds permitted by FINRA rules
A
8.5% of POP
22
Q
Quantity purchase discounts that apply to individuals who purchase funds within the same fund family
A
Breakpoints
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
24
Q
Maximum duration of a Letter of Intent
A
13 months
25
The maximum time allowed to backdate a Letter of Intent
90 days
26
Allows for reduction of sales charges on subsequent purchases based on combining additional purchases with prior share appreciation
Rights of accumulation
27
Maximum time limit for Rights of Accumulation
There are no time limits imposed on Rights of Accumulation
28
FINRA violation which involves encouraging a customer to purchase shares at a point below an available sales charge reduction
Breakpoint sale
29
Mutual fund share class with a front end sales load
Class A shares
30
Mutual fund share class with a back-end load and 12b-1 fees
Class B shares
31
Mutual fund share class with 12b-1 fees charged quarterly
Class C shares
32
The pricing concept that defines the purchase and redemption of mutual fund shares at the next calculated price
Forward pricing
33
Price at which open-end company shares are purchased
Public Offering Price (POP)
34
Price at which open-end company shares are redeemed
Net Asset Value (NAV)
35
An investment company fund with assets concentrated in a single industry
Specialized or sector fund
36
An investment company with no provision for redeeming outstanding shares
Closed-end
37
Three mutual fund trading practices that are disapproved by the SEC unless stringent disclosure and financial requirements are met
Purchasing securities on margin, selling securities short and participating in joint trading accounts
38
Performs customer service functions on behalf of the mutual fund
Transfer agent
39
Responsible for the safekeeping and segregation of a mutual fund's securities
Custodian
40
Implements the investment strategy and invests on behalf of the mutual fund
Investment adviser
41
Defines the fund's investment objectives and oversees the direction of the fund
Board of Directors
42
Also known as the sponsor or distributor, and is responsible for selling and marketing funds shares
Underwriter
43
Responsible for actively managing the portfolio of a management investment company
Investment adviser
44
Paid a fee by a mutual fund to perform administrative functions such as the safekeeping of securities and handling of distributions to investors
Custodian and transfer agent
45
Paid a fee by a mutual fund to sell the fund's shares
Underwriter
46
Frequency that mutual funds must send financial reports to shareholders
Semi-annually
47
The type of interest an investor owns in a mutual fund portfolio
Undivided
48
Type of security typically held by mutual funds with growth objectives
Common stock
49
Three types of securities that are held by mutual funds with income objectives
Bonds, preferred stock, blue chip common stock
50
Type of mutual fund that is focused on generating capital gains, and tends to reinvest most earnings
Growth fund
51
Type of mutual fund with low portfolio turnover and low expenses that tracks market performance
Index fund
52
Type of mutual fund that authorizes the fund adviser to rebalance the percentage of holdings between cash and different investment categories
Asset allocation fund
53
Usually sold with no sales or liquidation fees
Money market funds
54
NAV of a single share of a money market fund
$1
55
Mutual fund that offers tax-exempt income to shareholders
Municipal bond fund
56
Type of mutual fund that is best suited to an investor seeking maximum safety
U.S. government bond fund
57
Fund expenses/average net assets
Expense ratio
58
The maximum amount of 12b-1 fee a no-load fund can charge
0.25%
59
Fund's NAV/Number of Shares Outstanding
NAV per share
60
The impact on NAV per share when portfolio securities increase in value
Increase in NAV
61
The impact on NAV per share when shares are sold or redeemed
No impact
62
NAV + Sales Charge equals
POP
63
Another name for a back-end load
Contingent deferred sales charge
64
Disclosure document that must be provided to investors when variable annuities or mutual funds are sold
Prospectus
65
An accounting measure used to determine the owner's interest in the separate account when purchasing a variable annuity
Accumulation unit
66
Letters of intent for mutual funds can be backdated for
90 days
67
The most suitable mutual fund share class for a substantial fund investor with a long term perspective
Class A
68
12b-1 fees
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
actively managed fund
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
asset allocation fund
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
automatic reinvestment privileges
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
bond fund
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
breakpoint sale
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
breakpoints
Discounts off the sales charge based on the amount of money invested within a mutual fund.
75
Class A share
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
Class B share
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
Class C share
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
closed-end funds
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
combination fund
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
combination purchases
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
contingent deferred sales charge
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
continuous primary offering
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
corporate bond fund
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
exchange-traded fund (ETF)
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
expense ratio
A calculation of a mutual fund's expenses, including management fees and operating expenses, divided by the fund's average annual net assets.
86
face-amount certificate
A type of investment company that issues debt securities to its investors and is backed by interest on real property and other securities.
87
forward pricing
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
global fund
An equity mutual fund that invests in the stocks of companies from all over the world, potentially including US businesses as well.
89
front-end sales charge
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
high-yield bond fund
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
growth fund
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
income fund
An equity mutual fund that invests in dividend-paying companies including utility stocks, blue chip stocks, and preferred stocks.
93
Investment Company Act of 1940
A federal legislation that defines and regulates investment companies, including face-amount certificates, unit investment trusts, and management companies.
94
investment company
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
investment club
An account formed by a group of individuals who pool their capital to invest their money together.
96
letter of intent (LOI)
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
late trading
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
management investment company
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
management fee
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
money market fund
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
mutual fund
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
municipal bond fund
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
no-load fund
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
net asset value (NAV)
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
public offering price (POP)
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
redeemable share
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
sales load
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
sector fund
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
selling dividends
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
sponsor
The underwriter contracted by an investment company or limited partnership to help sell its shares.
111
stock fund
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
summary prospectus
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
switching
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
unit investment trust (UIT)
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
US government bond fund
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
What is a money market fund?
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
Money market funds fall under which regulatory acts?
**Securities Act of 1933 and Investment Company Act of 1940**
## Footnote
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
What law governs how investment companies are regulated?
**The Investment Company Act of 1940**
119
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 **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
What are the fees that investors pay when they purchase UITs?
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
On what exchange can an investor sell their UIT?
None. There are no exchanges for UITs, they must be redeemed with the issuer.
122
What types of **management fees** are UITs allowed to charge?
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
What are the benefits of a management investment company for investors?
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
There are two types of management companies. What are they?
**Open-end funds (aka mutual funds)** and **closed-end funds**
125
A closed-end fund trades most like what security?
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
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?
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
What are the two key characteristics of a mutual fund?
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
On what **exchange** do open-ended funds trade?
Mutual funds **do not trade on a secondary market**. Instead, the shares are reedeemed by the investor with the fund.
129
One of the benefits of open-end investment companies is professional management. Who hires the manager?
Fund managers are generally hired by the board of directors of the investment company.
130
Under the Investment Company Act of 1940, what percentage of a fund's board of directors must be independent?
**at least 40%**
131
What is the role of the custodian for a mutual fund?
The custodian bank serves administrative functions for the fund and safeguards the financial assets of the fund.
132
A mutual fund investors decides to automatically reinvest dividends rather than take a cash distribution. Is this a taxable event?
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
What are mutual expenses not covered in a 12b-1 fee?
Management expenses and trading fees
134
How does an investor sell their mutual fund shares?
**They redeem them directly with the fund**
135
Which types of investment companies are redeemable?
**Mutual funds and unit investment trusts**
136
How are shares of **mutual funds** sold?
Shares of a mutual fund are **redeemed with the fund that issued them**.
137
What is the formula for calculating the percentage sales charge of a mutual fund?
**(POP - NAV)/POP**
138
What are two major differences between mutual funds and ETFs?
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
**Describe the pricing of closed-ended funds**
**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**
