IP - Chapter 12 - Investment Companies* Flashcards
What are the 4 basic types of investment companies?
1) UIT’s
2) Closed End Funds
3) ETF’s
4) Mutual Funds (Open End Funds)
Which type of investment company is the leader in funds invested?
Mutual Funds (Open End Investment Companies) (Specifically Equity Mutual Funds)
What is becoming a more common form of retirement plans with employers?
Defined Contribution Plans
Risk of outliving ones assets
Supperannuation
This rule allows companies to avoid taxation by becoming Registered Investment Companies and being able to distribute interest, dividends, and capital gains to shareholders.
Internal Revenue Code Section 851
What is the shareholders tax liability in a mutual fund?
Equal to their proportional ownership of the fund
Who are investment companies regulated by?
- SEC
- Investment Company Act of 1940
What are the requirements for an investment company to be considered tax exempt under IRS Code 851?
1) 90% of income must be generated for the RIC must be of income from: dividends, interest, and capital gains
2) At least 90% of taxable income must be distributed to shareholders
3) At least 50% of RIC total assets must be invested in either Cash, Cash Equivalents, or Securities
4) Total assets in RIC can not exceed 25% by any one issuer (unless issued by government)
3 facts about UIT’s?
1) Passively managed
2) Cash payments immediately passed through to investors
3) Offered through a one time public offering
Most commonly, traditional UIT’s solely invest in _________ .
Bonds (can also invest in equity securities)
How is maturity determined for UIT’s containing only fixed income?
Maturity date uses longest term bond
For UIT’s containing equity, when is maturity date determined?
At inception
3 facts about ETF’s?
1) Created through UIT’s (in creation units)
2) Passively Managed
3) Can be traded throughout the day
How do closed end funds raise capital?
IPO
A fund that divides its shareholders into two classes, one that is scheduled to receive dividend payments and one that is scheduled to receive capital gains. (This allows investors to select if they want price appreciation or income but not both).
Equity Dual Purpose Fund (CEF)
3 Facts about CEF’s (Closed End Funds)?
1) Raise capital through an IPO
2) Fixed Capitalization when funds are raised
3) Trade on an exchange and can be bought and sold throughout the day
What is FINRA’s limit to sales loads by %?
8.5% is max sales load
4 Facts about mutual funds?
1) Most common type of Investment company
2) Continually accept new capital
3) Valued daily according to NAV
4) NAV calculated at the end of every trading day
What is the formula for calculating NAV?
(Market Value of Assets - Market Value of Liabilities) / Total Outstanding Shares
For mutual funds (open end investment companies), at least how much of the funds board must be composed of independent directors?
40%
Included when purchasing a security and paid as part of original investment?
Front End Load
Charged not with the purchase but with the sale of the security. Most charge decreasing fee rate overtime, the longer security is held.
Back End Load
On a back-end loaded mutual fund, there is likely a 0% fee if the fund is held ___________ or longer.
5 years
What type of load is associated with an A-share?
Front End Load
What type of load is associated with an B-share?
Back End Load
The SEC limits redemption fees to _____ % in most situations.
2%
This fee discourages frequent trading by shareholders that might be disruptive to financial goals of the fund.
Redemption fee
Fee charged by a mutual fund company to pay for the services of the brokers who sell the mutual funds and who maintain the client relationships.
12b-1 fee