Management Companies Flashcards
What is the Fund Sponsor?
This is the underwriter for a management company. They must register funds w/ the SEC prior to security sell
What is the Prospectus?
This discloses the structure of the fund, detailing when fees are involved, track record of sponsor, and the POP
What is the POP formula?
NAV + Max sales charge
Do selling groups act as agents or principals for the Sponsor?
AGENTS
Which type of fund REQUIRES a prospectus be sent to purchaser?
An OPEN-end fund.
Which type of fund does not need a prospectus?
A closed end fund does not need one after the shares trade in the secondary market
What does an investment adviser do?
Earns a MGMT fee based on % of AUM. The adviser’s contract is subject to shareholder vote every year after first contract ends
What is the role of a Custodian Bank?
Safeguard fund’s assets, and can act as transfer agent and paying agent
What are some requirements of a “diversified” fund?
- 75% or more of assets invested in securities
- Max of 5% of AUM w/ one issuer
- Max of 10% for holding securities in one issuer
What makes up a growth fund?
Primarily equity securities of rapidly growing companies for capital gains
What makes up a Growth & Income Fund?
Invests primarily in Blue chip stocks. Blue chips provide both dividend income and growth potential
What makes up an Income fund?
Investments in fixed securities such as preferred stocks and bonds:
- US Govt securities
- Municipal bonds
- Preferred stock
- Corporate bonds
- Money Markets
What is the definition of a balanced fund?
Provides both income and capital gains potential
What is the difference between a specialIZED and Special SITUATIONS fund?
- Specialized: investment in particular industry or geographic area
- Special situation: Bankruptcy, takeover, etc.
What types of shares are continuously issued?
Mutual fund shares
How often is NAV computed on mutual funds?
Every day, once a day. (marked to market)
What does it mean if a fund is No Load?
There is no sales charge, and the customer can buy the asset at NAV.
What type of fund is always no load?
Money market funds. The NAV is consistent at $1 always. If assets increase, shareholders just get more $1 shares
What is the maximum sales charge for mutual funds?
8 1/2% of POP. (All funds combined on a mutual fund cannot be greater than 8.5% per FINRA rules)
When a customer redeems shares, what is the max. length that a fund has to deliver the shares?
7 calendar days
What is a CDSC?
Contingent deferred sales charge. This applies to funds that do not have a sales charge to purchase shares, but if the investor redeems too early, a CDSC is charged
What 3 items MUST a fund have in order to charge the maximum 8.5% on a mutual fund?
- Breakpoints
- Letter of Intent
- Rights of Accumulation
What are breakpoints?
Reduced sales charge for a large dollar purchase. (these are not available to investment clubs)
What is a Letter of Intent?
If it is signed, the customer is saying he will buy more of a fund later in order to get the breakpoint pricing before actually buying the required amount.
How long does the LOI last?
Only 13 months, including the 90 day backdated period
Does asset appreciation or dividends received count towards the LOI?
No
What are rights of accumulation?
The investor’s accumulated position in the mutual fund counts toward future breakpoints for additional purchases
What are Rights of accumulation based on?
Current market price or cost, whichever is higher
What must a fund offer per FINRA rules regarding dividends?
The fund must allow a dividend reinvestment at NAV on divs received. There is no sales charge implaced
What are 12B-1 funds?
These are funds that impose fees for the cost of soliciting new customers
What is the maximum rate allowed on 12b-1 funds?
If no account maintenance fees: 7.25%
If there are account maint. fees: 6.50%
The FEE cannot exceed .75% of Average annual net assets
What are Class A fund shares?
Higher up front sales charge, but low or no 12b-1 fees. These are suitable for LONG term investors
What are Class B fund shares?
Impose a CDSC and 12b-1 fees. Suitable for INTERMEDIATE investors
What are Class C fund shares?
Have the HIGHEST 12b-1 fee and usually no CDSC. These are for SHORT term investors
Are any discounts allowed from the POP?
No - unless there is one listed in the Prospectus
What are the 3 types of Systematic withdrawal plans?
- Fixed Dollar
- Fixed Shares
- Fixed Period (specific liquidation of account over period of time. Best for college education)
What are some prohibited mutual fund sales practices?
- Trading mutual fund shares
- Breakpoint sales
- Bad recommendation of Class B shares
- Late trading
- Market timing
What are the characteristics of a closed end fund?
- Trade-able
- non-redeemable
- NAV is liquidity value of the fund
What are exchange traded funds (ETFs) legally classified as?
Open ended companies or UIT’s
What do ETF’s do?
They issue shares in large blocks to institutions (about 50,000 share blocks) that are known as creation units.
Do ETFs trade?
YES. Therefore, they are NOT mutual funds
What are the advantages of an ETF over an Index Mutual fund?
- Trade continuously throughout the day with the market price based on instant value in underlying index
- Purchased/sold at any time of day
- Can be purchased on margin and sold short
- Generally lower expense
- No tax liability on share appreciation
What are the 4 main ETF’s?
- SPDRS - SP 500 depository receipts
- DIA’s - Dow Jones Industrials (Diamonds)
- QQQ’s - NASDAQ’s 100 Index (Q’s or Qubes)
- I-Shares - partner w/ Barclays
What is a leveraged ETF?
A fund that borrows to MAGNIFY returns (and also losses). For example, a 300% Leveraged ETF will move 3x as fast a the index
Do ETF’s require a prospectus?
They require either a prospectus or a product document w/ key info and where a prospectus can be obtained
What are the characteristics of Hedge Funds?
- Private
- Only available to very wealthy/sophisticated investors
- Lightly regulated
- Take % of AUM and % of capital gains
What is a Fund of Hedge Funds?
- Mutual fund that makes selected investments in hedge funds
- Double layer of fees
- Inefficient investment vehicles
How often must financial statements be sent to fund shareholders?
Semi annually
What is the formula for net investment income?
Investment income - Expenses
What are some basic expenses for funds?
- Management fee (largest fee)
- Shareholder servicing fee
- Custodial fees
- Printing fee
- Legal and Audit fees
- Distribution fees (12B-1)
What is the formula for the expense ratio?
Total expenses/Total net assets
What is a Regulated fund under subchapter M?
Regulated if a fund distributes 90% or more of its NII to shareholders. Only the remaining NII is taxed
Who sets the Ex-date for mutual funds?
The Board of Directors!
What is the formula for a mutual fund current yield?
Annual income/offering price
What percent of the BOD must be “non-interested”
40%
