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Series 6 > Mutual Fund Purchase, Redemption, and Taxation > Flashcards

Mutual Fund Purchase, Redemption, and Taxation Flashcards

1
Q

Breakpoint sale

A

when a representative purposely makes a sale below the breakpoint in order to earn higher commissions

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2
Q

A violation to divide investable dollars among different fund families disallowing potential breakpoints

A

breakpoint sale

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3
Q

Class A mutual fund shares

A

these shares have lower operating expenses, lower 12b-1 fees and offer breakpoints and LOI

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4
Q

Front-end load is charged at purchase

A

Class A mutual fund shares

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5
Q

Full (statutory) prospectus

A

customers must receive at or before time of confirmation. (agents are prohibited from altering this document)

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6
Q

how often must mutual funds update their prospectus?

A

Every 16 months

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7
Q

corporate dividend exclusion

A

corporations can exclude 50% of the dividend income derived from investing in other domestic corporations

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8
Q

fund focus

A

the fund must invest at least 80% of its assets in investments based on the name of the fund (example tech fund needs to invest 80% in technology)

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9
Q

capital loss event

A

investor sells fund shares for less than cost basis. investor must net capital gains and losses against each other

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10
Q

qualifying groups

A
  • 10 members

- been in existence for at least 6 months

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11
Q

Public offering Price (equation)

A

(Also known as the ask) NAV + Sales charge = POP

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12
Q

The price an investor pays to buy shares of a mutual fund

A

POP

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13
Q

regulated investment company

A

90% of net investment income must be distributed to investors in order to be taxed on retained earnings

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14
Q

exchange privilege

A

investors may exchange within the same fund family without incurring a sales charge. IRS considers it a taxable invent.

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15
Q

geographical focus

A

the fund must invest at least 80% of its assets in investments tied to the geographic region named in the fund

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16
Q

forward pricing

A

all purchases and redemptions are held and processed at the end of the trading day (4 pm EST) based on the hours of the NYSE

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17
Q

Capital gain distribution

A

when the fund manager sells securities in the portfolio for a profit

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18
Q

This is paid out annually and considered long term and taxable at preferential rates

A

Capital gain distribution

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19
Q

Class C Mutual fund shares

A

have a level load and higher 12b - 1 fees. not convertible and may be suitable for investors with short or uncertain time horizon

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20
Q

cost basis

A

total purchase of investment if purchased with after-tax dollars

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21
Q

An investor who reinvests dividends and or gains to buy new shares will receive adjusted basis

A

cost basis

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22
Q

Summary prospectus

A

it must contain a legend that the full statutory prospectus is available on the fund’s website or available upon request

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23
Q

These may be used for the solicitation and purchase

A

summary prospectus

24
Q

Dividend distributions

A

taxable in the year they are paid

25
Q

how are qualified dividends taxed?

A

long-term capital gains rates

26
Q

how are ordinary dividends taxed?

A

as ordinary income

27
Q

Statement of Additional Information (SAI)

A

must be provided upon request, Contains supplementary information on many of the items found in the prospectus such ad fund holdings, transactions and fees

28
Q

Late trading

A

prohibited practice of placing orders to buy or redeem mutual fund shares after the NAV is calculated, but receiving the previously calculated NAV.

29
Q

omitting prosectus

A

contains fund’s objectives, principal investment strategy, principal risks, and toll-free number to obtain the prospectus

30
Q

Rights of Accumulation (ROA)

A

discounts based on greater of the dollar amount invested or the market value of the account (including the new money being added)

31
Q

Class B Mutual Fund

A

These shares have higher operating expense and higher 12 b-1 fees.

32
Q

The CDSC shares of this diminishes to 0% after 5-7 years, then converts to class A shares

A

Class B shares

33
Q

What causes changes in NAV

A
  • market value changes of the securities in the portfolio
  • distributions to shareholders (capital gains or dividends)
  • payment of management, administrative, or other fees
34
Q

Breakpoint

A

available to Class A shares. by reaching a breakpoint dollar limit the investor is entitled to a lover sales charge

35
Q

methods of establishing cost basis

A
  1. average cost basis per share
  2. share identification
  3. first in, first out
36
Q

NAV

A

price an investor receives when redeeming shares of a mutual fund (also known as bid)

37
Q

Dollar-cost averaging

A

The average cost per share is the total amount invested divided by the number of shares purchased

38
Q

The average price per share is the total of share prices divided by the number of times purchases are made.

A

Dollar-cost averaging

39
Q

Redemption of mutual fund shares

A

forward pricing determined at the NAV. orders entered after 4pm will be processed the next business day.

40
Q

How long before you must pay for a Mutual fund?

A

7 calendar days

41
Q

Mutual Fund Maximum sales charge

A

8.5%

42
Q

Requirements to charge the maximum sales charge

A

the fund must offer rights of accumulation and breakpoints

43
Q

Redemption fees

A

Charged to discourage short term traders

44
Q

what is the max redemption fee % of a mutual fund?

A

2 % of the value of the customer’s fund

45
Q

reporting requirements

A

every fund must send an audited annual report to the SEC and shareholders

46
Q

What is required to be in the annual audited report?

A

the auditor’s disclosure document

47
Q

Capital gain events

A

When the investor sells fund shares for more than the cost basis

48
Q

How long must an investor own a fund to be taxed as ordinary income?

A

12 months or less ( considered a short term gain)

49
Q

How long must an investor own a fund to be taxed as preferential rate?

A

12 months and a day ( or more )

50
Q

How much is a preferential tax rate?

A

15% ( for most investors)

51
Q

Letter of Intent (LOI)

A

discounts based on total anticipated dollars invested over 13-month period. (only can be fulfilled with new money invested, reinvestment of dividends or gains will not count towards LOI)

52
Q

How long can a letter of intent be backdated?

A

90 days

53
Q

Net Asset Value per share

A

Net Assets / number of outstanding shares

54
Q

Public offering price

A

the price investors pay for mutual fund shares (also known as the ask)

55
Q

how are mutual funds purchased?

A

Full or fractional shares

56
Q

POP calculation

A

NAV + Sales charge = POP

Series 6 (6 decks)

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