Mutual Fund Purchase, Redemption, and Taxation Flashcards
Breakpoint sale
when a representative purposely makes a sale below the breakpoint in order to earn higher commissions
A violation to divide investable dollars among different fund families disallowing potential breakpoints
breakpoint sale
Class A mutual fund shares
these shares have lower operating expenses, lower 12b-1 fees and offer breakpoints and LOI
Front-end load is charged at purchase
Class A mutual fund shares
Full (statutory) prospectus
customers must receive at or before time of confirmation. (agents are prohibited from altering this document)
how often must mutual funds update their prospectus?
Every 16 months
corporate dividend exclusion
corporations can exclude 50% of the dividend income derived from investing in other domestic corporations
fund focus
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)
capital loss event
investor sells fund shares for less than cost basis. investor must net capital gains and losses against each other
qualifying groups
- 10 members
- been in existence for at least 6 months
Public offering Price (equation)
(Also known as the ask) NAV + Sales charge = POP
The price an investor pays to buy shares of a mutual fund
POP
regulated investment company
90% of net investment income must be distributed to investors in order to be taxed on retained earnings
exchange privilege
investors may exchange within the same fund family without incurring a sales charge. IRS considers it a taxable invent.
geographical focus
the fund must invest at least 80% of its assets in investments tied to the geographic region named in the fund
forward pricing
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
Capital gain distribution
when the fund manager sells securities in the portfolio for a profit
This is paid out annually and considered long term and taxable at preferential rates
Capital gain distribution
Class C Mutual fund shares
have a level load and higher 12b - 1 fees. not convertible and may be suitable for investors with short or uncertain time horizon
cost basis
total purchase of investment if purchased with after-tax dollars
An investor who reinvests dividends and or gains to buy new shares will receive adjusted basis
cost basis
Summary prospectus
it must contain a legend that the full statutory prospectus is available on the fund’s website or available upon request
These may be used for the solicitation and purchase
summary prospectus
Dividend distributions
taxable in the year they are paid
how are qualified dividends taxed?
long-term capital gains rates
how are ordinary dividends taxed?
as ordinary income
Statement of Additional Information (SAI)
must be provided upon request, Contains supplementary information on many of the items found in the prospectus such ad fund holdings, transactions and fees
Late trading
prohibited practice of placing orders to buy or redeem mutual fund shares after the NAV is calculated, but receiving the previously calculated NAV.
omitting prosectus
contains fund’s objectives, principal investment strategy, principal risks, and toll-free number to obtain the prospectus
Rights of Accumulation (ROA)
discounts based on greater of the dollar amount invested or the market value of the account (including the new money being added)
Class B Mutual Fund
These shares have higher operating expense and higher 12 b-1 fees.
The CDSC shares of this diminishes to 0% after 5-7 years, then converts to class A shares
Class B shares
What causes changes in NAV
- market value changes of the securities in the portfolio
- distributions to shareholders (capital gains or dividends)
- payment of management, administrative, or other fees
Breakpoint
available to Class A shares. by reaching a breakpoint dollar limit the investor is entitled to a lover sales charge
methods of establishing cost basis
- average cost basis per share
- share identification
- first in, first out
NAV
price an investor receives when redeeming shares of a mutual fund (also known as bid)
Dollar-cost averaging
The average cost per share is the total amount invested divided by the number of shares purchased
The average price per share is the total of share prices divided by the number of times purchases are made.
Dollar-cost averaging
Redemption of mutual fund shares
forward pricing determined at the NAV. orders entered after 4pm will be processed the next business day.
How long before you must pay for a Mutual fund?
7 calendar days
Mutual Fund Maximum sales charge
8.5%
Requirements to charge the maximum sales charge
the fund must offer rights of accumulation and breakpoints
Redemption fees
Charged to discourage short term traders
what is the max redemption fee % of a mutual fund?
2 % of the value of the customer’s fund
reporting requirements
every fund must send an audited annual report to the SEC and shareholders
What is required to be in the annual audited report?
the auditor’s disclosure document
Capital gain events
When the investor sells fund shares for more than the cost basis
How long must an investor own a fund to be taxed as ordinary income?
12 months or less ( considered a short term gain)
How long must an investor own a fund to be taxed as preferential rate?
12 months and a day ( or more )
How much is a preferential tax rate?
15% ( for most investors)
Letter of Intent (LOI)
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)
How long can a letter of intent be backdated?
90 days
Net Asset Value per share
Net Assets / number of outstanding shares
Public offering price
the price investors pay for mutual fund shares (also known as the ask)
how are mutual funds purchased?
Full or fractional shares
POP calculation
NAV + Sales charge = POP
