Part 2 Unit 14

Question 1

Types of investment companies:

Answer 1

• Face Amount Certificate Companies (FACC)
  -Management Investment Companies
  -Unit Investment trust (UITs)

Question 2

FACC

Answer 2

FA certificate is a contract:
- Issuer guarantees pmt of a stated sum to investor at some set date in future
- In return, investor pays a lump sum or periodic payments to issuer

Question 3

Management Invst. companies

Answer 3

-Actively manages a securities portfolio.
-Either close end or open end
-Mutual funds are open=end
-Investment companies do not include holding companies

-Board of directors must not include more than 60% of interested persons
-Prohibited Activities
1. No purchase on margin
2. no joint account allowed
3. no short selling
4. can’t buy more than 3% of voting securities of another invst. comp

-Requires majority vote required for policy changes
-Size must have a net worth of min $100K
-Affiliated people (power to vote 5% of outstanding shares, officers, directors)
1. Can not sell personal security to the fund
2. borrow money from the fund
3. purchase any other security from the fund other than the fund’s shares

-Control person owning 25%+

Question 4

Net Assets Value Per Share (NAV)

Answer 4

Value of all its assets minus liabilities, and then dividing that by number of shares outstanding

Question 5

Invest. Comps:

Answer 5

Must have a custodian
Proceeds be sent no more than 7 days while redeemption
annual report with SEC and semi for investors.
-Issuer can invest but in the funds shares

Question 6

Initial Capitalization

Answer 6

Open-end (mutual funds) can raise unlimited capital
Can also issue common stock

Close end investment companies:
-To raise capital, conducts common stock offering. Fixed no of shares with SEC. The can also issue bonds and PF stocks.
-Close ends are often called publicly traded funds. There is a market for it. Market price is supply and demand so independent of NAV.
-Open ended you buy from the company or its underwriters at the public offering price (POP). POP is NAV per share plus any applicable sales charges.

Question 7

Mutual Funds Share Classes and Loads

Answer 7

-FINRA prohibits charges of underwriting more than 8.5% of POP.
-Front-end loads up to 8.5% charged by MF, and Back-end is usually when withdrawn.

Question 8

Close end do not carry sales charge.

Question 9

Charges methods of Open-end Funds

Answer 9

1. Frond End Loads
   -Charges are added to NAV and are referred to as Class A Shares; lower operating expense.
2. Back-end Loads
   Chrged when redeeming. Percentage that decreases every year until it gets to zero at which point shares are converted into class A.
3. 12b -1 fees
   Collect fee based on assets. can’t exceed 0.75.

Question 10

Classes of Funds Shares:

Answer 10

Class A (Front-end) invst. pay charge at time of purchase
Class B ( back-end) declines over time so invst. pay the charge at redemption
Class C (level load) no sales charge to purchase, 1% for one year, with coninous 12b-1 charge.

Question 11

LOI

Answer 11

If the investor promises to invest more money within the next 13 months, then they can lock in a lower fee in a mutual fund. If they didn’t follow through, then they need to pay the difference in fees paid backwards.
-Can be signed as late as 90 days after purchase

Question 12

Sales Load

Answer 12

Is the fee charged. It is a percentage of the POP. 12b-1 fee is never referred to as a sales load.

Question 13

Three ways to reach a breakpoint are:

Answer 13

1. a lump sum purchase
2. using a LOI granting 13 months to reach the breakpoint
3. taking advantage of rights of accumulation (no time limit)

Question 14

Private fund:

Answer 14

In 3 (c) 1 fund No more than 100 investors: and all of them qualified.
Hedge funds
2 categories:
a. Direct investment
b. Portfolio investment

a has 10% or greater voting interest in an operating company. In b, fund does not require control position and builds a portfolio that may be stock, bonds, derivatives, or combo.

One common type is Private liquidity fund (like a money market fund) not required to register with SEC

Question 15

VC

Answer 15

Limited partnership; investment decisions are made by the general public with capital coming from limited partners. VC funds look for yooung, promising companies with an expectation of high returns in exchange for high risk.

-Usually funds that are not fully operational. Exit strategy of 10 yrs

Typically the annual mgnt fee is 2% of committed funds plus 20% of the profits when business is sold. (called carried interest)

Question 16

Hedge funds

Answer 16

No Sec registration needed. Less transparent compared to mutual fund.

Can trade anything including shorting, derivatives and riskier assets.

Fees r higher; typically 2% mngt fee and 20% profit
Lock up period of 1 yr so not very liquid

Owners have skin in the game.

Funds if hedge funds; mutual fund based on hedge funds

Question 17

Unit investment trusts: UIT

Answer 17

Unmanaged invst. Company organized as trust.

Question 18

Etfs

Answer 18

Invest in index like s&p 500.
Are SEC registered and trade like close-end funds in the market.
Lower fees
Trade on margin

Question 19

Reits

Answer 19

Not taxes as corp. if they receive 75% of their income from real estate and distributing 90% or more of its taxable income to its shareholders.

Question 20

benefits and risks of pooled investments:

Answer 20

1 Diversification
2. Professional Management

Mutual Funds:
Pros:
1. Diversification
2. Prof. mngmt
3. Choice of objectives: (Growth, conservative, variety of choices..)
4. Convenience
5. Liquidity
6. Exchange privileges

Cons:
fees and expense, price fluctuations, other factors:

Private funds:
Pros:
1. Opp. for large profit
2. Say in the management
3. Added diversification

Cons:
1. Business risk
2. Liquidity risk
3. Lack of transparency

Hedge funds:
Pros: Positive returns
plenty of choices
reduce overall risk of portfolio
uncorrelated returns

Cons:
expense
liquidity
risky
approval of general partners needed