Series 7 STC Investment Companies (Ch. 9) Flashcards
In order to be characterized as a diversified company, an investment company must:
Have at least 75% of its assets invested in a prescribed way
Not hold securities of any one issuer in an amount greater than 5% of its total assets
Not hold more than 10% of the outstanding voting securities of an issuer
Comply with all of the above
Comply with all of the above
All of the following are legitimate 12b-1 expenses of a mutual fund, EXCEPT:
Printing expenses
Trailer commissions
Management fees
TV advertising costs
Management fees
A 12b-1 fee is used to pay the costs of distributing and marketing fund shares to the public. The fee can cover costs associated with printing, TV advertising, and trailing commissions. However, management fees are charged to pay the fund’s adviser for making the investment decisions in the portfolio.
The ABC Fund has a contingent deferred sales charge that begins at 4% and decreases to 0% after the fourth year. If a customer redeems shares of the fund 18 months after purchase, the appropriate CDSC will be:
Added to the fund’s offering price
Subtracted from the fund’s offering price
Added to the fund’s NAV
Subtracted from the fund’s NAV
Subtracted from the fund’s NAV
Redemptions of mutual fund shares are based on the next calculated NAV after the proper tender of a redemption notice. A fund’s NAV is also referred to as the bid price. Any redemption charges or contingent deferred sales charges are then deducted from the NAV, which is the net amount that the investor receives.
A mutual fund’s NAV is also referred to as the ____ price
Bid
All of the following are important factors to consider when recommending the class of mutual fund shares a customer should purchase, EXCEPT:
The investor’s anticipated holding period
The amount of money to be invested
Whether the fund offers a letter of intent or rights of accumulation
How much the RR will earn from the sale
How much the RR will earn from the sale
If an investor asks a registered representative to underline the most important facts in a mutual fund prospectus, the RR:
Cannot do this since it violates federal securities laws
May do this if a principal of the broker-dealer approves the change
May do this if the change is filed with FINRA
May do this without restriction since it was at the customer’s request
Cannot do this since it violates federal securities laws
A prospectus cannot be amended or altered in any way even with a highlighter unless the changes are filed with the SEC. An RR may discuss portions of the prospectus with the client, but should not make any marks on the document.
How long does an investor have to meet the Letter of Intent obligation (LOI)?
13 months
An individual invests $12,000 in the ABC family of funds and signs a letter of intent (LOI) for the additional $13,000 that’s needed to reach the first breakpoint. Which of the following actions will satisfy her LOI commitment?
Investing another $20,000 in the ABC fund family 15 months later
Investing another $15,000 at the same broker-dealer, but in a different fund complex
Purchasing $25,000 of a variable annuity that contains some subaccounts that are sponsored by the ABC fund family
Investing another $15,000 in the ABC fund family within 13 months.
Investing another $15,000 in the ABC fund family within 13 months.
To qualify for a breakpoint, all of the fund purchases must be within the same mutual fund family (complex). For this reason, any purchase of shares from another fund family will not be included. A purchase made 15 months later occurs too late since all purchases under an LOI must occur within 13 months. A purchase of a variable annuity is also of no benefit since the purchases of annuities and mutual fund shares are not typically considered combined purchases.
Regarding the compensation paid to a mutual fund’s investment adviser (IA), which of the following statements is TRUE?
The IA earns a portion of the profits that are generated by the portfolio.
The IA earns a portion of the 12b-1 fee.
The IA is paid based on the assets under management.
The IA is paid a percentage of the sales charges which cannot exceed 25 basis points.
The IA is paid based on the assets under management.
Mutual fund managers are compensated based on a percentage of the assets under management. This compensation may be referred to as the management or investment advisory fee. Fund managers are not compensated through the sales charges or 12b-1 fees that are collected.
A mutual fund has an NAV of $26.85 and a sales charge of 8%. In order to find the public offering price, an investor must divide the NAV of $26.85 by:
The 8% sales charge
The number of shares outstanding
100% plus the 8% sales charge
100% minus the 8% sales charge
100% minus the 8% sales charge
A mutual fund’s asked price or public offering price (POP) can be calculated by dividing the NAV by 100% minus the sales charge percentage (i.e., POP = NAV ÷ [100% - Sales Charge %]). In this question, the POP is $29.18 ($26.85 ÷ 92%).
What is the POP equation?
POP = NAV / (100% - Sales Charge%)
Shares of which type of investment company are purchased at their net asset value?
An open-end investment company
A closed-end investment company
A UIT
A no-load mutual fund
A no-load mutual fund
No-load funds offer their shares at the net asset value. There’s no sales charge or commission added to the cost of the shares. However, no-load funds may include a 12b-1 fee, but the 12b-1 fee cannot exceed .25% of the fund’s net assets per year.
The NAV of an open-end investment company is $40.22 and the sales charge is 7.25%. Based on this information, what’s the asked price?
$40.22
$43.36
$43.13
$47.47
$43.36
To find the asked price (AP), the net asset value (NAV) must be divided by the complement of the sales charge (SC), as shown below:
AP = NAV ÷ (100% - SC)
AP = $40.22 ÷ (100% - 7.25%)
AP = $40.22 ÷ 92.75%
AP = $40.22 ÷ .9275
AP = $43.36
The POP is the same as the _____ price
Ask
An investor has owned mutual fund shares for eight months and receives a cash distribution. The distribution is from gains on the sale of securities that were held in the fund’s portfolio for 18 months. Which of the following statements is TRUE regarding the taxation of the distribution?
Subchapter M of the IRS Code states that the fund is responsible for all taxes.
The investor pays taxes at ordinary income rates.
The investor pays taxes at capital gains rates.
The gains are not taxed until the investor liquidates the shares of the fund.
The investor pays taxes at capital gains rates.
The tax status of a distribution is determined by how it originated in the fund’s portfolio. This distribution represents profits on the appreciation of securities held for 18 months by the fund. Therefore, the distribution is taxed as a long-term capital gain to the shareholder who receives it. The length of time the shares were held by the shareholder is not relevant.
The tax status for mutual fund distributions is determined by the ______ holding period
Fund’s
Investment companies that have no management fees, have low sales charges, and create fixed portfolios of municipal or corporate bonds are categorized as:
Open-end investment companies
Closed-end investment companies
Unit investment trusts
Face-amount certificate companies
Unit investment trusts
The expense ratio of a mutual fund is indicative of:
The operating efficiency of the fund
The frequency of investor redemptions
Portfolio turnover
How the fund performs in bull and bear markets
The operating efficiency of the fund
The expense ratio of a fund measures the fund’s operating efficiency. It’s calculated by dividing fund expenses by its average net assets. Expense ratios are not always a good source of comparison between funds because smaller funds typically have higher ratios than larger funds. The expense ratio is disclosed in the prospectus.
To qualify as a regulated investment company under Subchapter M, an investment company must:
Distribute at least 90% of its net investment income to shareholders
Pay tax on all net investment income prior to making distributions to shareholders
Retain all net investment income to avoid paying taxes
Distribute all net investment income to shareholders
Distribute at least 90% of its net investment income to shareholders
To qualify as a regulated investment company, the company must distribute a minimum of 90% of its net investment income to shareholders. Most investment companies elect to distribute virtually all of their net investment income, since any undistributed portion would be taxable to the investment company.
If a broker-dealer is soliciting mutual fund transactions, when must it deliver the prospectus to an investor?
Within seven days of the settlement date
On the settlement date
At or prior to the solicitation to sell the mutual fund shares
On the trade date
At or prior to the solicitation to sell the mutual fund shares
A solicitation or offer to sell a fund’s shares must either be preceded by or accompanied by the current prospectus. The delivery may be made in physical or electronic form. Broker-dealers must have systems in place to ensure that clients receive this document before any purchase orders are processed.
Which of the following BEST describes switching?
The sale of one mutual fund followed by the reinvestment of the proceeds in another mutual fund
A change in a client’s investment objectives
The conversion of Class B shares to Class A shares after a set period
The transfer of a customer’s account from one broker-dealer to another
The sale of one mutual fund followed by the reinvestment of the proceeds in another mutual fund
Switching refers to the sale of one mutual fund followed by the reinvestment of the proceeds in another fund. There may be very good reasons for a registered representative (RR) to recommend a switch to a customer, such as a change in investment objectives or poor fund performance. However, not only is a switch a taxable event, it can also result in additional sales charges. When the benefits to the RR outweigh the benefits to the customer, switching becomes a prohibited activity. RRs should be prepared to justify any switch as being in the customer’s best interest
