SIE Exam: Unit 4

Question 1

4: Face-amount certificates (FACs)

Answer 1

Not managed. Contract between investor and issuer in which issuer guarantees payment of a stated (face amount) sum to investor at some set date in the future. Investor pays fee, if pay in lump sum fully paid FAC. Very few FAC companies operate today.

Question 2

4: Unit investment trusts (UITs)

Answer 2

Not managed. Organized as a trust. Create a portfolio of debt or equity designed to meet the company’s objectives. Sell redeemable interests (shares). Each share is undivided interest in underlying portfolio.
Fixed: terminates when bonds mature or at predetermined date. Portfolio is static, no active management or portfolio turnover.
Non-fixed: purchases shares of an underlying mutual fund.

Question 3

4: Managed Investment Company (closed and open end)

Answer 3

Actively managed.
Closed-end: IPO is limited and closes
Open-end: perpetually offering new shares.
ETF, mutual fund, separate accounts

Question 4

4: Closed-end Fund

Answer 4

Raise capital through common stock offering. Registers a fixed number of shares with SEC and offers them for a limited time. Can buy in secondary market after fund is closed. Can issue common stock, preferred stock, and debt securities. Intraday pricing.

Question 5

4: Open-end Fund (mutual fund)

Answer 5

Only issues common stock. Continuous primary offerings, raise an unlimited amount of investment capital by continuously issuing new shares. Do not trade on secondary market. Priced at end of business day (NAV). Transactions entered by 4 PM

Question 6

4: Annuity

Answer 6

Insurance contract designed to provide retirement income. Stream of payments guaranteed for a period of time, actual amount paid out may not be guaranteed.

Question 7

4: Annuitization

Answer 7

One time irreversible election to give up ownership of the assets in return for a lifetime income guaranteed by the insurance company. Amount of income determined based on gender, age, account value, payout option, assumed interest rate (GAAPI).

Question 8

4: Mutual Funds

Answer 8

Pool of investors money invested in various securities as determined by fund’s stated investment objective. Offer guaranteed marketability, each investor owns undivided interest, distributions at NAV, can reinvest, can be full or fractional shares.
Provide diversification, allow a minimum investment, can reduce sales charges based on investment size, voting rights, offer reinvestment of dividends (taxable), liquidate without disturbing portfolio balance, Form 1099, withdrawal plans, reinstatement provisions to reinvest w/o sales charge within 30 days, maximum sales charge is 8.5% of the POP.

Question 9

4: Class A Shares (front-end load)

Answer 9

Have front-end loads. Sales charges paid at the time an investor buys shares and sales charge taken from total amount invested.
Best for large investments and longer time frames.

Question 10

4: Class B Shares (back-end load)

Answer 10

Back-end load (contingent deferred sales charge). Paid at time an investor redeems. Sales load is a declining percentage charge reduced annually and applied to proceeds of any shares sold in that year. Drops to zero after an extended holding period (5 years). Shares then converted to A class and no sales charge applied at time of redemption. 
Better for long term investors with smaller investments.

Question 11

4: Class C Shares (level-load)

Answer 11

Have a one year, 1% CDSC, a 0.75% 12b-1 fee, and a 0.25% shareholder services fee. Appropriate for short-term investors because become expensive if own for more than 4-5 years.

Question 12

4: No-load shares

Answer 12

No sales charge, shares purchased at NAV. Can charge purchase fees, account fees, exchange fees, redemption fees.

Question 13

4: Breakpoints

Answer 13

Quantity discounts on mutual funds, greater the investment the lower the sales charge.

Question 14

4: Letters of Intent (LOI)

Answer 14

LOIs decrease immediate sales charge. Informs mutual fund of intention to invest additional funds necessary to reach the breakpoint within 13 months.
One sided contract binding to the fund only. If not completed in 13 months have to send a check for difference in sales charge or cash in escrowed shares to pay for difference

Question 15

4: Rights of Accumulation

Answer 15

Investor can qualify for reduced sales charges. Are available for subsequent investments and do not only apply to initial transactions. Allow investor to use prior share appreciation to qualify for breakpoints, do not impost time limits.

Question 16

4: Combination Privilege

Answer 16

Can combine investments in 2 or more funds within same fund family to reach a breakpoint.

Question 17

4: Exchange privilege

Answer 17

Allow investor to convert an investment in one fund for an equal investment in another fund in the same family without incurring an additional sales charge. Considered a taxable event.

Question 18

4: Breakpoint Sales

Answer 18

Sales just below the breakpoint. Must make investors aware of breakpoint schedule. Failure to disclose triggers a breakpoint sale violation.

Question 19

4: Forward pricing

Answer 19

NAV calculated at end of each day, the price the customer receives is the next NAV calculated after receipt of redemption request. Always have to wait until next available calculation to determine the value of shares redeemed or number of shares purchased.

Question 20

4: NAV Calculation

Answer 20

Changes daily, calculated at EOD.
Fund NAV=total assets - total liabilities
NAV per share= Fund NAV / shares outstanding.

Question 21

4: Expense ratio

Answer 21

Compares management fees and operating expenses, including any 12b-1 fees, with the fund’s net assets.
Expense ratio = expenses / average net assets.
Includes manager fee, admin fees, BOD costs, 12b-1 fees.
Does not include sales charges or loads.

Question 22

4: Full or Statutory Prospectus

Answer 22

Full and fair disclosure document that provides prospective investor with the material information needed to make a fully informed investment decision. Must be distributed before or during solicitation. Must contain key information to appear in clear and concise format and includes fund’s objective, investment policies, sales charges, management expenses, and services offered. Discloses 1, 5, and 10 year performance histories.

Question 23

4: Summary Prospectus

Answer 23

Summary of key information. Investor must be able to access full prospectus. Cover page must include fund’s name and share class, ticker, if ETF market that it trades on, legend with toll-free number to request paper delivery of prospectus or website where can be downloaded.
Also must provide investment risks, performance, fees, investment objectives, investment strategies, related risks, portfolio holdings, management, shareholder information, financial highlights.

Question 24

4: Statement of Additional Information (SAI)

Answer 24

Required to have for delivery in 3 business days of an investor’s request without charge. Includes fund’s history and policies, include fund’s consolidated financial statements (balance sheet, statement of operations, income statement, portfolio list).

Question 25

4: Omitting Prospectus (Rule 482)

Answer 25

Fund advertisement.

Question 26

4: Avoiding Triple Taxation of Mutual Fund

Answer 26

If mutual fund qualifies under Subchapter M of Internal Revenue Code (IRC). Acts as conduit or pipeline for distribution of net investment income (NII) may qualify subject to tax only on the amount of investment income the fund retains. Investment income distributed to shareholders escapes taxation at mutual fund level. Requires fund to distribute at least 90% of its net investment income to shareholders. Pays taxes on undistributed 10%.