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Series 66 Exam > Unit 14: Pooled Investments > Flashcards

Unit 14: Pooled Investments Flashcards

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Series 66 flashcards
1
Q

What is an investment company?

A

corporation or trust through which investors may acquire an interest in large, diversified portfolios of securities by pooling their funds with other investors’ funds

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2
Q

What are the 3 types of investment companies?

A

FACC, Management Investment companies, and UITs

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3
Q

What is NOT included in the definition of an investment company?

A

holding companies

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4
Q

Investment Company Act of 1940

A

SEC registration of investment companies and their activities

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5
Q

Face-Amount Certificate Companies

A

contract between and investor and an issuers in which the issuer guarantees payments of a stated (or fixed) sum to the investor at some set date in the future

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6
Q

Management Investment Companies

A

actively managements a securities portfolio to achieve a stated investment objective

2 types: closed-end and open-end (mutual funds)

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7
Q

All open-end investment companies must issue:

A

common stock

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8
Q

At least ____ of the board of directors must be non interest persons.

A

40%

Noninterest = outside directors which are usually academics or prominent community members

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9
Q

What are the prohibited activities for investment companies?

A
  • Purchasing any security on margin
  • Cannot have a joint account with someone else
  • Sell any security short
  • Acquire more than 3% of the outstanding voting securities of another investment company
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10
Q

A majority vote of the outstanding voting stock is required (shareholder vote)
for:

A
  • A change in subclassification
  • Deviation from any policy in its registration statement (change in investment objective)
  • Changing the nature of its business as to cease to be an investment company
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11
Q

Size of Investment Company

A

no registered investment company is permitted to make a public offering of securities unless it has a net worth of at least $100,000

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12
Q

Contracts must be in writing and provide that the contract:

A
  • describes all compensation to be paid
  • Will be approved at least annually by the board of directors or by majority vote of the shareholders if it is to be renewed after the first 2 years
  • Provides that it may be terminated at any time, without penalty, by the board of directors of by majority vote of the shareholders on not more than 60 days’ written notice to the investment adviser
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13
Q

No advisors contract, whether initial or renewal,

A

may take effect without approval of the noninterested members of the board.

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14
Q

Affiliated persons cannot:

A
  • Sell any personally owned security to the fund except redeeming personally owned shares of the fund
  • Borrow money from the fund
  • Purchase from that investment company any security other than the fund’s shares
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15
Q

Who is an affiliated person?

A

any person owning, controlling, or holding with power to vote 5% or more of the outstanding shares of the investment company

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16
Q

Who is a control person?

A

when owning or controlling more than 25% of the outstanding shares

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17
Q

Custodian

A

required that every registered investment company keep its assets with a custodian, such as a bank

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18
Q

Redemption of Shares - Mutual Funds

A

be sent within 7 days and the investor receives the next computed NAV per share using the forward pricing principle

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19
Q

Periodic and Other Reports

A
  • Must file annual financial reports with the SEC

- Shareholders must be sent financial information semiannually

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20
Q

Open-End Investment Companies (Mutual Fund) Initial Capitalization

A
  • Does not specify the exact number of shares it intends to issue
  • Can raise an unlimited amount of investment capital by continuously issuing new shares
  • An investor is always purchasing a newly issued share
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21
Q

Because mutual funds are a continuous new offerings,

A

the prospectus must be distributed to a prospective investor before or during any solicitation

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22
Q

Closed-End Investment Companies Initial Capitalization

A
  • Conducts a common stock offering to raise capital
  • For the initial offering, the company registered a fixed number of shares with the SEC and offers them to the public for a limited time through an underwriting group (like corporate stock)
  • Fund’s capitalization is fixed unless it wants an additional public offering is made at a latter time
  • Can also issue bonds and preferred stock
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23
Q

Closed-end investment companies are commonly known as

A

publicly traded funds

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24
Q

Closed-end investment companies trade based upon

A

supply and demand for their shares. As a result, their buying and selling price does not have a direct relationship to the NAV of the shares. Put another way, the market price of a closed-end fund is independent of the fund’s NAV.

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25
Q

Country funds are funds that

A

concentrate their investments in the securities of companies domiciled in foreign countries. Well-known examples are the Korea Fund, the New Germany Fund, and the Mexico Fund.

These country funds are generally organized as closed-end companies because it is often difficult to liquidate the foriegn securities to get their value into the United States.

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26
Q

POP =

A

NAV per share + any applicable sales charges

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27
Q

How often is NAV usually calculated for closed-end funds?

A

once a week

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28
Q

Forward Pricing

A

compute NAV once per day as of the close of the market, prices are based on the next computer NAV

  • Order received prior to 4 pm ET will be executed at the price computed as of that day’s market close
  • Order received at 4 pm or later will be executed based on the next business day’s NAV
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29
Q

All mutual funds, load and no-load, have:

A

expense ratios

Expense ratio = annual operating expenses / average dollar value of the fund’s assets under management

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30
Q

Typically, more aggressive funds have

A

higher expense ratios

31
Q

Closed end funds do not carry

A

sales charges.

An investor pays a brokerage commission in an agency transaction or pays a markup or markdown in a principal transaction.

32
Q

Class A (front-end):

A

investors pay the charge at the time of purchase

33
Q

Class B (back-end):

A

declines over time to investors pay the charge at redemption

34
Q

Class C (level load):

A

no sales charge to purchase, generally a 1% CDSC for one year, with a continuous 12b-1 charge

35
Q

Class I:

A

only sold to institutional investors and usually have lower fees and expenses

36
Q

Class R:

A

would only be sold to participants in retirement plans such as a 401(k) and have no front-end or back-end load, but may have a 12b-1 fee

37
Q

Breakpoints

A

a scale of declining sales charges based on the amount invested

38
Q

Rights of accumulation

A

permits an investor to aggregate shares owned in related account in some or all funds in the fund family to reach a breakpoint discount with no time limit

39
Q

Who does NOT qualify for breakpoints?

A

Investment clubs or associations form for the purpose of investing

40
Q

In practice, very few firms will accept an order for Class B shares in excess

A

of $100,000

41
Q

Letter of Intent (LOI)

A

the investor informs the investment company that he intends to invest the additional funds necessary to reach the breakpoint within 13 months.

Appreciation and reinvested dividends do not count toward the LOI.

42
Q

If not complete within 13 months, the investor will be given the choice

A

of sending a check for the difference or cashing in escrowed shares to pay the difference.

43
Q

Backdating the Letter

A

a fund often permits a customer to sign an LOI as late as 90 days after an initial purchase. If the customer signed the LOI after 60 days, they have 11 months to complete the letter

44
Q

Purchases may be combined with

A

spouses and dependent children, but not other family members, such as siblings.

45
Q

Private Funds

A

generally referred to as private equity funds, limit their ownership so as not to be considered investment companies

46
Q

Direct investment

A

the funds have a 10% of greater voting interest in an operating company with the goal of influence management and operations

47
Q

Portfolio investments

A

The fund does not acquire a control position and builds a portfolio that may be stock, bonds, and/derivatives

48
Q

Private Liquidity Fund

A

any private fund that seeks to generate income by investing in a portfolio of short-term obligations to maintain a stable NAV

  • Like a money market fund
  • Exempt from SEC registration
49
Q

Venture Capital Funds

A

generally organized as limited partnerships where investment decisions are made by the general partner with the capital coming from LPs

  • They look for young, promising companies with an expectation of high returns in exchange for the high risk
50
Q

Hedge Funds are generally organized as:

A

a limited partnership with no more than 100 investors that does not have to register with the SEC, although the portfolio managers are usually required to register as an IA.

  • Much higher management fee
  • illiquid - lock up provisions
  • Limited to accredited investors (institutional clients and wealthy individuals)
51
Q

Hedge fund managers have

A

“skin in the game,” so they have a greater motivation to succeed

52
Q

Hedge funds are indirectly available”

A

to ordinary investors through mutual funds called funds of hedge funds. This offers not only diversification but also the liquidity of the mutual fund.

53
Q

What do hedge funds and mutual funds have in common?

A

They are pooled investments.

54
Q

What is a united investment trust? (UIT)

A

A UIT is an unmanaged investment company organized under a trust indenture.

  • Do not have board of directors
  • Do not employ an investment adviser
  • Do not actively manage their own portfolios (trade securities)
55
Q

UIT only issues

A

redeemable units.

56
Q

An ETF registers with the

A

SEC under the Investment company Act of 1940 either as a UIT ETF or an open-end ETF. In both cases, the ETF computes its net asset value daily just as would any other UIT or open-end company.

57
Q

An ETF trades like

A

a stock on an exchange and in this way is similar to a closed-end investment company

58
Q

Most ETFs are passive in that

A

they are based on some index. However, in recent years, there has been a growth in actively traded ETFs where instead of attempting to mirror an index, the managers select individual assets based upon expected performance.

59
Q

ETFs can be purchases

A

on margin and sold short

60
Q

Expenses of ETFs tend to be

A

lower than mutual funds

61
Q

Because there are brokerage commissions on each trade, ETFs are generally

A

not competitive with a no-load index fund for small investors making regular periodic investments such as a dollar cost averaging plan

62
Q

What is a REIT?

A

A company that manages a portfolio of real estate investments to earn profits and/or income for its shareholders. Normally publicly traded and service as a source of long-term financing for real estate projects. Shareholders received dividends from investment income or capital gains distributions.

63
Q

Types of REITs:

A

Own commercial property → Equity REITs

Own mortgages on commercial property →

Mortgage REITs
Own both → Hybrid REITS

64
Q

REITs are organized as

A

trusts

65
Q

An owner of REITs holds an

A

undivided interest in a pool of real estate investments.

66
Q

REITs are not

A

investment companies (they are trusts)

67
Q

REITs offer dividends and gains to investors but do not

A

flow through losses like limited partnership, and therefore are not considered DPPs.

68
Q

How much of a REIT’s assets must be presented by real estate assets?

A

at least 75%

69
Q

In order to qualify as a REIT, the REIT must

A

distribute at least 90% of its taxable income.

70
Q

Front-end loads

A

% of POP

Frequently referred to as Class A Shares

71
Q

Back-end loads

A
  • charged at the time an investor redeems shares
  • is reduced annually and eventually drops to 0 at which time they are converted to Class A shares
  • frequently referred to as Class B shares
72
Q

12b-1 fees

A
  • asset-based fees, typically not a sales charge
  • % of the fund’s average NAV during the year (typically 0.5% of net assets and cannot exceed 0.75%)
  • If the fee exceeds 0.25% the fund cannot use the term no-load
73
Q

In order to charge a 12b-1 fee, the plan must meet the following requirements:

A
  • The plan had been approved by a vote of at least a majority of the outstanding voting securities
  • Been reapproved at least annually
  • The plan may be terminated at any time by a vote

Series 66 Exam (18 decks)

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