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FINRA Series 6 > Unit 2: Investment Company Securities & Variable Contracts > Flashcards

Unit 2: Investment Company Securities & Variable Contracts Flashcards

1
Q

Variable Annuities

A

popular retirement instrument that may invest in mutual funds or may invest directly in individual securities for the purpose of funding a customer’s retirement

most suitable for someone who can fund the contract with cash

not suitable for anyone who might need the lump sum of cash back

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2
Q

Investment Company Act of 1940

A

three types of investment companies:

  1. face-amount certificate companies (FACs)
  2. unit investment trusts (UITs)
  3. management investment companies

requires that a mutual fund must have $3 of assets for each $1 it borrows

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3
Q

Face-Amount Certificate Companies (FACs)

A

contract between an investor and an issuer in which the issuer guarantees payment of a stated (face amount) sum to the investor at some set date in the future

  • classified as investment companies
  • pay a fixed rate of return
  • do not trade in the secondary market but are redeemed by the issuer

very few operate today

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4
Q

Unit Investment Trusts (UITs)

A
  • investment companies
  • UIT shares are not traded in the secondary market, they must be redeemed by the trust
  • UITs are not actively managed, there is no board of directors or investment advisor

fixed UIT: purchases a portfolio of bonds and terminates when the bonds in the portfolio mature

nonfixed UIT: purchases shares of an underlying mutual fund

similar to a mutual fund

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5
Q

Management Investment Companies

A

actively manages a securities portfolio to achieve a stated investment objective

either closed-end or open-end
both sell shares to the public in an initial public offering

can be diversified or nondiversified

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6
Q

Closed-end Investment Companies

A
  • fixed, single offering of shares
  • may issue common and preferred stock and debt securities
  • issues full shares only
  • initial primary offering limited to authorized number of shares to be sold, secondary trading in OTC or on an exchange, does not redeem shares
  • price determined by supply & demand
  • shareholder rights: dividends, voting, and preemptive rights
  • are sold with prospectus during IPO only
  • FINRA sets ex-date
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7
Q

Open-end Investment Companies

A
  • unlimited, continuous offering of shares
  • issues common stock only
  • issues full or fractional shares
  • sold and redeemed by the fund only, continuous primary offering, must redeem shares
  • Shareholder rights: dividends, voting
  • board of directors sets ex-date

may borrow from banks provided their asset-to-debt ration is not less than 3:1 or 300%

similar to mutual funds

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8
Q

Diversified investment company

A

one that meets requirements of the 75-5-10 test

75% of fund’s total assets must be invested in securities issued by companies other than the investment company itself or its affiliates

no more than 5% of fund’s total assets are invested in the securities of any one issuer (part of 75%)

no more than 10% of the outstanding voting securities of any one issuer is owned (part of 75%)

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9
Q

NonDiversified Investment Company

A

does not meet the 75-5-10 test

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10
Q

Hedge Funds

A

type of equity security with similarities to a mutual fund
hedge fund does not have to register with the SEC
have high min. initial investment requirements and are only available to accredited investors
free to adopt far riskier investment policies than ordinary mutual funds

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11
Q

Real Estate Investment Trusts (REITs)

A
  • an owner of REITs holds an undivided interest in a pool of real estate investments
  • trade on exchanges and OTC
  • not investment companies (open or close-end)
    • offer dividends and gains to investors but do not pass through losses like limited partnerships and are not considered to be direct participation programs (DPPs)
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12
Q

SEC registration

A

companies may register for SEC if they are
1. in the business of investing in, reinvesting in, owning, holding or trading securities
OR
2. 40% or more of the company’s assets are invested in securities

need at least $100,000 in net assets and clearly defined investment objective

two parts:
1. Part 1, N1-A Prospectus
2. Part 2, statement of additional information (SAI)
disclaimer

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13
Q

Investment Company Prospectus

A

mutual funds must always be sold with a prospectus

closed-end funds must be sold with prospectus in their IPO only

financial info in a prospectus may be no more than 16 months old

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14
Q

Margin

A

the use of money borrowed from a bank through a brokerage firm to purchase securities

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15
Q

Mutual Fund trading activities prohibited by the SEC

A

margin account trading
short selling
joint account trading
naked (uncovered) options trading strategies

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16
Q

Board of Directors duties

A

defines the type of funds to offer
defines the fund’s objective
approves/hires the transfer agent, custodian and investment advisor

at least 40% of directors must be independent or non interested persons

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17
Q

Underwriter

A

distributes fund shares

paid by sales charge

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18
Q

Transfer Agent

A

customer service
redeems shares
paid from fund income

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19
Q

Custodian

A

safekeeper of funds and securities
paid from fund income
generally a commercial bank

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20
Q

investment advisor

A

trades the portfolio
adheres to portfolio objectives
paid from fund income
fee is largest fund expense

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21
Q

Statutory Prospectus (full)

A
  • must be distributed to an investor before or during the solicitation
  • contains fund’s objective, investment policies, sales charges, management expenses, and services offered
  • discloses 1, 5, & 10 year performance histories or performance over the life of the fund whichever is shorter
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22
Q

Summary Prospectus

A

summary of key information in the fund’s statutory prospectus

after receiving this, investors will either purchase fund shares using the application found therein or request a statutory prospectus

if investor purchases fund shares after summary prospectus, they must receive a copy of the statutory prospectus no later than the confirmation of the sale

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23
Q

Statement of Additional Information (SAI)

A

required by Mutual funds and closed-end funds to have available to investors upon request without charge

additional info from prospectus

  • blaance sheet
  • statement of operations
  • income statement
  • portfolio list at the time the SAI was compiled
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24
Q

Financial Report

A

Investment Company Act of 1940 requires that shareholders receive financial reports at least semiannually

one of these must be an audited annual report

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25
Q

Mutual Funds Characteristics

A
  • offer guaranteed marketability
  • redeemable securities, do not trade in secondary market
  • professional investment adviser manages the portfolio for investors
  • provide diversification by investing in diff companies
  • allow minimum investment $500 or less to open an account and allow additional investment for as little as $25
  • investor has voting rights of one vote per share
  • contain manage portfolios
  • regulated by investment company act of 1940
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26
Q

Net Asset Value (NAV) formula

A

determines price of mutual fund shares because they don’t trade in the secondary market so value is not determined by supply and demand

Total Assets - Liabilities = Net Assets

Net Assets/Shares Outstanding = NAV

calculated at least once per business day usually cat 4pm ET every business day

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27
Q

Public Offering Price (POP)

A

purchase price of a fund share

for front-end loaded shares it is NAV + sales charge

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28
Q

FINRA sales charges restrictions

A

members are prohibited from assessing sales charges in excess of 8.5% of the POP on customers’ mutual fund perchases

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29
Q

closed-end funds

A

may trade at a premium (above) or a discount (below) relative to their NAV

in IPO do not have sales charge imbedded in share price

in secondary market, investor pays a brokerage commission or pays a markup or markdown

spread between NAV and POP must be greater than 8.5%

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30
Q

open-end funds

A

all sales commissions and expenses are embedded in the POP or other fees

front-end loads
back-end loads
level loads

spread between NAV and POP must be 8.5% or less

may never be greater than POP

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31
Q

Front-end loads

A

called Class A shares

the charges included in a fund’s public offering price
most common way of paying for the distribution services a fund’s underwriter and broker/dealers provide

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32
Q

Back-end loads

A

Class B shares

charged if and when an investor redeems mutual fund shares

often called a CDSC

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33
Q

Level loads

A

Class C shares

appropriate for investors that have short time horizons as they become quite expensive to won if investing for more than 4 or 5 years

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34
Q

12b-1 fees or asset-based distribution fees

A

used to cover the costs of marketing and distributing the fund to investors

used to compensate registered representatives for servicing an account but shouldn’t be confused with sales charges

  • approval requires 3 votes: majority of the outstanding voting securities, full board, and the noninterested members of the board
  • renewal (done annually) requires two votes
  • termination requires either a majority of the outstanding voting securities or the noninterested members of the board
  • charges covered by 12b-1 fees include advertising, sales literature, and prospectuses delivered to potential customers, not fund management expenses
  • fund may charge no more than .25% of average net assets for 12b-1 fees
  • max. charge is .75% for distribution and promotion
  • charged and reviewed quarterly
  • FINRA allows an additional .25% charge for shareholder services but that is treated separate from 12b-1 charge
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35
Q

Sales Charge percentage formula

A

when NAV and POP are known

POP - NAV = sales charge dollar amount

sales charge dollar amount/POP = sales charge percentage

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36
Q

Name Rule

A

instituted to prevent abuse

requires a registered investment company with a name suggesting that the company focuses on a particular type of investment such as stocks, bonds, federal or municipal debt invest at least 80% of its assets in the type of security indicated by its name

a small-cap, mid-cap, or large-cap fund seeking max flexibility with respect to its investments would be free to select a name that does not connote a particular investment emphasis

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37
Q

Large-cap funds

A

growth with low risk

companies with market capitalization of more than $10 billion

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38
Q

Small-cap funds

A

capital gains/higher risk

companies with market capitalization of less than $2 billion

39
Q

Mid-Cap funds

A

companies with market capitalization of between $2 and $10 billion

40
Q

Income funds

A

stresses current income over growth

41
Q

Specialized Sector Funds

A

specialize in particular economic sectors or geographic areas

wishes to invest in medical technology and is not risk averse

must have a min. of 25% of their assets invested in their specialties

42
Q

Special situation funds

A

buy securities of companies that may benefit from a change within the companies or in the economy

seek investments in undervalued companies

43
Q

Blend/core funds

A

stock funds with a portfolio comprised of a number of different classes of stock (growth stocks and value stocks)

44
Q

Index funds

A

invest in securities to mirror a market index, such as the S&P 500

45
Q

Foreign stock funds

A

invest mostly in the securities of companies that have their principal business activities outside the US in order to diversify an investor’s portfolio

long term capital appreciation is their primary objective, although some funds also seek current income

46
Q

Principal Protected Funds

A
  • closed to new contributions during their protected periods
  • protect initial principal for those mutual fund shares that are held to maturity, but interim gains generated on such principal are not protected
  • typically front-end loaded
47
Q

Balanced funds

A

known as hybrid funds

invest in stocks for appreciation and bonds for income

diversify securities and is conservative
capital gains/income/lower risk

48
Q

Asset Allocation Funds

A

purchase variety of assets to achieve capital gains, income, diversification, low risk

split investments between stocks for growth, bonds for income, and money market instruments or cast for stability

fund advisers switch the percentage of holdings in each asset category according to the performance of that group

49
Q

Bond Funds

A

income is their main investment objective

  1. corporate bond funds
  2. tax-free bond funds
  3. US government and agency security funds
50
Q

Corporate Bond Funds

A
  • have higher credit risk than various government issues but can still be classified as investment grade or non investment grade (riskier)
51
Q

Municipal Bond Fund

A

dividends are federally ta exempt and capital gains are subject to taxation

52
Q

US Government and Agency Security Funds

A

purchase securities issued by the US Treasury or an agency of the US government such as Ginnie Mae

investors seek current income and maximum safety

53
Q

Money Market Funds

A

open-end funds that serve as temporary holding tanks for investors who are most concerned with liquidity and safety

54
Q

Blue-chip funds

A

invest in established more recognized companies with large market capitalization to achieve growth with less risk

desires capital growth with minimal risk

55
Q

Conservative growth fund

A

capital gains/low risk

56
Q

Aggressive growth fund

A

wishes to maximize capital gains quickly with high risk tolerance

57
Q

Fund of hedge funds

A

possibly enhanced growth/high risk

58
Q

Factors when comparing mutual funds

A
  1. performance
  2. costs
  3. taxation
  4. portfolio turnover
  5. services offered
59
Q

Mutual Funds Performance

A

law requires each fund disclose the average annual total returns for 1, 5, and 10 year periods or as long as fund has operated

performance must reflect full sales loads with no discounts

60
Q

Mutual Funds Costs

A

sales loads, management fees and operating expenses reduce investor returns because they reduce the amt of money available for investment

61
Q

expense ratio

A

for all mutual funds

calculated by dividing a fund’s expenses by its average net assets

usually between 1% and 1.5% of a fund’s average net assetts

*factors effecting expense ratio:
1. BOD stipend
2. investment adviser fee
3. custodian fee
4. transfer agent fee
5. 12b-1 fee
6. legal and accounting expenses
sales load not included

62
Q

Portfolio turnover ration

A

reflect costs of buying and selling securities and a fund’s holding period

aggressive growth funds often have a turnover rate of 100% or more meaning it holds its securities on average for less than one year

63
Q

services mutual funds offer

A
  • retirement account custodianship
  • investment plans
  • check-writing privileges
  • telephone transfers
  • conversation privileges
  • combo investment privileges
  • withdrawal plans
64
Q

Voluntary accumulation plan

A

mutual fund investment plan

allows a customer to deposit regular periodic investments on a voluntary basis

flexible contribution and frequency

65
Q

Dollar Cost Averaging

A
  • investing a fixed amount of money every period, regardless of market price fluctuation

purchases more shares when prices are low and fewer when prices are high

does not guarantee profits in a declining market just results in a lower cost per share than the average price per share

66
Q

Contractual Plans

A

no longer sold

nonbinding agreement to make periodic payments (monthly) to the plan company for a specific period (10 or 20 yrs) to be invested in a particular mutual fund

**
Front-end load:
- maximum sales charge that may be withdrawn in any one year = 50%

Spread load:

  • max average sales charge that may be withdrawn over any 4-year period = 16%
  • max sales charge that may be withdrawn in any one year = 20%

9% max sales charge percentage over the life of any contractual plan (both front-end and spread load)

67
Q

Withdrawal Plans

A
  1. fixed-dollar plan
  2. fixed-percentage or fixed-share plan
  3. fixed-time plan
  • never guaranteed rate of return
  • charts and tables must be cleared by SEC before use

*RISK: investor may outlive his income

68
Q

fixed-dollar withdrawal plan

A

customer pay request the periodic withdrawal of a fixed-dollar amount

fund liquidates enough shares each period to send that sum

69
Q

fixed-percentage or fixed-share withdrawal plan

A

either a fixed number os hares or a fixed percentage of the account is liquidated each period

70
Q

fixed-time withdrawal plan

A

customers liquidate their holdings over a fixed period of time such as 10 years

amount of each check is determined by the performance of the fund and therefore unknown

71
Q

Types of Mutual Funds

A 
B- Balanced
BD - bond
C - common
CN - Canadian
CV - convertible bond, preferred stock
FL - flexible
H - hedge
L - leverage
P - preferred
SP - specialized
TF - tax-free
72
Q

Annuity

A

an insurance contract designed to provide retirement income

payments guaranteed for the life of the annuitant, until the annuitant reaches a certain age, or for a specific number of years

amount to be paid not guaranteed

*mortality guarantee

73
Q

Fixed Annuity

A

investors pay premiums to the insurance company that are invested in the company’s general account

guaranteed rate of return

inflation risk

74
Q

Index Annutity

A

market participation with a guarantee against loss based on performance of S&P 500

participation rate (max growth)
guaranteed minimum interest rate
75
Q

Variable Annuity characteristics

A

investor assumes the investment risk

must be sold with prospectus by individuals with insurance license and securities license

invested in separate account (have diversified portfolios of common stock), not guaranteed

contain manage portfolios

regulated by investment company act of 1940

have voting rights on investment policy and investment advisor one vote per share

guarantees fixed mortality expense and fixed administrative expense and minimum ROR

76
Q

Immediate Annuity

A

purchased with a lump sum and the payout of benefits usually commences within 60 days

77
Q

Bonus Annuities

A

enhancement of buyer’s premium with insurance company contributing an additional 3-5% to the premium payment

higher fees and expenses, longer surrender periods than typical 7-10 years

78
Q

accumulation stage

A

growth phase

number and value of accumulation units is used to calculate the total number of annuity units

79
Q

annuity phase

A

payout phase

80
Q

Life Annuity/Straight Life

A

company will pay annuitant for life, but when they die the insurer keeps the leftover

largest monthly income

81
Q

Annuity with Period Certain

A

period of 10-20 years of guaranteed payments even if annuitant dies

if annuitant lives to age 150 they would keep receiving benefits but if they die in 5 years, beneficiary would receive income for 5 more years

82
Q

Joint Life with Last Survivor Annuity

A

guarantees payments over two lives

smaller check than period certain

83
Q

Unit Refund Option

A

minimum number of payments are made upon retirement

if value remains after death it is payable in lump sum to beneficiary

guarantees full refund

84
Q

Largest to Smallest Monthly Income Annuity Options

A
  1. Life only
  2. Life with 10 year period certain
  3. Joint and last survivor
  4. Unit refund
85
Q

Deductions form the gross premium in Variable Life

A

(acronym PASS)

  • premiums
  • administrative fee
  • sales load
  • state premium taxes
86
Q

Deductions form the seperate account in Variable Life

A
  • mortality risk fee (COI): risk policyowner may live past assumed age
  • expense risk fee: risk the costs of administering and issuing policy are greater than assumed
  • investment management fee
87
Q

Frequency of DB, cash value, and unit value calculations

A 
DB = annually
CV = monthly
UV = daily
88
Q

Frequency of DB, cash value, and unit value calculations VL

A 
DB = annually
CV = monthly
UV = daily
89
Q

Contract Exchange VL

A

VL for WL contract
must be available for a min. of 2 years
no medical underwriting is required

90
Q

Free-Look Period VL

A

45 days from submitting application
or
10 days from receiving policy

whichever is longer
if insured wants refund, get all money paid back

91
Q

VL voting rights

A

one vote per $100 CV funded by separate account

92
Q

VL voting rights

A

one vote per $100 CV funded by separate account

93
Q

Life insurance settlement options

A
  1. lump sum
  2. second to die
  3. annuity
  4. interest income only

FINRA Series 6 (6 decks)

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