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Series 66 > Unit 3 - Pooled Investments > Flashcards

Unit 3 - Pooled Investments Flashcards

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Series 66 flashcards
1
Q

Types of Investment Companies

A
  1. Face-Amount Certificate (FAC) Companies
  2. Management Investment Companies
  3. Unit Investment Trusts (UITs)
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2
Q

Do management investment companies include holding companies?

A

No, Management Investment Companies do not include holding companies

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3
Q

Calculate Net Asset Value (NAV)

A

NAV = (All Assets - Liabilities)/# of shares outstanding

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4
Q

What percentage of Board of Directors in management investment companies (open-end and closed-end) must be “non-interested”?

A

40%

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5
Q

What activities are open-end investment companies (mutual funds) prohibited from engaging in?

A
  1. Purchasing any security on margin
  2. Participating on a joint basis in any trading account in securities (i.e. can’t have joint account)
  3. Sell any security short
  4. Acquire more than 3% of the outstanding voting securities of another investment company
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6
Q

Registered investment company must have net worth of ? to make public offering

A

$100,000

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7
Q

Majority vote of the shareholders is required to approve the contract between the investment company and its investment adviser and the contract with its principal underwriting. These contracts must be in writing and provide that the contracts -

A
  1. Describe all compensation to be paid
  2. Be approved at least annually by the board or by majority of shareholders (if renewed after first two years); and
  3. May be terminated at any time, without penalty by board or majority vote of shareholders on not more than 60 days written notice to the investment adviser
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8
Q

What is an Affiliated Person?

A
  • Any person directly or indirectly owning, controlling or holding, with power to vote, 5% or more outstanding shares of an investment company.
  • Any person directly or indirectly controlling, controlled by, or under common control with the investment company or any officer, director, partner, or employee of the investment company.
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9
Q

What is a Control Person?

A

A person owning or controlling more than 25% of outstanding shares.

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10
Q

The Investment Company Act of 1940 requires that proceeds from redemption of shares of mutual funds be sent in how many days?

A

7 days

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11
Q

How often must investment companies file annual financial reports with the SEC?

A

Annually

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12
Q

How often must shareholders receive financial information from investment companies?

A

Semi-annually

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13
Q

Open-end investment companies - Initial Capitalization

A
  1. Does not specify # of shares
  2. Registers open offering with SEC
  3. Continuously issues new shares
  4. Investors always purchasing new issue (primary offering with the money going to the issuer - the mutual fund)
  5. Can only ISSUE common stock (for initial capitalization)
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14
Q

Closed-end investment companies - Initial Capitalization

A
  1. Fixed shares of common stock through underwriting group
  2. Can also issue bonds and preferred stock
  3. Capital structure similar to any corporation - common stock, preferred stock, and bonds
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15
Q

Closed-end investment companies are commonly known as -

A

Publicly Traded Funds

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16
Q

How are closed-end investment companies traded

A

Based on supply and demand
(Market price not linked to the funds NAV)

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17
Q

What are country funds?

A

Funds that concentrate their investments in the securities of companies domiciled in foreign countries

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18
Q

How are country funds generally organized and why?

A

Country funds are generally organized as closed-end companies because it is often difficult to liquidate foreign securities to get their value into the US

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19
Q

What is a mutual funds Public Offering Price (POP)?

A

POP = NAV + applicable sales charge

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20
Q

Open-end company - Capitalization?

A

Unlimited; continuous offering of shares

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21
Q

Open-end company - Issues?

A

Common stock only; no debt securities

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22
Q

Open-end company - Shares?

A

Full or fractional

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23
Q

Open-end company - Offering and Trading?

A

Sold and redeemed by fund only
Continuous primary offering
Must redeem shares

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24
Q

Open-end company - Pricing?

A

NAV + sales charge (known as public offering price - POP)
Selling price determined by formula in the prospectus; the price can never be below the NAV

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25
Q

Closed-end company - Capitalization?

A

Fixed; single offering of shares

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26
Q

Closed-end company - Issued?

A

May issue common stock, preferred stock, debt securities

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27
Q

Closed-end company Shares

A

Full only

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28
Q

Closed-end company - Offering and Trading

A

Initial primary offering
Secondary trading OTC or on an exchange
Does not redeem shares

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29
Q

Closed-end company - Pricing?

A

Price determined by supply and demand, so it can be above, below, or the same as NAV

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30
Q

How often do closed-end funds compute NAV?

A

Once per week

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31
Q

How often do open-end companies compute NAV?

A

Once per day - 4pm EST

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32
Q

What is forward pricing?

A

Price determination for purchase and sales of mutual funds - the next computed NAV per share

33
Q

Mutual funds - FINRA prohibits sales charge greater than?

A

8.5% of POP (public offering price)

34
Q

Calculate a mutual fund’s expense ratio

A

Expense Ratio = Annual Operating Expenses/Average dollar value of fund’s assets under management

35
Q

What is the sales charge of a mutual fund?

A
  1. Commissions for managing underwriter and broker dealers and agents who sell the fund
  2. Expenses incurred with communications to the public
  3. Stated as a percentage of POP per share
36
Q

Three methods used by mutual fund distributors to collect the fees for the sale of shares -

A
  1. Front-end loads
  2. Back-end loads
  3. 12b-1 fees
37
Q

What is a front-end load of a mutual fund?

A
  1. Reflected in fund’s public offering price (POP)
  2. Known as Class A shares
  3. Lower operating expenses
38
Q

What is a back-end load of a mutual fund?

A
  1. Referred to as Contingent Deferred Sales Charge (CDSC)
  2. Charge when redeemed
  3. Declining % each year
  4. Drops to 0% in 6-8 years
  5. Known as Class B shares
39
Q

What is a 12-b1 Asset Based Fee of a mutual fund?

A
  1. Only way a fund can collect a fee for promotion or sales related activities
  2. Typically 0.5% - can’t be more than 0.75%
  3. Must be voted on annually by board and non-interested persons of the company
  4. Can be terminated at any time by vote of board and non-interested persons of the company
40
Q

How are 12b-1 fee used for a mutual fund?

A

Marketing and distribution only

41
Q

Two ways to reduce sales charge in a mutual fund

A
  1. Breakpoints
  2. Rights of Accumulation
42
Q

What are breakpoints (mutual fund)?

A

Scale of declining sales charge based on amount invested

43
Q

What are Rights of Accumulation (mutual fund)?

A

Combine previous investments in the fund with today’s to determine today’s sales charge

44
Q

What does the term “sales load” refer to (mutual fund)?

A

The mutual fund’s sales charge as a % of price of purchase (POP)

45
Q

Maximum allowable sales charge of mutual fund?

A

8.5%

46
Q

What is a Private Equity Fund?

A
  1. Limit their ownership to under 100 investors so as not to be considered investment companies
  2. Most organized as partnerships
  3. Hedge fund type of private fund
47
Q

What are exemptions for Private Equity Fund?

A
  1. 3(c)(1) exemption - they don’t have to register
  2. 3(c)(7) exemption - all investors must be qualified purchasers (individuals with at least $5M in investments, or business entities with at least $25M in investments)
48
Q

Two categories of Private Equity Funds

A
  1. Those that make Direct Investments - funds have 10% or more voting interest in operating company with goal of influencing management/operations
  2. Those that make portfolio investments - Fund does not acquire a control person; Builds portfolio - stocks, bonds, derivatives, etc.
49
Q

What is a Private Liquidity Fund?

A
  1. Type of Private Equity Fund
  2. Any private fund that seeks to generate income by investing in a portfolio of short-term obligations in order to maintain a stable NAV per unit or minimize principal volatility for investors
50
Q

What are Venture Capital Funds?

A
  1. Organized as Limited Partnerships
  2. Capital comes from limited partners (wealthy individuals, pension & endowment funds, hedge funds)
  3. Look for young up and coming companies
51
Q

Common characteristic of Private Equity and Venture Capital Funds?

A

Their management fee is 2% + 20% of profits - called carried interest

52
Q

What are Hedge Funds

A

Organized as limited partnership with no more than 100 investors and no registration requirement

53
Q

Hedge Funds Prospectus referred to as -

A

Private Placement Memorandum (less info)

54
Q

Typical fee structure of a Hedge Fund?

A
  • Performance Based
  • Known as “2 and 20” - most funds take a 2% management fee and 20% of any profits
  • Fund compensation agreemnets may also contain hurdle rate - where incentive fee will only be paid if the fund return exceeds a set threshold return (ex. 4%)
55
Q

What is general minimum for Hedge Fund?

A

$500,000 - $1M

56
Q

How are most Hedge Funds organized?

A

As limited partnerships with the portfolio manager investing along with the investors

57
Q

What are Unit Investment Trusts (UIT)?

A

Unmanaged investment company organized under a trust indenture
- No board of directors
- No investment advisor
- No actively managing their own portfolios

58
Q

What type of securities do Unit Investment Trusts issue?

A

Redeemable securities - units or shares of beneficial interest

59
Q

What is an Exchange Traded Fund (ETF)?

A
  • Registered with SEC as either UIT or open-end management company
  • Invests in specific index
  • Similar to mutual fund but trades like stock on exchange or NASDAQ (makes it similar to closed-end)
  • Most passive but can be actively managed
  • Can be purchaed on margin and sold short
  • Lower expenses
  • Tax advantages
  • Brokerage commissions with each trade (so not competitive with no load index fund)
  • Shares not redeemable
60
Q

Advantages of ETFs over Mutual Funds?

A
  1. Intra-day trading
  2. Lower expenses
  3. Can be purchased on margin
61
Q

What are Real Estate Investment Trusts (REIT)?

A

Can own commercial property (equity REIT), own mortgage on commercial property (mortgage REIT), or both (hybrid REIT)

62
Q

A REIT must invest how much of total assets in real estate assets and case?

A

At least 75%

63
Q

A REIT must derive how much of its gross income from real estate related sources?

A

At least 75%

64
Q

A REIT must distribute how much of its taxable income to shareholders annually in the form of dicidends?

A

At least 90%

65
Q

An owner of a REIT holds -

A

An undivided interest in a pool of real estate investments

66
Q

Why are REITS liquid?

A

They trade on exchanges and OTC

67
Q

Are REITS investment companies?

A

No (they are not mutual funds)

68
Q

Are REITS considered Direct Participation Programs?

A

No. REITS do offer dividends and gains to investors but do not flow through losses like limited partnerships.

69
Q

Benefits of Mutual Funds

A
  • Diversification
  • Professional Management - register as inv adviser with SEC
  • Choice of objectives
  • Convenience
  • Liquidity - redeem shares at NAV - funds received within 7 days
  • Minimum initial investment - some $100
  • Convenient tax form - 1099
  • Combination privilege - reduce cost
  • Exchanges within family of funds - convert an investment in one fund for an equal investment in another fund in same family at NAV
70
Q

Risks of Mutual Funds

A
  • Market Risk
  • Fees and Expenses - Sales charges, 12b-1 fees, possible redemption fees, management fees, tax efficiency (based on when manager trades)
  • Net redemption - excess of shareholder redemptions over new share purchases; portfolio manager has to decide which assets to liquidate when prices falling
71
Q

Benefits of Private Funds

A
  • By investing before company matures, large profits
  • Structured to give investors say in management and development of company
  • Added diversification
72
Q

Risks of Private Funds

A
  • Business risk
  • Liquidity risk - no secondary market
  • Lack of transparency
73
Q

Benefits of Hedge Funds

A
  • Generate positive returns in up and down markets
  • Variety of investment styles - easy to meet objectives
  • May reduce portfolio risk and volatility, increase returns
  • Proper selection can create uncorrelated returns
74
Q

Risks of Hedge Funds

A
  • Increased expenses
  • Risk
  • Liquidity risk - lock-up period, no secondary market
  • Because it is limited partnership, sale of partnership interests may require approval
75
Q

When retaining the services of an investment adviser for a mutual fund, who must approve?

A
  1. The shareholders
  2. The fund’s board of directors
  3. The portion of the fund’s board consisting of non-interested members (board must be 40% non-interested)
76
Q

Investment adviser of investment company’s contact is good for -

A

Original contract is for 2 years and then renewed annually

77
Q

Are REITs flow through vehicles?

A

No

78
Q

How is the investment objective of a mutual fund change?

A

The majority of outstanding shares must vote to approve the change in an investment objective.

Series 66 (1 decks)

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