Unit 3 - Pooled Investments (Study Guide) Flashcards
There are three borad types of investment companies. What are they?
The Investment Company Act of 1940 classied the three types: Face-Amount Certificate Companies (FACC); Management Investment Companies, & Unit Investment Trusts (UITs)
What is a management investment company?
A management investment company, which actively manages a securities portfolio to achieve a stated investment objective.
what are the two types of Management Investiment Companies?
They cosed-end or open-end
Are Mutual Funds closed-end or open-end nvestment companies?
They are Open-End Investment companies
What is NAV and how is it determined?
NAV is Net Asset Value per share. It is determined by subtracting liabilities and dividing that by the number of shares outstanding.
Does the definition of investment company include holding companies?
No
What is the composition of Management Investiment companies board of directors?
No more than 60% who meet the definition of interested persons. Or, at least 40% of the board must be non-interested or outside directors. That is to say, are just normal investors.
Open-Ended Investiment companies are prohibited from engaging in several activities. Mutual Funds may not do what?
Purchase any security on margin
Participate on a joint basis in any trading account in securities (i.e., an investment -company cannot have a joint account with someone else)
Sell any security short; or
Acquire more than 3% of the outstanding voting securities of another investment company.
The Investment Company Act of 1940 prohibits registered open-end investment companies from engaging in any of the following practices except
A. issuing common stock.
B. selling short or purchasing securities for the company’s portfolio on margin.
C. owning more than 3% of the outstanding voting securities of another investment company.
D. opening a joint account with another investment company.
A. The one thing that all open-end investment companies must do is issue common stock. That is the form of ownership. All of the other activities are prohibited.
In order for an investment company’s board to make fundamental investment policy changes, a majority vote of the outstanding voting stock is required. Examples of fundamental changes would include:
A change in subclassification, such as from an open-end to a closed-end company or from a diversified to a nondiversified company;
Deviation from any fundamental policy in its registration statement, including a change in investment objective; and
Changing the nature of its business so as to cease to be an investment company.
What must an investment company be worth prior to the public offering of securities?
No registered investment company is permitted to make a public offering of securities unless it has a net worth of at least $100,000.
A 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 underwriter. These contracts must be in writing and provide what in that the contract?
Precisely 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 two years; and
May be terminated at any time, without penalty, by the board of directors or by majority vote of the shareholders on not more than 60 days’ written notice to the investment adviser.
Individuals who are affiliated with the investment company or its underwriter have certain restrictions when it comes to dealing with the fund. These individuals cannot do what?
Sell any personally owned security to the fund except redeeming personally owned shares of the fund (like any other investor);
Borrow money from the fund; or
Purchase from that investment company any security other than the fund’s shares.
What is the definition of an affiliated person?
An affiliated person is defined as any person directly or indirectly owning, controlling, or holding, with power to vote, 5% or more of the outstanding shares of the investment company.
An affiliated person also includes 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.
However, while technically considered an affiliated person, no person is deemed to be an “interested person” for purposes of the maximum percentage of interested persons on the board solely by reason of being a member of the fund’s board of directors or
an owner of its securities. A person is deemed to be a control person when owning or controlling more than 25% of the outstanding shares.
What is a control person?
A person is deemed to be a control person when owning or controlling more than 25% of the outstanding shares.
ABC is an FINRA member broker-dealer. Among other functions, it serves as the principal underwriter of the XYZ Mutual Fund. Which of the following transactions of ABC would be prohibited?
A. ABC tenders, from its investment account, 500 shares of the XYZ Mutual Fund for redemption.
B. ABC purchases, for its investment account, 500 shares of XYZ Mutual Fund.
C. ABC purchases some securities directly from XYZ’s portfolio.
D. All of these.
C. It would be a violation of the Investment Company Act of 1940 for any affiliated person, such as the principal underwriter, to purchase any security from an investment company other than shares of the fund itself. Investing in the fund’s shares would be permitted, not prohibited.
Which of the following statements correctly expresses requirements under the Investment Company Act of 1940?
I. A registered open-end investment company using a bank as custodian must choose one that has FDIC coverage.
II. If an affiliated person of a registered investment company wishes to borrow money from the fund, there must be at least 300% asset coverage.
III. No investment advisory contract may be entered into that does not provide for termination with no more than 60 days’ notice in writing.
IV. No registered investment company may acquire more than 3% of the shares of another investment company.
A. I and II
B. I and IV
C. II and III
D. III and IV
D) The Investment Company Act of 1940 requires that all advisory contracts contain a provision that the contract may be terminated upon no more than 60 days’ notice in writing, choice III. The act prohibits any registered investment company from owning more
than 3% of the shares of another investment company, choice IV, making choice D the correct answer. There are no circumstances under which an affiliated person can borrow from the fund, and it is not a requirement that the custodian bank have FDIC insurance.
As described in the Investment Company Act of 1940, the term management investment company would include
A. face-amount certificate companies, unit investment trusts, and open-end and closed-end investment companies.
B. unit investment trusts and open-end and closed-end investment companies.
C. open-end and closed-end investment companies.
D.growth funds and income funds
C) The act describes three kinds of investment companies: FACCs, UITs, and management companies. Management companies are divided into two types: open end and closed end. The definition in the act does not list different objectives, such as growth and income.
What type of stock is open-ended, or Mutual Funds, allowed to issue?
Common Stock
An investor is always purchasing newly issued shares of common stock when investing in
A. a closed-end investment company.
B. an open-end investment company (mutual fund).
C. a unit investment trust (UIT).
D. a holding company.
B. A unique characteristic of mutual funds is that they are capitalized by a continuous offering of new shares. Whenever an investor adds to her portfolio, she is buying new shares of common stock issued by that fund. In a UIT, the investor is purchasing units, not shares.
What must be given to a prospective investor before or during an soliciation for sale?
Because mutual funds are a continuous new offering, the prospectus must be distributed to a prospective investor before or during any solicitation for sale
How does a Closed-end investment company raise capital and subsequently trade?
It does so by offering common stock. It registers a fixed number of shares with the SEC and offers them for a limited time. They can also issue bonds or preferred stock.
Closed-end investment companies are known as?
Publicy Traded Funds
Closed-end investment companies trade based on what for their shares?
Supply and Demand whose market price is independent of the fund’s NAV.
What are country funds?
Country funds are funds that 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.
What is Public Offering Price (POP)?
any person who wants to invest in the company buys shares directly from the company or its underwriters (or a broker-dealer with a selling agreement) at the public offering price (POP).
What is the value of POP?
NAV plus any applicable sales charges.
How are Net Assets calculated?
Calculated daily by subtracting assts from liabilities.
How is NAV per share calculated?
Dividing the funds assets by the number of outstanding shares.
What are redeemable securities?
When an investor sells shares, the company redeems that at their NAV.
What is the difference between open-end and closed-end as it relates to capitalization?
Open-end is Unlimited, continuous offering of stocks; Closed-end offers fixed, single offering of shares’
What is the difference between open-end and closed-end as it relates to Issues?
Open-end issues common stock only, no debt securities; Closed-End issues common stock, preferred stock, & debt securities
What is the difference between open-end and closed-end as it relates to shares?
Open-End offers full or fractional shares whereas Closed-end officers only full shares.
What is the difference between open-end and closed-end as it relates to offering and trading?
Open-end seld and redeemed by fund only, continuous primary offering, must redeem shares, and NAV + Sales charge. Closed-end initial primary offering, secondary trading via exchange or OTC, does not redeem shares, at current market value plus commission
What is the difference between open-end and closed-end as it relates to pricing?
Open-End selling price determined by formula in the prospectctus and the price can never fall be the NAV; Closed-end price is determined by supply and demand so it can be above, below, or the same as NAV.
When is the NAV computed for both types of investment companies?
Open-end companies commpute it daily whereas Closed-end compute it once per week is determined by supply and demand.
What is Forward Pricing?
Price is detemined on went the order is requested. If before 4 PM than the price will be what the NAV is calculated that day. If an order is received after 4 PM, the price will be the computed NAV of the next day.
Daniella has a number of investment company products within her retirement portfolio. One of these investments trades on an exchange and may trade at a premium or discount to its net asset value. These features are most likely found in what type of investment?
A. Closed-end investment company
B. Unit investment trust
C. Open-end investment company
D. Face-amount certificate company
A. A closed-end investment company (closed-end fund, or CEF) is a type of investment company whose shares trade in the secondary market. It is critical to remember for the exam that the price of the shares of a closed-end company is based on supply and demand and, therefore, can sell at, above, or below the fund’s net asset value.
All mutual funds, load and no-load, have expense ratios. The expense ratio is calculated how?
The expense ratio is calculated by dividing annual operating expenses by the average dollar value of
the fund’s assets under management. The sales charge is not considered an expense when calculating a fund’s expense ratio.
Mutual funds distributors use three different methods to collect the fees for the sale of shares. What are they?
Front-end loads (difference between POP and net NAV)
Back-end loads (contingent deferred sales loads)
12b-1 fees (asset-based fees—technically not a sales charge, but may be referred to as an asset-based sales charge on the exam)
What are Class A shares?
Front-End Loads. Front-end sales loads are reflected in a fund’s public offering price. The charges are added to the NAV at the time an investor buys shares. They are frequently referred to as Class A shares and have lower operating expense ratios than other classes.
What is another name for Back-end sales loads?
Contingent Deferred Sales Charge or load (CDSC), is charged at the time an investor redeems mutual fund shares. The sales load, a declining percentage charge that is reduced annually (for instance, 8% the first year, 7% the second, 6% the third, and so forth), is applied to the proceeds of any shares sold in that year. The back-end load is usually structured so that it drops to zero after six to eight years, at which time the shares are converted to Class A with their lower operating expense ratios. They are frequently referred to as Class B shares.
What are Class B shares?
Back-End sales load, aka a contingent deferred sales charge or load (CDSC).
What are 12b-1 Asset-Based Fees?
Mutual funds cannot act as distributors for their own fund shares except under Section 12b-1 of the Investment Company Act of 1940. This provision permits a mutual fund to collect a fee for promotion or sales-related activities in connection with the distribution of its shares. The fee is determined as a percentage of the fund’s average net assets during the year.
Is there a limit to 12b-1 Asset-Based Fees
typically they are 0.5% of net assets but cannot exceed 0.75% of net assets.