Unit 4:1 Investment Companies Flashcards
Investment Company Act of 1940
defines an investment company as being in the business of holding and managing a portfolio of securities for its investors
This federal Act regulates the organization of companies that are in the business of holding and managing a portfolio of securities for its investors.
A federal securities law that sets the SEC registration requirements for investment advisers and sets general guidelines to protect the interests of the public when dealing with investment advisers.
what is an investment company
A corporation, trust, or partnership that issues packaged securities to investors.
a corporation, trust, or partnership that issues packaged securities to investors; collects the investors’ money and then selects the appropriate securities
What is one advantage an investment company offers?
Instant diversification
To be defined as an investment company, a company is required to have all the following
- A clearly defined investment objective 2. A portfolio of securities 3. $100,000 in net assets
The most common investment companies
unit investment trusts and management companies.
Trusts are created to
hold investor funds and securities.
trust is operated by
board of trustees
unit investment trust (UIT)
- established or organized under a trust indenture
- fixed portfolio, which may consist of equity securities (stocks) or debt securities (bonds)
- UITs use a “buy and hold” strategy resulting in lower operating costs and fewer taxable transactions on a year-to-year basis
-Typically invest in a fixed portfolio of securities
-Units are referred to as shares of beneficial interest
-Are redeemable with the issuer
-Have a predetermined end date
-Are not actively managed
This investment company is established under a trust indenture, and issues shares of beneficial interest that are redeemable with the issuer and not actively managed.
shares of beneficial interest (SBIs)
Issued by unit investment trusts as redeemable securities to show ownership interest.
redeemable securities
1. sold to investors in fixed dollar increments (typically $1,000 per unit)
2. Each SBI represents the investor’s ownership in the UIT portfolio
3. typically redeemable back to the issuer, which means the trust will buy back an investor’s units at the net asset value (NAV)
participating UITs
A UIT that purchases mutual fund shares that will be held in a trust.
management company (or management investment company)
organized as a corporation, operates under the direction of a board of directors, and issues shares of undivided interest to investors
2 subcategories: open-end and closed-end management companies.
Board of Trustees
The group that establishes the investment objective and supervises the operations of a trust.
Undivided Interest
Investors share in the profits and losses generated within the portfolio in proportion to their investment, but do not have a beneficial ownership interest in the individual securities.
board of directors (BOD
protect shareholder interest.
Elected by the fund’s shareholders, this group establishes the fund’s investment objectives, oversees the professionals hired by the fund, and protects shareholders’ interests.
responsibility of the fund’s investment adviser (fund manager)
making security selections for the fund’s portfolio
providing investment advice to the fund
maintaining appropriate diversification in the portfolio, and conforming to the investment objective established by the board
managing the day-to-day trading within the portfolio
Advisers register with the SEC using Form ADV.
Management Fees
Investment advisers are paid a fee for their services
based on a percentage of total assets under management
typically the largest ongoing expense for the fund
Custodian
organization, such as a trust company, commercial bank, or similar financial institution, that physically safeguards the cash and securities (stocks, bonds, and certificates) owned by the fund
transfer agent
all recordkeeping and customer service functions for the fund, processes name and address changes, and keeps track of the number of shares owned by each investor
issues new shares to buyers and cancels old shares that have been redeemed.
act as the paying agent for the fund, distributing dividends and capital gains to investors
expense ratio
method for measuring the annual expenses against the average net assets; it shows how efficiently the fund is operating.
Expenses of the Fund
-Board of directors’ stipends
-investment adviser management fees - largest component
-Custodial services
-Transfer agent fee
-12b-1 fee, if charged
-Administrative fee, including legal, accounting, and day-to-day ———-expenses
underwriter
(distributor or sponsor) must be a FINRA member firm
responsible for the preparation of retail communication
activities are prohibited for mutual funds
Buying on margin (buying securities with borrowed funds)
Selling on margin, or short selling
Selling an uncovered (naked) option contract
Covered call writing
acceptable option strategy a mutual fund can use as an investment alternative.
occurs when the fund holds common stock and then the fund sells a call against the common stock.
Option income funds traditionally participate in covered call writing to generate extra income.
Form ADV
The form used to register an investment adviser with the SEC.
Fund Underwriter
They earn compensation for distributing fund shares to BDs and the public and prepare retail communications.
Closed-End Management Company (Closed-End Fund)
An investment company that issues a fixed number of shares through an IPO which will then trade in the secondary market.
Open-End Management Company (Mutual Fund)
An investment company registered with the SEC that does not specify how many shares it will issue and continuously offers new shares to investors in the primary market allowing the fund to raise an unlimited amount of capital.
net asset value (NAV)
price a customer receives upon selling, or redeeming, a mutual fund share
fundamental value of the fund
sales charge/sales load
primary compensation paid to the underwriter and broker-dealers for marketing, advertising, and selling fund shares to the public
expressed as a percentage of the POP, not a dollar amount
sales charges cannot exceed 8.5%.
public offering price (POP)
price the customer pays when purchasing shares of a mutual fund
12b-1 fees
The expenses to cover distribution and sometimes shareholder services
Relationship Between NAV and POP
12b-1 distribution fee includes
Marketing, advertising, and other costs of distributing fund shares
Advertising includes the printing and mailing of prospectuses and sales literature to new investors, but not existing investors
Class A share
sales charge is assessed at the time of purchase
contingent deferred sales charge (CDSC)
only paid if the customer fails to stay invested in the fund for a prescribed minimum period of time
