Unit 8- Investment Companies

Question 1

What is the 75-5-10 requirement for a diversified management company?

Answer 1

• 75% of the funds assets must be invested in securities neither the fund nor its affiliates issued.
• The 75% must be invested in such a way that:

1) No more than 5% of the funds total assets are in the stock of a single company.

And

2) No more than 10% of the voting shares of another company are owned.

Question 2

Which closed-end fund does not trade in the secondary market?

Answer 2

Interval Funds

Question 3

Features of a business development company?

Answer 3

• 70% of assets in “eligible assets.”
• Provides managerial assistance.

Question 4

Maximum sales charge for an open ended mutual fund?

Answer 4

8.5%

Question 5

How far can you backdate a LOI?

Answer 5

90 days from the initial purchase.

Question 6

Does share appreciation contribute to the fulfillment of a LOI?

Answer 6

No…just funds invested.

Question 7

Annum allowed 12b-1 fee?

Answer 7

0.75%

Note: can add a 0.25% service fee on top of this. But this is technically not part of the trailer fee.

Question 8

Minimum 12b-1 fee if a fund is calling itself “no-load”?

Answer 8

0.25%

Question 9

Formula for a funds Net Investment Income?

Answer 9

NII = (interest + dividends) - operating costs

NOTE: sales expenses aren’t included in operating expenses.

Question 10

How do funds qualify as a Regulated Investment Company and avoid triple taxation?

Answer 10

The fund must distribute 90% or more of its NII

Question 11

Investment company BOD requirements?

Answer 11

No more than 60% of the BOD can be an interested party (40% or more must be outsiders) .

Question 12

Prohibited activities for open ended investment companies?

Answer 12

• Buying securities on margin
• Selling short
• Having a joint account with someone else
• Aquire more than 3% of the outstanding voting shares of another investment company.

Question 13

When is a majority vote of an open ended investment companies share holders required?

Answer 13

When doing the following:

• Change in classification (open to closed end, or diversified to non-diversified)
• Decision from registration statement/change in investment philosophy.
• Ceasing to be an investment company.

Bottom line: the company works for the shareholders, so any action that impacts them must be voted on.

Question 14

Minimum size for an investment company to make a public offering?

Answer 14

$100,000 net worth

Question 15

Requirements regarding the contract between the investment company and its investment advisors and underwriters?

Answer 15

• Contract must describe all compensation paid
• Must be approved by BOD, of majority shareholder vote
• Can be terminated at anytime without penalty, within 60 days of written notice.
• Contract renewal must include a majority vote of the BOD that is not an interested party (the 40%)

Question 16

Investment company custodian requirement?

Answer 16

Investment companies must keep their assets at a custodian (bank, broker dealer, etc). Does not need to be FCID insured.

Question 17

Investment company reporting requirements?

Answer 17

• Balance sheet and income statements are filed with the SEC annually.
• Financial reports sent to the shareholders semi-annually.

Question 18

What are the anti-reciprocal rules when selling shares of an investment company?

Answer 18

• Can’t compensate a rep based on the amount of commission generated from the sale is a specific investment company.
• Member cannot encourage their reps to sell a shares from a specific investment company, based on commissions to be generated.

Question 19

Requirements for Non-cash compensation?

Answer 19

• Can not be contingent on achieving a sales target.
• physical gifts can not exceed $100/yr
• Occasional meals or tickets may be given.
• Attendance of an event can be sponsored of the rep gets approval from employer, the venue is reasonable, and the expenses of any guest the rep brings are not covered. Travel expenses for the rep can be covered.

Note: these same principals apply with regard to a member firm and its sales staff.

Question 20

What is the gift rule?

Answer 20

• No gift can be given in any form that exceeds $100, if it is tied to the business of the recipients employer.
• There is no limit to the gifts that can be given to employees, if it’s not tied to the business (example: wedding).

Note: this ruse is different than the non-cash compensation rules.