10.7 Mutual Fund Marketing and Pricing
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---Breakpoint discounts are available only to legal persons. -- An investment club is not considered a legal person, but trusts and corporations are.
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---No-load open-end investment company shares are sold to investors and redeemed through the issuer at their book value, which is the same as their net asset value, or bid price.
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---Orders to redeem shares are executed at the next computed price.
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---The term "breakpoint sale" refers to a sale made at a purchase amount just below a breakpoint (the point at which an investor would qualify for a quantity discount) for the obvious purpose of earning a higher commission.
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---When the customer makes the first investment under a letter of intent, the reduced sales charge applies immediately and to each subsequent investment. -- With each additional investment, the same reduced charge is deducted. --If the customer does not invest the amount stated in the letter, the full sales load applies retroactively to the total investment.
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--12b-1 fees may not be used to pay for the portfolio manager's fees, only for sales promotions and fees, and other activities relating to the distribution of the fund's shares.
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--A breakpoint sale is defined as the sale of mutual fund shares in an amount: ***just below the dollar amount at which the sales charge is reduced.*** --The term "breakpoint sale" refers to the violation that occurs when a sale is made just below the point at which the investor would receive the reduced sales charge. --The practice earns a higher commission for the salesperson but is not in the interest of the customer.
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--A closed-end or exchange-traded fund is purchased on an exchange or over the counter where buyers pay the ask price plus a commission. --Open-end (mutual) funds are purchased at the POP, which includes a sales charge. -- Management company offerings include both open-end and closed-end funds.
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--A fund must notify shareholders of their right to reinvest at least annually (usually communicated through the annual report). --A fund must inform its shareholders of their right to reinvest dividends at NAV annually
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--A redeemable security has no secondary market. --To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. --REITs trade in the secondary markets either on exchanges or OTC.
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--A sales load is the difference between the public offering price and the net asset value per share of the fund.
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--Although a transfer within a family of funds is generally not subject to a sales charge, the customer is liable for any taxes due. --The IRS considers this transaction a sale and a purchase. --Any losses or gains must be declared on that year's tax form.
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--An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund's net asset value --(total assets - liabilities = net assets).
10.7.6.1
--Any concession earned by the member selling the shares must be returned to the principal underwriter of the fund if the shares are redeemed within 7 business days of purchase
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--Breakpoints are not available to investment clubs.
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--Class A shares are purchased at NAV plus sales charge. --Class B shares pay the sales charge upon redemption. --Class D shares have a level load plus a redemption fee. --Class C shares have only a level load (a 12b-1 fee) which is taken from net assets during the year.
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--Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. --Class A shares carry a front-end load. --Class C shares carry a level load.
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--Dividends paid and received by the fund directly affect NAV. -- Changes in the portfolio value affect NAV because the securities are marked to market daily. -- While share redemption will reduce total net asset value, --the number of shares outstanding decreases in proportion, so the NAV per share stays the same.
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--Exchange privileges allow an investor to convert the value of shares held in one fund for those of an equal value in the same family. --Remember that conversion is a taxable event; --if the shares converted have increased in value, capital gains taxes will be due.
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--If a customer redeems mutual fund shares within 7 business days of purchase, any concession earned by the member firm that sold it to him must be returned to the underwriter. The same rule applies to variable annuities.
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--If any security issued by a mutual fund is tendered for redemption within 7 business days after the date of the transaction, --the broker/dealer must refund to the underwriter the full concession allowed to the broker/dealer on the original sale.
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--In a breakpoint sale, a customer unknowingly buys investment company shares in an amount just under a dollar bracket that would qualify for reduced sales charges. --As a result, the registered representative receives a somewhat higher commission but the customer pays higher sales charges, reducing the number of shares purchased and resulting in a higher cost per share
10.7.5.1
--Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore are eligible to purchase new equity issues. -- Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. -- Investment clubs are never permitted to take advantage of breakpoints available on mutual fund purchases.
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--Investment companies may charge the maximum sales load of 8.5% if they offer dividend reinvestment at NAV, rights of accumulation, and quantity discounts (breakpoints). -- If a fund offers none of these features, it cannot assess a sales charge of more than 6.25%.
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--Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. --The income yield of a mutual fund includes dividends only. --A group of friends is not eligible for a breakpoint (investment clubs are not eligible). --"Selling dividends" is a prohibited practice because of the immediate tax liability incurred with the dividend and share price adjustment that results after the dividend distribution.
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--Mutual funds must calculate the value of fund shares at least once per business day; --funds may calculate the value more often and will disclose this fact in the prospectus.
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--Open-end investment companies (mutual funds) are limited to a maximum sales charge of 8.5% of the offering price.
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--Purchase or redemption of mutual fund shares occurs at the net asset value next calculated after the fund receives the order; --this is known as forward pricing.
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--The public offering price (POP) for a quoted mutual fund includes the maximum sales charge the fund distributor can assess.
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--The time limit for a letter of intent is 13 months, but the letter may be backdated up to 90 days from the date it was filed. -- In that case, the investor has 10 months to complete the letter.
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--Two customers cannot combine their purchases to take advantage of a fund's breakpoints. -- Breakpoints are never allowed for investment clubs.
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--Two unrelated adults may not combine transactions to receive a breakpoint.
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A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If he deposits $11,000 6 months later, which of the following statements is TRUE? ***** He will receive a reduced load on $13,200 worth of the shares. --An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. --The sales charge in this case, then, will be based on the total investment of $13,200. -- If at the end of the 13 months the investor had not invested up to the breakpoint, the fund would liquidate enough shares to pay the difference in sales load.
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A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect? A) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. **** ---The exchange is treated as a sale of the growth fund shares followed by a purchase of the income fund shares. ---The gain or loss is determined by comparing the cost basis of the growth fund shares with the net asset value at the time of exchange. --Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund.
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A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has an NAV of $12 and a POP of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that: B) GEM may be an open- or closed-end fund and ABC is a closed-end fund. The price for open-end funds is determined by adding the sales charge to the NAV. -- An open-end fund can never have a POP less than its NAV, ---therefore ABC cannot be an open-end fund.
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A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 in order to qualify for a breakpoint. One year later, the shares are valued at $25,100 even though he has made no new investments. Which of the following statements regarding the above situation is TRUE? ****The representative should remind the customer that he signed a letter of intent 12 months ago. --A letter of intent must be met with dollars invested within 13 months. --The customer needs to invest an additional $7,000 to fulfill his letter of intent. --The representative should remind the customer of his intention to qualify for the reduced sales charge.
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A customer seeks a significant long-term investment in the Ajax fund, a growth-oriented mutual fund. To take advantage of breakpoints applicable to large investments, the customer should purchase: **** Class A shares. **** --For initial purchases, breakpoints are only available if the customer purchases Class A shares, which are sold with a front-end load deducted from the initial investment. -- A substantial purchase can often reduce the sales charge to zero. --Class-B and Class-C shares are sold with annual 12b-1 fees as well as a contingent deferred sales charge. --Class D shares are sold with a level sales load plus a redemption fee.
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A customer wishes to invest $800,000 in the Ajax Fund, an open-end company with a long-term growth objective. In order to take advantage of breakpoints, you recommend that the customer purchase: ********Class A shares. ******* ---Class A shares come with a front-end load that can be reduced or eliminated by breakpoints. ---Class B shares come with a back-end load combined with 12b-1 fees. --Class C shares assess 12b-1 fees. --Class B or C shares cannot take advantage of breakpoint reductions
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A customer wishes to redeem 1,000 shares of a mutual fund. The NAV and POP are $10, and a redemption fee of 0.5% will be charged. How much will the customer pay in redemption fees? ****50. **** --The question did not ask how much he would receive upon redemption, but how much he would pay in redemption fees. ---Mutual fund shares are redeemed at the NAV (bid): 1,000 shares × $10 each = $10,000. $10,000 × .005 (.5% redemption fee) = $50.
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A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to: ----buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and .75% 12b-1 fee. ----------------------------- ---If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; ----------------------------------------------------------- ------the sales load would be lower than that of either Class A or Class B shares.
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A customer with no other mutual fund investments wishes to invest $47,000 in the XYZ Technology Fund. If the Class A shares are eligible for a breakpoint sales charge discount at the $50,000 investment level, the action least appropriate for an agent is to: D) place the order as instructed. ----If a customer intends to invest an amount just below a breakpoint threshold, he should be informed of the breakpoint discount, as well as the various methods by which he can receive it.
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A father opens 4 custodial accounts for each of his children with the same mutual fund company. He invests $15,000 in each account. The fund company has breakpoints at $50,000, $100,000, and $200,000. The sales charge is: ****based on the total $60,000 investment and qualifies for the $50,000 breakpoint.**** --An investment made by one person in 4 custodial accounts for his children at the same fund company would qualify for the breakpoint that is applicable to the total amount invested. In this case, $60,000 was invested, so the applicable breakpoint is at $50,000.
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A letter of intent for a mutual fund does NOT contain which of the following provisions? ---The fund can halt redemption during the period of time the letter of intent is in effect. -------------------------------------------------------- --A letter of intent is not binding on the client in any way. ---Should the client decide to liquidate the account before completing the letter, ---the company will reduce the redemption by the amount of shares held in escrow.
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A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? B) 8.3. (7.8+.5) The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge.
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A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among 5 different mutual funds within 2 fund families, as opposed to purchasing just 1 fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B $495,000 XYZ Research Class B $310,000 XYZ Investors Growth Stock Class B $495,000 ABC Capital Enterprise Class B $495,000 ABC Capital Opportunity Class b $310,000 Total $2,105,000 These recommendations are: ****unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near 0%. ******** ---Class A shares, in most mutual funds, provide breakpoint sales charge discounts so there is no sales charge when purchasing $1 million worth of shares (or less in some cases). ---Class A shares also have lower operating expenses than Class B shares. --This retired investor would be subject to back-end loads with Class B shares if the funds were needed unexpectedly within a few years
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A shareholder invested in a mutual fund and has signed a letter of intent to invest $25,000. Her original investment was $13,000, and her current account value is $17,000. For her to complete the letter, she must deposit: *** 12000. *** Under a letter of intent, the full contribution is required for the letter to be completed. Appreciation is not considered.
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All of the following events will affect the NAV per share of a mutual fund EXCEPT: ****Wholesale redemption of fund shares . *****
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An agent has recommended investments in the XYZ fund family to his customers for 10 years. He is referred by one of his customers to a prospect who has inherited $500,000 as beneficiary of a life insurance policy. The prospect tells the agent she has never invested in the market before, is risk averse, and wants safety of principal to be the first priority with liquidity second. The agent recommends the following investments: XYZ government bond fund, B shares $200,000 XYZ large-cap growth and Income B shares $150,000 XYZ liquid reserve money market $150,000 The recommendation is: ****** B) unsuitable because it does not address the customer's two primary objectives. ****** --The customer's objectives of safety and liquidity are not satisfied by these recommendations. --The government bond fund and large-cap growth and income fund are both subject to market risk and, -- as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. --the back-end load is not consistent with the customer's liquidity objective.
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An investment company share purchased at its NAV that can always be redeemed later at its then-current NAV is a: --Class C share.
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An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is $12.05 bid $13.01 asked, what amount will the investor receive? *** 2410. **** --If a mutual fund has no redemption fee, the investor will receive the bid price per share (net asset value) multiplied by the number of shares being redeemed. --In this case, the investor would receive $2,410 ($12.05 x 200 shares).
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An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the NAV was $11.08. If the current POP is $12.50 and the NAV is $11.80, the investor receives: *** 3540.*** --- investor receives= (# of shares x NAV) --Shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80).
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Five years ago, the ABCD mutual fund bought 200,000 shares of Comet Industries at an average price of $42.25. After a series of accounting scandals, the shares are now trading at $6. If the fund decides to sell its shares, what will be the impact of the sale of Comet shares on the NAV of the ABCD fund? **** The NAV will not change. ***** --Portfolio holdings in a mutual fund are marked to the market each day. --Therefore, the NAV of the fund already reflects the current value of each security in its portfolio, including Comet Industries. ---When the fund sells the position, the value of the stock is replaced by an equivalent amount of cash, so net asset value does not change.
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For a mutual fund that collects a 12b-1 fees, which of the following statements are TRUE? ---The fund may use the money to pay for mailing sales literature. ---The fund's prospectus must disclose the fee. I and IV. ---12b-1 fees may be used only to cover promotional and other distribution expenses for funds that are distributors of their own shares; fee amounts must be disclosed in the prospectus. ---The fund may not use the term" no-load "in any communications with the public if the 12b-1 fee and other service fees exceed .25% of average net assets.
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For the purpose of qualifying for breakpoints, the definition of "any person" includes family units, but only minor children. Adults, other than a husband and wife, are separate persons.
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If a mutual fund's net asset value is $9.30 and its sales charge is 7%, its offering price is: *** 10. *** To determine the selling price of the shares when given the NAV, divide the NAV by 100% minus the sales load: NAV / (100% - SL%) = public offering price. In this case, $9.30 divided by 93% (.93) = $10.
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If a registered representative is seeking to sell shares of an investment company to a client, which of the following statements would be accurate and permissible regarding her recommendation? ---When the client redeems his shares, he will not immediately know their dollar value. ---If the client purchases the shares of 2 or more funds in the same family of funds, he may be entitled to a reduced sales charge. --The purchase of two funds in the same family of funds may qualify an investor for combination privileges. --At redemption, he will receive the next price calculated (forward pricing), which is not yet known. ------------------------------------------------------------------- --Class B shares, or deferred sales charge shares, may or may not provide the best return. --Share class suitability can depend on the amount invested and the client's individual needs. --Lastly, while the dividend is received if the fund shares are purchased before the ex-dividend date, there is no added value. --The fund share price is reduced by the amount of the dividend on the ex-dividend date, just as it would be for a cash dividend paid on equity securities.
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If the ABCD mutual fund has a $25,000 breakpoint on its Class-A shares where the sales charge decreases from 5% to 4%, which of the following purchases would likely represent a breakpoint sale? A) 24000. ---25,000*.96 A breakpoint sale occurs just below a breakpoint where the customer could realize a reduced sales charge. Selling mutual fund shares to a customer just below a breakpoint (to share in the higher sales charges applicable to those sales) is a rules violation.
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If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that: --dividend distributions will be reinvested at net asset value. --capital gains distributions will be reinvested at net asset value. A) I and III. Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value.
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One of your clients purchased shares of the Ajax Mutual Fund several months ago. At that time, the NAV of the fund was $17.20. Today, the NAV is $17.56 and your client wants to know what accounts for the difference. You should advise him that the difference likely represents: *******unrealized appreciation. ******** The NAV of mutual funds is marked to the market daily; the increase reflects higher market prices for the securities in the fund's portfolio.
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The main purpose of dividend reinvestment in a mutual fund accumulation plan is to:. --- compound the growth of a mutual fund investment. --------------------------- --Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. --Taxes are due on dividends whether or not they are reinvested. --Capital gains or losses will occur whether or not dividends are reinvested. -- The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested. --Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends.
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Under the Investment Company Act of 1940, if a customer tenders mutual fund shares for redemption, payment must be made within 7 calendar days, --unless the NYSE is closed on other than a weekend or holiday, or the SEC grants an exception.
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Which of the following is TRUE about a sales agreement between a principal underwriter and a member, which enables the member to receive a discount from the public offering price? --It must be in writing. I---t must provide for a refund of the concession by the member to the underwriter if the shares are redeemed within 7 business days of the sale. **** --All sales agreements must be in writing, -provide for a 7-day refund of the concession, include a stipulation that the member will maintain the public offering price (POP), not the NAV.
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Which of the following is the least suitable mutual fund transaction? B) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence. ---Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, as the client might be subject to substantial additional sales charges.
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Which of the following statements best describes a breakpoint sale? ******* Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission. ******* --A breakpoint sale is a violation of the Conduct Rules. -- It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.
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Which of the following statements regarding 12b-1 fees is TRUE? ****** These fees are charged against the assets of the fund to defray distribution expenses. **** --These fees are used to offset distribution expenses of the fund and are charged against the assets of the fund, and may be assessed against Class-A, -B, and -C shares.
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XYZ Technology Fund permits rights of accumulation. A shareholder has invested $9,000 and signed a letter of intent for a $15,000 investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent? *** 6000. The shareholder must contribute the full $15,000, so he owes an additional $6,000. Reinvested dividends
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mutual fund's unrealized loss last month results in which of the following? ---Lower NAV per share. ---Reduction in the proceeds payable to shareholders who liquidate their shares. --An unrealized loss is the same as a decrease in net asset value. --An investor receives less at redemption than she would have received if the redemption had taken place before the asset's depreciation.
