Investment Companies - Management Companies
Diversified fund
(1) 75% or more of its assets invested in securities (2) a maximum of 5% of its assets invested in any one issuer (3) a maximum of 5% of its assets invested in any one issuer
When a customer redeems, he must be paid within...
...7 calendar days
Under FINRA rules, the maximum sales charge on mutual fund purchases is...
...8 ½% of the Public Offering Price
Breakpoint can also be met by...
...asset appreciation
Net capital gains are distributed to shareholders...
...once a year; net capital losses are not distributed
FINRA requires that 12b-1 funds can impose a maximum sales charge of...
...only 7 ¼% if the fund does not impose fees for account maintenance; and 6 ¼% maximum if the fund does impose service fees for account maintenance; the 12b-1 fee is not allowed to exceed .75% (¾ of 1%) of average annual net assets
Outsiders must comprise X% of a fund's board of directors
40% (non-interested persons)
Non-diversified fund
A fund that does not meet this definition is a non-diversified fund
Current yield on a mutual fund
Annual income / offering price
Fund allocates assets among different types of securities - maintaining a "balance" of equities and fixed income securities
Balanced fund
Investor agrees to invest the same dollar amount periodically in fund shares
Dollar cost averaging; as long as prices fluctuate fairly evenly, dollar cost averaging always results in slightly more shares being purchased, resulting in a lower average cost
This fund invests in "blue chip" equities that provide both dividend income and growth potential
Growth and income fund
Invests primarily in equity securities of rapidly growing companies to achieve capital gains
Growth fund
The practice of placing orders to buy, redeem, or exchange mutual fund shares after the time as of which the fund calculates its daily NAV (typically at 4:00 PM ET)
Late trading
The practice of frequently buying and selling a fund's shares to exploit inefficiencies in how the mutual fund company computes NAV per share
Market timing
The charges for printing of the prospectus (for mutual funds) and for printing the semi-annual reports to shareholders
Printing fees
SEC Rule 12b-1
The fund is permitted to charge the cost of soliciting new investment to the existing shares as "12b-1 fees"; typical 12b-1 fee on these shares is .50% annually, and the representative that sells these shares usually gets half of this annually in the form of "trail commissions."
Expense ratio
Total expenses / total net assets
Mutual funds are redeemed
at NAV less a redemption fee (if any)
The front-end load on a mutual fund is best described as the:
cost of investing in a fund (sales charge)
Class A shares are suitable for
large dollar amounts and long term investors
Expense ratios for fixed unit investment trusts tend to be
much lower than those for mutual funds, since there is no "management fee" to pay; reduced sales charges (breakpoints) are available for large purchases of both fixed UITs and mutual funds
Under the Investment Company Act of 1940, ETFs are registered as...
open-end funds (creation of additional shares via their arbitrage mechanism); though they act like closed-end funds since they trade on exchanges
Board of Directors of open-end funds
set the declaration date, record date, and payable date of dividends, as well as the ex-date (normally set by the exchange, but open-end funds don't trade on exchanges)
Money market funds are unusual in that
the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each
Open end mutual funds are purchased at the offering price
which is inclusive of any sales charges
In order for a fund to charge the maximum 8 ½% sales charge, under FINRA rules, the fund must offer:
(1) Breakpoint (2) Letter of intent (3) Rights of accumulation
Prohibited mutual fund sales practices
(1) Breakpoint sales (2) Trading mutual fund shares (3) Inappropriate recommendation of Class B shares (4) Late trading (5) Market timing
Advantages of ETFs (compared to mutual funds)
(1) continuously priced on the exchange based on the changes in value of the stocks held in the index (2) purchased without a sales charge (3) can be purchased on margin and sold short (4) expenses are comparable or lower (no 12b-1 fees) (5) tax efficient; not obligated to distribute capital gains to shareholders annually
Money market funds
(1) no-load (2) NAV per share is constant at $1.00 (3) As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each
Open-end shares are...
(1) non-negotiable, redeemable securities (2) continuously issued by the sponsor (3) do not trade in the secondary market
Shareholders in a management company have the right to...
(1) vote for the Board of Directors (2) vote for changes in investment objective (3) vote annually on the investment adviser (4) receive annual and semi-annual reports
Sales charge percentage
(Ask - NAV Bid) / Ask
To establish a fund, the Sponsor must start with minimum...
...Total Net Assets of $100,000 of its own
If a customer decides to liquidate John Hancock Bond Fund and uses the proceeds to buy John Hancock Growth Fund, the switch is made...
...at NAV; no sales charge is imposed on the new purchase
When a customer places an order to buy a mutual fund, the customer...
...does not know the exact price at which he or she will buy because the purchase price is computed at that day's closing Net Asset Value
Since open-ended fund shares are continuously issued by the sponsor...
...every purchaser must receive the latest Prospectus
The letter of intent can only last...
...for 13 months, inclusive of the 90-day backdate period
You can give a customer the "breakpoint" sales charge before he gets to that investment level if...
...he signs a letter of intent to purchase more of the fund; you are allowed to backdate the letter to include purchases in the preceding 90 days and get the breakpoint on those shares
Under the Investment Company Act of 1940, management companies are obligated to send financial statements to shareholders...
...semi-annually; financial statements include an income statement for the fund, a balance sheet, and a listing of all holdings in the portfolio
If a customer wishes to redeem a mutual fund, he or she receives...
...that day's closing Net Asset Value
The fund is established by...
...the fund "sponsor" or underwriter
If a fund does not distribute at least 90% of its NII...
...then it is not "Regulated" and all of its NII is taxable
If a fund distributes at least 90% of its NII to shareholders...
...then the fund is "Regulated" under Subchapter M of the Internal Revenue code; a regulated fund pays no tax on the distributed net income; fund only has to pay tax on the retained income
Closed-end funds sell at discounts (premiums) because...
...they give a lesser (greater) rate of return relative to the market
Even though ETFs trade like any other stock, the purchaser is required...
...to be delivered either a prospectus similar to that for a mutual fund, or a "Product Document" summarizing key information about the ETF and the details of where a prospectus can be obtained
If a mutual fund distributes 99% of its Net Investment Income to its shareholders, how much of the Net Investment Income will be taxable?
1%; A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount. So, only the 1% of the income retained will be taxed.
The charges for soliciting new shareholders to become fund investors
12b-1 distribution fees
The main marketplace for ETFs
AMEX (NYSE-MKT)
Current yield (after the ex-date) on a mutual fund
Annual income / (offering price + prior year distributions) Prior year distributions = dividend + capital gain
If an ETF is trading at a discount, designated large institutional investors are permitted to buy the fund shares (at the discount price), and sell (short) the equivalent shares of the stocks in the underlying portfolio; institutional investors are then permitted to exchange the purchased ETF shares for the underlying stocks in the portfolio, which can be used to cover their short positions
Arbitrage mechanism to keep prices at NAV
Ask price formula
Bid (NAV) / 100% - Sales Charge %
Which of the following investment company terms are synonymous? A. Bid; Net Asset Value B. Bid; Public Offering Price C. Ask; Net Asset Value D. Ask; Redemption Price
Bid and Net Asset Value; Bid and Net Asset Value are the same terms for investment company shares. Bid is also the same thing as Redemption Price. Ask is the same thing as Public Offering Price.
Reduced sales charge for a large dollar purchase
Breakpoint
The practice of not making a customer aware that he or she is close to meeting a breakpoint
Breakpoint sales
Impose a higher "up-front" sales charge, but typically have no, or very low (about ¼%), annual 12b-1 fees; these shares are most suitable for long-term investment
Class A shares
Impose a contingent deferred sales charge that declines to "0" the longer the investor stays in the fund, but impose a higher (about ½%) annual 12b-1 fee; these shares are most suitable for intermediate term investment.
Class B shares
Impose no up-front sales charge, and the "rear load" is smaller when the investor leaves; however, these shares have the highest (about ¾%) annual 12b-1 fees; only suitable for short term investment
Class C shares
These funds have a one-time stock issuance and then the funds' books are "closed"; no new shares are issued; the stock then trades on an exchange, and is valued like any other negotiable security.
Closed-end funds
Some funds impose a sales charge only if the customer redeems his shares before a stated time period has elapsed
Contingent deferred sales charges;
The bank charges for safekeeping the fund's investments and for acting as transfer agent and paying agent
Custodial fees
Usually acts as transfer agent for the fund, canceling old shares and issuing new shares. It also keeps the shareholder list, for mailings of reports, proxies, and distributions to shareholders
Custodian bank; holds the portfolio of investments in safekeeping
Specifies a dollar amount to be received periodically (say monthly), and the fund redeems enough shares each month to do this
Fixed dollar
Specifies the number of shares to be redeemed periodically (say monthly); because NAV changes each day, the monthly payments will vary
Fixed shares
Which of the following customers is NOT allowed a breakpoint on mutual fund purchases? I Investment Club II Omnibus Account III Corporate Purchaser IV Individual Purchaser
I and II; Investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint
An investor in a "Ginnie Mae" mutual fund assumes which of the risks? I Prepayment Risk II Credit Risk III Fluctuation of Net Asset Value IV Reinvestment Risk
I, III, and IV; since Ginnie Maes are backed by the full faith and credit of the U.S. Government, there is no credit risk; since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists; as with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise
Which statements are TRUE? I Mutual fund shares can be bought on 50% margin II Mutual fund shares must be paid in full when purchased, but become marginable after being held for 30 days III ETF shares can be bought on 50% margin IV ETF shares must be paid in full when purchased, but become marginable after being held for 30 days
II and III; Mutual fund shares are bought from the fund sponsor and are a prospectus offering. As such, they must be paid in full and only become marginable after being held in the customer's account for 30 days. Mutual fund shares cannot be sold short.
Invests in fixed income securities such as preferred stock and bonds for the current income provided
Income fund; income funds may specialize in one type of fixed income security
Which statement about management fees is TRUE? A. A no-load fund is one that does not have a management fee B. Management fees cannot be more than 8 1/2% of the Public Offering Price C. Management fees cannot be based on fund performance D. Maximum management fees are set under the Investment Company Act of 1940
Management fees cannot be based on fund performance; The Investment Company Act of 1940 does not set maximum management fees either - it requires that shareholders vote on the management contract, which will tend to limit compensation; and that compensation cannot be based on fund gains and losses. The permitted management fee structure is either a flat fee; or a fee based on percentage of assets under management.
Mutual fund redemption fees
Mutual funds can charge redemption fees, but all fees combined (Up-Front Sales Charge and Redemption Fee) cannot exceed 8 ½% of the P.O.P. under FINRA rules; if a fund charges an 8 ½% sales charge, there can be no redemption fee; if a fund charges an 8% sales charge, there can be a ½% redemption fee
POP of an open-end fund
NAV + a sales charge (similar to the spread)
Revised offering price formula
NAV / (100% - Sales Charge %)
No sales charge and customers can buy at net asset value
No-load fund; sold directly by mutual fund sponsors who do not use selling groups or salesmen; mutual funds still charge an annual management fee
As an investor builds a position in a mutual fund, his accumulated position counts towards the breakpoint
Rights of accumulation
The cost of maintaining customer support services such as personnel needed to answer shareholder inquiries and requests
Shareholder servicing fees
Most successful ETFs
Spiders - SPDR (S&P 500 Depository Receipts) Diamonds - DIA (Down Jones Industrial Average) Qubes - QQQ (NASDAQ 100 Index)
Specifies how much the investor wishes to receive periodically
Systematic withdrawal plans
The investment adviser of a mutual fund determines all of the following EXCEPT: A. purchases of securities into the portfolio B. sales of the securities from the portfolio C. percentage of cash or equivalents held in the portfolio D. investment objective of the fund
investment objective of the fund; the investment objective for a mutual fund is initially set by the sponsor; and can only be changed by majority vote of the fund's outstanding shares. The investment adviser decides which securities to buy and sell in the portfolio; and decides the timing of these transactions
