Unit 8.10 Investment Co Act of 1940

Investment companies must send financial reports to shareholders: A) semiannually. B) monthly. C) quarterly. D) annually.

Answer: A Investment company financial reports must be sent twice a year and must include a portfolio list, income statement, statement of compensation paid to the board of directors and the advisory board, and a statement of the total dollar amount of securities bought and sold during the period. One of these reports must be the audited annual report. Reference: 8.10.11.1 in the License Exam Manual.

As defined in the Investment Company Act of 1940, the term "investment company" would NOT include a: A) unit investment trust. B) holding company. C) face amount certificate company. D) management company.

Answer: B Holding companies are not included in the definition of "investment company". Reference: 8.10.1 in the License Exam Manual.

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of: A) a majority of the board of directors. B) they do not need approval. C) a majority of the outstanding shares. D) the fund's investment adviser.

Answer: C Changes in investment policy require a vote of the majority of outstanding shares for approval. Reference: 8.10.7 in the License Exam Manual.

All of the following statements regarding a closed-end investment company are true EXCEPT: A) it differs from a mutual fund. B) it may redeem its own shares. C) it is a type of management company. D) it sells at the market price plus a commission.

Answer: B A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares. Reference: 8.10.2 in the License Exam Manual.

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as a: A) closed-end company. B) unit investment trust. C) growth fund. D) utilities fund.

Answer: B A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded. Reference: 8.10.1 in the License Exam Manual.

Jasper Whitlock is considered an affiliated person of the Tahor Clean Energy Mutual Fund. Under the Investment Company Act of 1940, Mr. Whitlock is prohibited from I.borrowing from the fund (money or property) II.buying anything from the fund, except shares of the fund III.selling anything to the fund, except shares of the fund A) II and III B) I, II and III C) I and II D) I and III

Answer: B Affiliated persons may not have any dealings with the investment company (outside of contractual obligations and the purchase or redemption of shares of the investment company), such as buying securities, furniture, real estate, or other property from the company or selling such property to the company. Reference: 8.10.9.1 in the License Exam Manual.

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT: A) investment companies can own no more than 3% of the shares of another investment company. B) persons convicted within the past 10 years of a securities industry crime are not allowed to serve as directors without SEC permission. C) 12b-1 distribution charges must be approved semiannually by a majority vote of the outstanding shares and by the board of directors. D) mutual fund shareholders must be sent semiannual statements that identify compensation paid to directors, officers, and other affiliated persons.

Answer: C 12b-1 fees are subject to annual approval by a majority vote of the outstanding shares and the board of directors. Reference: 8.10.5 in the License Exam Manual.

If XYZ Mutual Fund has an expense ratio of 1.85% that includes a 12b-1 fee of .30%, which of the following statements are TRUE? I.The fund may use the 12b-1 fee to pay for mailing sales literature. II.Advertising materials may state that the fund is no-load. III.Management fees may be paid from the 12b-1 fee. IV.The fund's prospectus is required to disclose the fee. A) II and III. B) III and IV. C) I and IV. D) I and II.

Answer: C 12b-1 fees may only be used to cover promotional expenses, not fund management expenses. The amount of the fee must be disclosed in the prospectus. Funds that charge 12b-1 fees of more than 0.25% cannot call themselves no-load funds. Reference: 8.10.5 in the License Exam Manual.

According to the Investment Company Act of 1940, all of the following statements are true EXCEPT: A) open-end investment companies must redeem securities within 7 days after their tender. B) an investment company must have more than $100,000 capitalization to be offered to the public. C) shareholders have the right to vote on a company's change from a closed-end to an open-end investment company. D) an investment company's board of directors may be composed of up to 70% of the company's interested persons.

Answer: D At least 40% of the board of directors must be noninterested persons. No more than 60% may be interested persons of the investment company. Reference: 8.10.9 in the License Exam Manual.

According to the Investment Company Act of 1940, if an issuer is in the business of investing, reinvesting, trading, owning, or holding securities, and owns or intends to own securities that exceed 40% of its assets, it is classified as a(n): A) face-amount certificate company. B) unit investment trust. C) investment partnership. D) investment company.

Answer: D By definition under the Investment Company Act of 1940, an investment company is in the business of investing, reinvesting, trading, owning, and holding securities, and owns or intends to own securities that exceed 40% of its assets. Although face-amount certificate companies and unit investment trusts are investment companies, those choices are not as inclusive an answer. Reference: 8.10 in the License Exam Manual.

To be in compliance with the Investment Company Act of 1940, it is permissible for the portfolio manager of an open-end investment company to buy all of the following securities EXCEPT: A) call options. B) high yield bonds. C) shares of other mutual funds. D) stock on margin.

Answer: D The Investment Company Act of 1940 generally prohibits mutual funds from making purchases on margin. There are exceptions to this rule, such as in the case of hedge funds. A fund is not prohibited from buying options or low-quality bonds. A mutual fund may invest in other mutual funds so long as it does not acquire more than three percent of the outstanding shares of the other fund. Reference: 8.10.6 in the License Exam Manual.

Under the Investment Company Act of 1940, SEC Rule 12b-1 allows a fund to charge distribution and sales expenses to net assets as a percentage of the total assets. Normally, the cost of distribution of the shares is paid by the underwriter out of the sales load paid by the individual purchaser. For a fund to impose 12b-1 charges, which of the following conditions apply (applies)? I. The board of directors has sole approval authority. II. The majority of the outstanding shares has sole approval authority. III. Both the board and the majority of outstanding shares must approve it. IV. A distribution plan must be written. A) III and IV. B) I only. C) I and III. D) II and III.

Answer: A For the fund to impose 12b-1 charges, the distribution plan must be in writing and approved by a majority of the outstanding shares as well as a majority of the board of directors, including a majority of directors classified as outside directors. Reference: 8.10.5 in the License Exam Manual.

How often must an investment company file reports with the SEC as required by the Investment Company Act of 1940? A) Annually. B) Monthly. C) Quarterly. D) Semiannually.

Answer: A Registered investment companies are similar to other publicly registered entities in that an annual audited report must be filed with the SEC. Reference: 8.10.11 in the License Exam Manual.

Under the Investment Company Act of 1940, which of the following qualify for a discount in a mutual fund's sales charge? I. Mr. and Mrs. Jones each purchase $5,000 worth of shares; the fund offers a volume discount for a single purchase of $10,000. II. Neighbors Jan, Mickey, and Lee form an investment club; Jan places an order for $10,000 worth of shares to be held in their three names. The fund offers a volume discount for a $10,000 purchase. III. Allen is the vice president of a firm under contract to provide investment advice to a mutual fund. He buys shares of that fund. A) II and III. B) I, II and III. C) I and III. D) I and II.

Answer: C A husband and wife and all children under 21 qualify as a single person for the purposes of obtaining a quantity discount, as do corporations formed for a purpose other than obtaining such a discount and employee benefit plans. But other associations acting collectively, such as the members of an investment club, do not qualify as a single person for such a purpose. Discounts may also be made to directors, officers, partners, employees, or sales representatives of the fund, its investment adviser, or its principal underwriter. Reference: 8.10.10 in the License Exam Manual.

In 1940, Congress passed the Investment Company Act. Among the provisions of this sweeping law was the listing of the classifications of investment companies. Included in that listing would be all of the following EXCEPT: A) management investment companies. B) unit investment trusts. C) holding companies. D) face amount certificate companies.

Answer: C Even though holding companies do many of the same things as investment companies (buy stock in other companies to try to make a profit), they are not included in the definition stated in the Investment Company Act of 1940 Reference: 8.10.1 in the License Exam Manual.

Under the Investment Company Act of 1940, the reporting requirements investment companies must comply with include: I. filing an audited report with the SEC annually. II. sending semiannual reports to shareholders. III. notifying shareholders of changes in the portfolio as those changes occur A) I and II. B) I and III. C) II and III. D) I, II and III.

Answer: A Investment companies must file audited reports with the SEC annually and send at least semiannual reports to shareholders. They are not required to notify shareholders of changes in the portfolio as they occur. Reference: 8.10.11 in the License Exam Manual.

In a mutual fund portfolio, you might find all of the following EXCEPT: A) junk bonds. B) covered calls. C) short stock. D) index options.

Answer: C A mutual fund is generally prohibited by the Investment Company Act of 1940 Act from taking short stock positions. There are exceptions to this rule, such as in the case of hedge funds. Index options are permissible if they are consistent with the fund's stated objectives. Junk bonds or high-yield bonds are permissible in those high income funds that authorize such an investment. Some funds may use covered calls to generate income. Reference: 8.10.6 in the License Exam Manual.

Under the Investment Advisers Act of 1940, it is legal for an investment adviser to: I. rebate the commission on a mutual fund sale to a client who has already paid a fee for investment advice. II. keep the commission on a mutual fund sale when the client who purchased the shares has already paid for investment advice. III. reduce a client's advisory fee by any commissions earned on mutual fund sales to that client. A) I and II. B) I and III. C) I, II and III. D) II and III.

Answer: D Rebating commissions on mutual fund sales is prohibited. However, because mutual fund commission are not negotiable (as are secondary market transactions), the adviser may reduce the client's advisory fee by the commission or, with appropriate disclosure, keep the commission. Reference: 8.10.10 in the License Exam Manual.

Under the Investment Company Act of 1940, which of the following would be considered an affiliated person? I. Persons who control, are controlled by, or share common control with the company. II. Any officer, director, or employee of the company. III. Persons who own or control five percent or more of the voting shares of the company. A) II and III. B) III only. C) I, II and III. D) I and III.

Answer: C Affiliated persons are any investment company directors, officers, employees, or owners of five percent or more of the voting shares of stock, and/or any persons controlling or controlled by such persons. Reference: 8.10.4 in the License Exam Manual.

Under the Investment Company Act of 1940, purchases by which of the following are eligible for the reduced sales charges applicable at the fund's stated breakpoints? I.A qualified retirement plan. II.The combined purchases of a man and a custodial account for his daughter where his wife, not he, is the custodian. III.Two friends who have pooled their money to make a large purchase. IV.An investment club. A) I and II. B) I and III. C) II and IV. D) III and IV.

Answer: A Investment clubs and otherwise unaffiliated groups may not pool their money to receive a breakpoint. Incorporated or otherwise affiliated entities, such as spouses or a parent and minor child, may do so. The fact that the custodian of the daughter's account is the spouse does not change things Reference: 8.10.10 in the License Exam Manual.

The Investment Company Act of 1940 requires that a mutual fund do which of the following? I. Provide a monthly balance sheet to investors. II. Have $100,000 minimum capitalization prior to making a public offering. III. Provide semiannual reports to shareholders. . IV.Not acquire more than five percent of the outstanding shares of another registered investment company. . A) II and III. B) I and III. C) I and IV. D) II and IV.

Answer: A The Investment Company Act of 1940 requires that an open-end investment company have a minimum of $100,000 in net assets prior to commencing a public offering. Reports must be sent to shareholders on a semiannual basis. No fund is permitted to own more than three percent of the outstanding shares of another registered investment company. Reference: 8.10.11.1 in the License Exam Manual.

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $.25 per share and capital gains of $.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50 and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be: A) 3.33%. B) 83%. C) 3.85%. D) 27.20%.

Answer: A The current yield on mutual funds is calculated by dividing the annualized yield ($.25 × 4 = $1) by the POP. In this case, $1 ÷ $30 = .0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth. Reference: 8.10.14.1 in the License Exam Manual.

Under the Investment Company Act of 1940, which of the following statements about advisory contracts between an investment company and an outside adviser is TRUE? A) The initial contract is effective once approved by the board of directors. B) The contract may be in writing, or it may be oral if there are at least two witnesses to the agreement. C) The contract may not be unilaterally assigned to another adviser. D) The contract must be established for a 1-year period and renewed annually thereafter.

Answer: C All contracts between an investment company and an outside adviser must be in writing and must contain certain provisions; these include that the contract may not be unilaterally assigned to another adviser. The initial contract may be for two years, but it is subject to annual reapproval by a majority vote of the outstanding shares or the board of directors as well as a majority of the directors who are considered to be non-interested parties. Reference: 8.10.9 in the License Exam Manual.

Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that: I. no contract may be terminated with more than 60 days notice in writing. II. the initial contract is for a maximum of 1 year and then may be renewed on either an annual or biannual basis. III. unless a specific exemption applies, the fund may not engage in margin trading. IV. the contract must be in writing. A) II and III. B) II and IV. C) I and IV. D) I and III.

Answer: C Contracts between funds and their advisers may not be terminated with more than 60 days notice and these contracts must be in writing. The initial contract is for a 2-year period and then renewed on an annual basis. Whether the fund can trade on margin is not a function of the management contract. Reference: 8.10.9 in the License Exam Manual.

The Investment Company Act of 1940 allows a majority vote of outstanding shares of a registered investment company to authorize the fund to: I. borrow money from a commercial bank. II. invest funds in securities consistent with the fund's objectives. III. change the objectives of the fund. IV. change the nature of its business and cease to be an investment company. A) II and III. B) I, II and III. C) I, III and IV. D) I only.

Answer: C Under the Investment Company Act of 1940, a vote of the majority of outstanding shares may approve borrowing money from a bank, changing the investment objectives of the fund, and deciding to cease to be an investment company. Shareholder approval is not necessary to authorize the fund to invest consistent with the fund's objectives. Reference: 8.10.7 in the License Exam Manual.

Which of the following statements regarding an investment company's board of directors is NOT true? A) An investment company's board of directors manages the portfolio on behalf of the investor shareholders. B) An investment company's board of directors concerns itself with policy and administrative matters. C) The board of directors contracts with an outside investment adviser or portfolio manager to invest the cash and securities held in the fund's portfolio. D) No convicted felon or person convicted of a misdemeanor involving the securities industry ​within the past 10 years ​may serve on the board of directors of an investment company.

Answer: A The board of directors sets policy and manages the administrative affairs of the investment company, but it does not manage the portfolio. The board contracts with an outside investment manager to invest the funds.​ It is unlawful for any person to serve or act in the capacity of employee, officer, director, or investment adviser of any registered investment company, or principal underwriter for any registered open-end company, registered unit investment trust, or registered face-amount certificate company if that person, within the past 10 years, has been convicted of any felony or a misdemeanor involving the purchase or sale of any security. Reference: 8.10.9 in the License Exam Manual.

Among the restrictions placed on open-end investment companies by the Investment Company Act of 1940 are: I. mutual funds are only allowed to maintain TIC accounts with other funds that are members of the same "family" of funds. II. no public offering may commence unless the fund has at least $100,000 in net assets. III. no registered investment company may own more than 3% of the voting shares of another registered investment company. IV. shares of the fund will not have any margin loan value until the 30th day after purchase. A) II and III. B) I and II. C) I and IV. D) II and IV.

Answer: A The minimum capitalization requirement for a new fund is $100,000 in net assets. A further restriction placed by the act is limiting one fund's holdings to a maximum of 3% of the voting shares of another fund. Because the shares of an open-end company are always considered a new issue, the shares may not be purchased on margin, but, as with other new issues, do have a loan value once owned at least 30 days. However, this restriction is part of the Securities Exchange Act of 1934, not the Investment Company Act of 1940. Reference: 8.10.6 in the License Exam Manual.

Which of the following best describes a 12b-1 fee? A) A fee charged to all mutual funds to cover the expense of FINRA regulation. B) A fee charged by some mutual funds to cover sales and distribution expenses. C) A fee charged by some mutual funds to redeem shares that have been held less than one year. D) A fee imposed against a mutual fund company for violating SEC rules.

Answer: B A 12b-1 fee may be charged by mutual funds that do not charge the maximum permissible sales load. SEC Rule 12b-1 allows a mutual fund to serve as distributor of its own shares and charge a percentage of the average net assets for distribution and sales-related expenses. Reference: 8.10.5 in the License Exam Manual.

Under the Investment Company Act of 1940, which of the following statements is(are) TRUE about an investment company that wishes to contract with an outside investment adviser to manage its portfolio? I.This is prohibited under the act. II.Investment companies may employ outside advisers if a written contract is executed. III.The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares. A) I, II and III. B) II only. C) I only. D) II and III.

Answer: B One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open or closed-end) must be in writing. The initial contract must be approved by a majority vote of the outstanding shares and the "non-interested" members of the board of directors. It is renewed annually by either a majority vote of the outstanding shares or the board of directors as well as a majority of the directors who are considered to be non-interested parties. Reference: 8.10.9 in the License Exam Manual.

The Investment Company Act of 1940 does which of the following? A) Sets rules for the registration of investment advisers. B) Prescribes procedures for the establishment of investment companies. C) Regulates the secondary market. D) Governs the issuance of new issues.

Answer: B The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulation to ensure investors are fully informed and fairly treated by the management of investment companies. Reference: 8.10. in the License Exam Manual.

When an agent is discussing possible discounts related to the purchase of mutual funds shares, she would be referring to: A) breakpoints. B) 12b-1 fees. C) reinvesting distributions. D) the CDSC.

Answer: A Mutual funds that carry a load will have a schedule of reduced sales charges when reaching specified quantity levels known as breakpoints. Reference: 8.10.10 in the License Exam Manual.

Which of the following qualify for a discount in a mutual fund's sales charge under the Investment Company Act of 1940? I. An investment club places an order for $10,000 worth of shares to be held in 3 names; the fund offers a volume discount for a single purchase of $10,000. II. A vice president of a firm under contract to provide investment advice to a mutual fund buys $10,000 worth shares of the fund with a $10,000 breakpoint. III. A married couple each purchases $5,000 worth of fund shares; the fund offers a volume discount for a single purchase of $10,000. A) I, II and III. B) II and III. C) I and II. D) I and III.

Answer: B Discounts may be made to directors, officers, partners, employees, and agents of a fund, as well as to its investment adviser and principal underwriter. A husband and wife and all dependent children younger than 21 qualify as a single person for the purpose of obtaining a quantity discount. But other associations acting collectively, such as the members of the investment club, do not qualify as a single person for this purpose. Reference: 8.10.10 in the License Exam Manual.

Which of the following individuals would be considered a noninterested person in a mutual fund? A) A person who holds a position with the fund's underwriter. B) A member of the board of directors who does not hold another position within the investment company. C) A member of the board of directors who is also employed as the investment adviser. D) A shareholder who owns 10% of the fund's shares.

Answer: B The Investment Company Act of 1940 defines an interested person as someone employed by or has a material business relationship with the fund, its adviser, or underwriter. Someone who owns 5% or more of the outstanding shares (an affiliated person) is also considered "interested". Merely sitting on the board does not make someone an interested person. Thus, a director with no other relationship with the fund qualifies as a noninterested person. Reference: 8.10.9.1 in the License Exam Manual.

The investment adviser under contract to a regulated, diversified, open-end investment company: I. makes sure the fund invests in such a manner as to retain its diversified status. II. attempts to fulfill the fund's investment objective by means of careful investing. III. changes investment objectives that he believes are in the best interest of the investors. IV. investigates the tax status of potential investments. A) III and IV. B) I, II and IV. C) I, II and III. D) II and IV.

Answer: B The investment adviser is responsible for making investments according to the objective stipulated by the investment company. These decisions should maintain and reflect the diversified status of the fund and should identify the tax status of potential investments. The fund's objective may be changed only by majority vote of the outstanding shares (i.e., by the owners of the company, not the portfolio manager). Reference: 8.10.7 in the License Exam Manual.

The total return of a mutual fund is equal to: A) the reinvestment of all unrealized dividend and capital gain income. B) the return attained by reinvestment of all dividend and capital gains distributions. C) annualized fund dividends divided by the current POP. D) all realized and unrealized capital appreciation.

Answer: B The total return assumes reinvestment of all dividend and capital gains distributions. Reference: 8.10.14.2 in the License Exam Manual.

Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is NOT true? A) The contract must be terminable upon no more than 60 days notice. B) The renewal may be executed orally, provided it is done within two years of the initial contract. C) The renewal must be approved by either a majority vote of the board or a majority vote of the outstanding shares as well as a majority vote of the noninterested members of the board. D) The renewal must state the adviser's compensation.

Answer: B When an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract is for two years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the noninterested members of the board of directors and annually renewed by either a majority vote of the board of directors or of the outstanding shares as well as a majority vote of the noninterested members of the board. The contract must be terminable at any time, with a maximum of 60 days notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned. Reference: 8.10.9 in the License Exam Manual.

Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are TRUE? I. Only the board of directors needs to approve changes in the investment objective. II. The majority of outstanding shares must vote to approve changes in the investment objective. III. The SEC must approve all changes in the investment objective. IV. The investment adviser does not set, but tries to meet, the investment objective. A) I and III. B) III and IV. C) II and IV. D) I and II.

Answer: C A majority of the outstanding shares must vote to approve any change in investment objective or policy. The investment adviser's job is to try to achieve the investment objective. Reference: 8.10.7 in the License Exam Manual.

All of the following would qualify as management companies EXCEPT: I. face amount certificate companies. II. unit investment trusts. III. closed-end investment companies. IV. open-end investment companies. A) II and IV. B) III and IV. C) I and II. D) I and III.

Answer: C As defined in the Investment Company Act of 1940, closed- and open-end funds are subclassifications of management companies (actively managed portfolios). Face amount certificate companies and unit trusts are separate investment company classifications and do not have managed portfolios. Reference: 8.10.1 in the License Exam Manual.

Under the Investment Company Act of 1940, the reporting requirements investment companies must comply with include: I. filing a report with the SEC annually, or more frequently if required. II. sending semiannual reports to shareholders. III. notifying shareholders of changes in the portfolio as those changes occur. A) II and III. B) I, II and III. C) I and II. D) I and III.

Answer: C Investment companies must file reports with the SEC at least annually (more frequently if required) and send at least semiannual reports to shareholders. They are not required to notify shareholders of changes in the portfolio as they occur. Reference: 8.10.11 in the License Exam Manual.

Which of the following statements is NOT true? A) Mutual fund shares may not be purchased on margin because their shares are always public offerings of new shares. B) Mutual funds may be used as collateral in a margin account if they have been owned for more than 30 days. C) Open-end investment companies must have a minimum of $1 million in assets to have a public offering. D) The sale of open-end investment company shares is a continuous public offering and must be accompanied by a prospectus.

Answer: C Minimum assets of $100,000 are required. Reference: 8.10.8 in the License Exam Manual.

Under the Investment Company Act of 1940, SEC rules permit mutual funds to make sales charge discounts available to: I. employee benefit plans. II. single purchasers making large purchases. III. employees of the investment company and its affiliates. A) I and III. B) II and III. C) I, II and III. D) I only.

Answer: C SEC and FINRA rules permit sales charge discounts for single purchasers making large purchases, tax-exempt organizations (e.g., pension plans, employee benefit plans), and directors, officers, employees, underwriters, and other persons affiliated with the fund. Reference: 8.10.10 in the License Exam Manual.

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of: A) the majority vote of the board of directors. B) the majority vote of the noninterested directors. C) the majority vote of the outstanding shares and a majority of that portion of the board of directors that are considered noninterested members. D) the majority vote of the outstanding shares.

Answer: C The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members. Reference: 8.10.9 in the License Exam Manual.

In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by: A) FINRA. B) the SEC. C) the principal underwriter of the fund. D) a majority vote of the fund's board of directors or of the outstanding voting shares as well as a majority vote of the noninterested members of the board.

Answer: D When it comes to management investment companies (open-end or closed-end), renewal of the investment adviser's contract is approved annually by the fund's board of directors or a majority vote of the outstanding voting shares. The initial contract must be approved by both the board of directors and a majority vote of the outstanding shares. In both of these cases, initial and renewal, a majority vote of the noninterested (outside) members of the fund's board of directors is also required. Reference: 8.10.9 in the License Exam Manual.