Management Companies - Series 7

In order for a fund to charge the maximum 8 1/2% sales charge, under FINRA rules, the fund must offer:

- Break points -Letter of Intent -Rights of accumulation

A diversified fund is one which has

-75% or more of its assets invested in securities -a maximum of 5% of its assets invested in any one issuer - a maximum holding of 10% of the voting securities in any one issuer

FINRA prohibits the following practices

-Breakpoint sales - Trading mutual fund shares - Inappropriate recommendation of Class B shares - Late trading -Market timing

Income funds may specialize in only on type of fixed income security. The type of income funds include:

-U.S. Gov't securities fund -Municipal Bond fund -Preferred Stock fund -Corporate Bond fund -Money Market Securities fund

Types of diversification

-different industries or among companies in the same or similar industries - different securities such as stock, bonds, and money market instruments

12b-1 fee is not allowed to exceed ___ of average annual net assets

.75%

In 1980, the SEC passed Rule

12b-1

Mutual fund shares are long-term investment vehicles. They are not allowed to be traded. If a customer buys a mutual fund share and redeems within

7 business days, all sales charges earned are forfeited and returned to the fund distributor

FINRA requires that 12b-1 funds can impose a maximum sales charge of only

7/14% if the fund does not impose fees for account maintenance and 6 1/4% maximum if the fund does impose service fees for account maintenance

Under FINRA rules the maximum sales charge on a mutual fund purchase is

8 1/2% of the public offering price

Breakpoints

A breakpoint is a reduced sales charge for a large dollar purchase. FINRA sets breakpoint schedules that it considered to be fair and reasonable. Mutual funds may lower the sales charges percentages but cannot exceed them.

Inappropriate Recommendation of Class B Shares

A customer might believe that Class B shares are cheaper because they have no up-front sales charge. However, they do impose annual 12b-1 fees. This can be more expensive to a customer that has a large dollar amount to invest over a long time horizon.

What fees are associated with purchasing a ETF?

A regular stock trading commission is charged when you buy or sell ETFs

Letter of Intent (LOI)

A signed agreement allowing an investor to buy mutual fund shares at a lower overall sales charge based on the total dollar amount of the intended investment. A letter of intent is valid only if the investor completes the terms of the agreement within 13 months of signing the agreement. A letter of intent may be backdated 90 days. Syn. statement of intention.

Spiders and Diamonds trade on the

AMEX or NYSE

Rights of Accumulation

As an investor builds a position in a mutual fund his accumulated position counts towards the breakpoint. This is based upon the current market value of the fund shares, not the original cost. If the fund shares have appreciated this growth my move the customer into a lower breakpoint sales charge when they purchase new shares.

Switching between Funds in the same Fund Family allows you to avoid ____ but not ___.

Avoid sales charge is imposed on the new purchase, however switching between different funds is considered a sale under tax rules.

Administrative Fees

Charges for office personnel, etc.

Any assets appreciation that occur over the 13 month life of the LOI, as well as any reinvested dividends _________ in reaching the breakpoint amount set in the LOI.

Do Not count

DIAs

Dow Jones Industrial Average or Diamonds

The _______ is set by the board, the share price is reduced for the distribution.

Ex-date

Legal + Audit Fees

Funds must be audited annually; lawyers are retained for SEC filing work, investment adviser contracts, etc.

Regulated Fund Under Sub-Chapter M

If a fund distributes at least 90% of Net Investment Income (NII) to shareholder, then the fund is Regulated under Subchapter M of the Internal Revenue Code. A regulated fund pays no tax on the distributed net income; those monies flow through to the shareholders. The shareholders include them on their personal tax returns. The fund only has to pay tax on the retained income.

Growth Fund

Invest primarily in equity securities of rapidly growing companies to achieve capital gains

Specialized Funds

Invests in a particular industry or geographic area. Such as energy funds or gold funds. These are also called sector funds.

Special Situations Fund

Invests in companies in bankruptcy or takeover candidates. If the company emerges from bankruptcy or is taken over there is large capital gains potential.

Income Fund

Invests in fixed income securities such as preferred stock and bonds for the current income provided. The fund may enhance income by using covered call and put writing strategies, if disclosed in the prospectus.

I-Shares

It has introduced a complete line of international sector index ETFs and specialized index ETFs

Class A shares suitable for _______ and long term investors

Large dollar amounts

Trading Mutual Fund Shares

Mutual fund shares are a buy and hold security. There is no trading of fund shares. The shares are redeemable- not negotiable.

QQQ trades on the

NASDAQ

Open-end investment company shares are computed everyday they find its

Net Asset Value per common share. To do this all securities held by the fund are marked to market, with the total market value divided by the number of common shares of the fund outstanding.

Dividends may be paid more than once a year but

Net Capital Gains are only once a year.

Can Investment clubs or groups of individuals take advantage of the breakpoints?

No, breakpoints are applied on a customer by customer basis

If a shareholder elects to have dividends automatically reinvested will they avoid taxes?

No, fund distributions, whether reinvested or not, are taxable in that year.

ETFs permit the creation of additional shares via their arbitrage mechanism, they are technically _______ funds registered under the Investment Company Act of 1940.

Open-end funds

Much of the registration statement is proposed in the _____

Prospectus, which details the objective of the fund, the board of directors, feeds involved, the track record of the sponsor, ect.

QQQ

Qubes

Rule 12b-1

Rule which allows fund managers to dip into the fund's assets annually to pay for marketing, distribution, and other promotional expenses, including sales commissions.

The sponsor must register the fund with the ____ before the security can be sold

SEC

Class A Shares

Shares of a mutual fund that charges a front-end load and a small or no 12b-1 fee. These shares are most suitable for long-term investment.

Contigent Deferred Sales Charge (CDSC)

Some mutual funds impose a sales charge only if the customer redeems his shares before a stated time period has elapsed. This encourages the investor to keep their monies in the fund.

Fixed shares

Specifies the number of shares to be redeemed periodically. Because NAV changes each day, the monthly payments will vary.

Target Date Fund

Starts with a more aggressive asset allocation and then moves to a safer and safer asset mix as the target date approaches. Investments might start with growth stocks, then shift to a balance of stocks and bonds, and finally shifts into money market instruments as the target date approaches.

TRUE or FALSE. When a customer placing an order buy a ETF its purchasing at that moment's price.

TRUE, ETFs are continuously priced on the exchange based on the changes in value of the stock held in the index and trade similar to common stock.

Custodial Fees

The bank charges for safekeeping the funds investments and for acting as transfer agent and paying agent

Printing

The charges for printing of the prospectus and for printing the semi-annual reports to shareholders

12b-1 Distribution Fees

The charges for soliciting new shareholders to become fund investors. These charges are permitted under SEC Rule 12b-1 under tightly controlled conditions.

Shareholder serving fees

The cost of maintaining customer support services such as personnel needed to answer shareholder inquires and requests

If the fund sells off depreciated securities, it will have a capital loss. If there is a net capital loss for the year, this cannot be distributed. What dose the fund do with this loss?

The funds retain the loss and use it as an offset against future year capital gains.

Cost Basis for Tax purposes

The investor's cost of the shares is the original purchase price plus all reinvested distributions. If the sale proceeds exceed this amount per share, then there is a taxable capital gain; if they are less there is a tax-deductible capital loss

Breakpoint Sales

The practice of not making a customer aware that he or she is close to meeting a breakpoint. If a customer is investing enough to be "close" to the breakpoint, the customer must be informed of this fact, and should be encouraged to sign a letter of Intent

Late Trading

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. Any late orders are not supposed to be processed a that day's closing NAV; rather they should be processed a the following day's NAV. This is prohibited under the Investment Company Act of 1940.

Leveraged ETFs

These use borrowing to magnify returns (and magnify losses). Its designed to move twice as fast as the S& P 500 Index, either up or down.

Inverse ETF

These use short selling to move inversely to the market. For example, an "S&P 500 Inverse ETF" is designed to move down 5% when the S&P 500 Index moves up 5%.

Are the expenses associated with running a ETFs comparable to mutual funds?

They are comparable to or lower than mutual funds because they don't have a 12b-1 fees

Growth And Income

This fund invests in blue chip equities that provide both dividend income and growth potential

Index Fund

This fund type matches its portfolio to the composition of recognized index, such as Standard & Poor's 500 Index. The investment adviser is not researching and selecting the securities to be purchased, the management fees are lower than for other funds.

Annual Management Fee

This is typically the largest expense of operating a fund.

Balanced Fund

This type of fund allocates assets among different types of securities- maintaining a balance of equities and fixed income securities. It provides both income and capital gains potential.

To establish a fund, the sponsor must start with a minimum

Total Net Assets of $100,000 of its own

Can ETFs be purchased on margin?

Yes, and ETFs can be sold short

Are ETF's considered tax-efficient?

Yes, they are not obligated to distribute capital gains to shareholders annually. Therefore there is no annual tax bill on the appreciation.

Non-Diversified

a fund that does not diversify

Selling group

acts as agent, selling the fund for the sponsor, the sponsor will give up part of the sales charge as a selling concession

If a fund is Unregulated

all of its Net Investment Income (NII) is taxable. In addition, the tax code imposes tax surcharges on funds that do not distribute at least 97% of NII and 98% of capital gains to shareholders. Due to this tax code provision, virtually all funds distribute the higher percentages

Interval Fund

another name for a fund of hedge funds, it only offers to buy back its units as stated intervals- monthly or quarterly. Some interval funds limit the amount that can be redeemed each time between 5 to 25% of NAV. This adds to the illiquidity of this investment

Declarations of dividend distributions and capital gain distributions are made by the

board of directors

Fund of hedge funds (FoHFs)

broker-dealers created this fund, a closed-end investment company under the Investment Company Act of 1940. It can be sold to an unlimited number of investors. These are not listed on an exchange. The fund offers its units on a monthly or quarterly basis and periodically offers to buy back units through tender offers. Typically offered in $25,000 minimums.

If an investor whishes to liquidate closed-end shares, they

cannot be redeemed. They are sold in the market, like any other stock, at the prevailing market price.

Publicly traded funds

closed end investment companies; capitalized differently from open-end funds; one-time stock issuance, no new shares are issued. the stock trades on an exchange and is valued like any other negotiable security

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

Closed-end funds sell at _____ because they give a lesser rate of return relative to the market; or when there is greater uncertainty surrounding the types of investments held in the fund.

discount

If the fund sells off appreciated securities it will have a capital gain. Net capital gains are

distributed to shareholders once a year. These are included on the shareholder's tax return as capital gains, not investment income.

The Net Investment Income is available for

distribution to the shareholders.

The prospectus details which investment advisor has been selected to manage the fund within its object. The advisor

earns a management fee, based on the percentage of all assets under management. The adviser's contract is initially set for two year and is subject to shareholder vote every year thereafter.

The prospectus will disclosure the structure of the management company

either open-end or closed-end

Under the Act of 1940, he managers of the fund cannot_______ of the board, this means outsiders must comprise at least___.

exceed 60%, outsiders 40%

The fund is established by the

fund sponsor or underwriter

Public offering price is stated

in the prospectus is the Net Asset Value per share plus a sales charge

Interval funds are tax _____ investment vehicles

inefficient

SPIDER

is a ETF, stands for "Standard & Poor's Depository Receipt," often abbreviated SPDR

Hedge funds

is a private investment funds that are open only to accredited investors. They are not registered under the Investment Company act of 1940, nor the SEC. These investment funds use sophisticated aggressive investment strategies that are high risk but high reward.

Buying shares prior to Ex-date

is not prudent, the investor must pay tax on the distribution and after the ex-date, has shares that are reduced in value by the entire before tax distribution amount. The buyer will receive a return of their own money on which tax must be paid.

ETF Arbitrage

keeps price at NAV

The sponsor can be a

large investment firm or firms that specialize in running funds

The only way to change a fund investment objective is by

majority vote of the shareholders

If the fund wants to change its investment objective or change its policies a

majority vote of the shareholders is requried

The investment adviser contract specifies the

management fees to be paid to the adviser, the fees should be reasonable based upon the performance of the adviser.

The interval fund manager is compensated with

management fees; mutual fund manager selects the earning fees so there is a double layer of fees to this investment.

To prevent_____ most mutual funds have placed restrictions on excessive trading in their prospectuses and monitor accounts for excessive short term trading

market timing

Expense Ratio

measure of efficiency

FINRA does not allow its member firms to sell _____ unless that fund offers dividend reinvestment at Net Asset Value.

mutual fund

A management company is formed when an idea for an investment company objective that is

needed by investors, reaching a fund targeted to investors wants, such as safety and income, or high dividends or large capital gains.

Almost all money market funds are

no load funds since they are viewed as temporary holding places for customer funds.

Closed-end funds are capitalized like regular corporate stock offering. There is a

one tie issuance of stock, and then the shares are listed and trade of an exchange.

Almost all ETFs are index funds, these are so called_______ investments because the fund manager is matching the portfolio composition to a benchmark index.

passively managed

Hedge fund managers often invest a large amount of their_____ so the investor knows that the manager has a true personal interest in achieving good investment results

personal wealth in the fund

Closed-end fund structures are used for

portfolios of illiquid securities such as municipal bonds and third world investments.

The ETFs purchaser is required to deliver a ______

prospectus or product document summarizing key information about the ETF and details of where the prospectus can be obtained.

There is no sales charge applied to

reinvested distributions

Exchange Traded Funds

represent shares of ownership in portfolios of common stock that track the performance of a specific index

The prospectus also details the "custodian bank"

selected to safeguard the assets of the fund. The custodian bank 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. For these functions the bank earns a custodial fee.

Under the Investment Company Act of 1940, management companies are obligated to send financial statements to shareholders, how often?

semi-annually.

Class B Shares

shares impose a contingent deferred sales charge that declines to 0 the longer the investor stays in the fund, but impose a higher annual 12b-1 fee. Suitable for intermediate term investment.

Class C Shares

shares impose a no upfront sales charge similar to Class B shares and usually no rear load either. These shares have the highest annual 12b-1 fees. They are only suitable for short term investment.

Fixed Dollar

specifies a dollar amount to be received periodically, and the fund redeems enough shares each month to do this

Fixed Percentage

specifies that a fixed percentage of the total net assets invested in the fund be redeemed periodically

Fixed Period

specifies that the account be liquidated over a fixed time period, say 4 years, to fund a college education. The monthly liquidation amount is set to meet this requirement.

Hedge fund managers are compensated by ___________________.

taking a percentage of assets under management plus a percentage of capital gains in the fund

If a customer whishes to redeem a mutual fund, he or she receives

that day's closing Net Asset Value

Mutual funds can charge redemption fees, but all fees combined cannot exceed

the 8 1/2 % of the POP under FINRA rules

Dollar Cost Averaging

the investor agrees to invest the same dollar amount periodically in fund shares

Market Timing

the practice of frequently buying and selling a fund's shares to exploit inefficiencies in how the mutual fund company computes NAV per share

Arbitrage Mechanism

the simultaneous purchase and sale of the same security in different markets in an attempt to profit from short-term price disparities between the two markets

No-load fund

there is no sales charge and customers can buy at net asset value.

Withdrawal plan

this feature makes it easier for investors to cash out of the fund when they so desire - specify how much the investor whishes to receive periodically

Mutual fund families allow breakpoints

to be applied to all purchases within that family

Shareholders in a management company have the right to:

vote for the Board of Directors Vote for changes in investment objectives vote for annually on the investment adviser receive annual and semi-annual reports

When a customer redeems a mutual fund he must be paid _____ under the Investment Company Act of 1940, but industry practice usually results in much shorter time frame.

within 7 calendar days