series 6: chp 6
Which of the following statements best describes the same investment company that offers various mutual funds with different investment objectives? A Annuity B Family of funds C A broker-dealer D Investment adviser
B A mutual fund complex is a term used to designate all funds which are offered by a particular fund family. This term (fund family) is often thought of as a "brand name" of funds (e.g., Fidelity, Vanguard, American Funds). Note: Exchanges or switches within a fund family are typically done at NAV but are considered taxable events by the IRS if done in a nonqualified account.
All the following statements about Class B shares are correct, except: A Class B shares have a back-end sales load B The contingent deferred sales charges decline over time C Class B shares have a lower 12b-1 fee than Class A shares D There is no front-end load, so the total amount of the investor's purchase is invested
C Class B shares have higher 12b-1 fees than A shares. All the other answers are correct.
Which of the following statements is true regarding a mutual fund offering breakpoints? A Breakpoint discounts are generally aggregated if the same broker-dealer is used to buy the mutual fund within the same fund family B Breakpoint discounts are generally aggregated at the individual account level C Breakpoint discounts are generally aggregated at the fund family level D Breakpoint discounts are generally allowed for investment clubs
C In a family of funds, breakpoints can be obtained by adding the total amount invested in the fund family, not at the broker-dealer level or account level. Investors can purchase through more than one broker-dealer. The investor must disclose to the registered representative all investments held by the investor and immediate family members, to be sure they are receiving the appropriate breakpoint for the mutual fund family. Investment clubs that form for the purpose of investing do not qualify for breakpoints.
The ABC Income Fund currently shows the NAV and POP at $18. This fund is most likely a: A Aggressive growth fund B Closed-end fund C No-load fund D Sinking fund
C When a fund's NAV and POP are the same, it is often a no-load fund. A closed-end fund would be offered at POP only at its IPO. After that it is traded in the secondary market at bid and ask prices.
To qualify for an immediate reduced sales load, the investor can invest in large lump sums or establish an agreement to purchase shares over how long a period? A 1 year B 6 months C 3 years D 13 months
D An LOI covers a period of 13 months. The LOI may be backdated 3 months, meaning that the customer has 10 remaining months to complete the LOI.
The chart below shows the NAV and ask prices of X Investment Company and Y Investment Company on a particular day. Choose the response that best characterizes the two companies: NAV POP X $12.10 $10.00 Y $14.25 $15.00 A X is closed-end, Y is either B X is closed-end, Y is open-end C X and Y are open-end companies D X and Y are closed-end companies
A A closed-end fund may trade at a discount from NAV because price is market driven. An open-end fund never does because its POP = NAV + SC.
A registered representative is working with a client that has $15,000 to invest. The mutual fund that the representative is discussing with the client has a breakpoint at $25,000 The client states that the $15,000 is all that is currently available for this investment, and the sale is made. One month later the client is talking with the representative and says I wish I had held off on making that investment! I just got a $20,000 bonus at work and I would have liked to save money on those sales charges! What should the representative tell the client? A That's OK, it's not too late to do a letter of intent, we can backdate it for up to 90 days. So, if you plan on making additional purchases, the original purchase will also qualify for the reduced sales charge. B The fund may waiver sales charges if you add the additional $20,000 to offset the higher sales charges on your initial purchase C That's OK, if you want to add additional money the new purchase will qualify for a reduced sales charge D We can reverse that transaction and you can make a new purchase into the fund to get the reduced sales charge
A If an investor has already purchased shares without signing an LOI in the recent past, the investor can still be eligible for a reduced sales charge for those shares purchased in the past by backdating the LOI. An LOI can be backdated up to 90 days.
When an investor redeems their mutual fund shares, which of the following statements is accurate? A The holding period is long term if the investor held the shares for greater than 12 months and any gains are taxed at preferential rates B The investor cannot use capital losses to offset capital gains C The holding period is based on how long the fund has held the investments D The holding period is short term if the investor held the shares one year or less and any gains taxed at preferential rates
A If the shares were held for over 12 months (12 months and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at preferential rates of either 15% or 20%. Capital losses can be used to offset up to 100% of capital gains. Any unused losses may be used to offset up to $3k of ordinary income and can be carried forward indefinitely.
An investor buys $5,000 of a new offering of a mutual fund that has a net asset value of $13 a share, a sales charge of $1.00 a share, and a management fee charge of 20 cents a share. Approximately how many shares will the investor buy? A 357 B 378 C 385 D 352
A Investors buy at the public offering price, which is the NAV ($13 a share) plus the sales charge ($1 a share). Therefore, the cost is $14 a share. $5000 / $14 = 357.143 shares.
ABC Growth Fund has a calculated NAV per share of $9.20 and the sales charge is $0.80. What is the POP for ABC Growth Fund? A $10.00 B $10.00 plus an 8% sales charge C $8.40 plus an 8% sales charge D $8.40
A The POP is equal to the NAV (per share) plus the sales charge in dollars, also known as the sales load. NAV+ Sales Charge (in dollars) = Public Offering Price (POP).
Under the Investment Company Act of 1940, investors are permitted to combine purchases of mutual fund shares to qualify for the reduced sales charge if the securities are purchased: A For a single fiduciary account, such as a qualified employee profit-sharing plan B By the duly designated agent of a group of individuals joined together for this purpose C For a father and his 26-year-old daughter D By individuals who have formed an investment club
A The customer may not be an investment club. The investor must be a single individual or a fiduciary, legal entity, such as a corporation, a married couple in a joint account, or a parent and minor child.
(POP-NAV)÷ POP is the formula used to calculate: A Sales charge percentage B POP C NAV D Sales charge in dollars
A This is the formula used to calculate the sales charge percentage. To calculate the sales charge in dollars, that would be POP ($) x Sales Charge (%) = Sales Charge ($).
While reviewing trades, a principal noticed that a client of one of the registered representatives has invested $190,000 in the PBT Growth Fund. The fund has an initial breakpoint at $200,000. What prohibited practice has the RR likely committed? A Selling dividends B Breakpoint selling C Acting in concert D Front running
B A breakpoint sales violation occurs when a registered representative purposely makes a sale just below the breakpoint in order to earn a higher sales commission (or divides investable dollars among different fund families). This is a violation of SEC and FINRA rules and is prohibited. Selling dividends is when the RR leads the prospect to believe that buying shares of a fund just prior to the dividend distribution is in their interest. In a nonqualified account the dividend would be taxable, the share price is reduced after the distribution resulting in the prospect getting less shares per dollar invested, and essentially the prospect is getting their own money back, but it is taxable.
All the following are considered advantages to an investor purchasing mutual fund shares rather than individual securities in the market, except: A The fund can usually attain a broader diversification of its assets B They do not have to pay the expense of professional portfolio managers C Mutual funds offer simplified tax and recordkeeping services D An investor can have their full investment working by purchasing full and fractional shares
B A mutual fund's large pool of money usually has more advantages than the portfolio of a single investor. One of the greatest advantages of mutual fund investing is that the fund pays for an experienced investment adviser to manage the day-to-day portfolio transactions.
Which of the following remarks regarding Class B shares is unacceptable? A "Class B shares are subject to a contingent deferred sales charge" B "Class B shares are considered a no-load if held beyond the surrender penalty date" C "Class B shares do not qualify for breakpoints" D "A purchase of Class B shares is invested in the same underlying portfolio as A shares of the same fund"
B Class B shares are back-end load mutual fund shares that carry a sales charge that is contingent on the investor's holding period. They share the same underlying portfolio as other share classes of the same fund and tend to have higher annual expenses than A shares due to higher 12b-1 fees. However, Class B shares are not no-load funds. Also, large purchasers should not be pointed toward Class B shares since this share class is not eligible for a reduction of sales charges based on breakpoints.
All the following expenses may be paid from 12b-1 charges, except: A Dealer compensation B Legal expenses C Advertising fees D Distribution fees
B Distribution expenses that are allowed under 12b-1 fees include marketing, distributing, dealer compensation, direct mailings, fees to advertising agencies, annual reports, and prospectus charges. Legal expenses are included in the fund's administrative costs but not included in 12b-1 charges.
An investor purchased $10,000 of Class A shares of an aggressive growth fund through their broker-dealer. The investor changed their mind 3 days later and redeemed the shares. Which of the following is true in this situation? A The investor will receive a refund of the current NAV of the shares, minus the sales charge paid on the original purchase B The broker-dealer must return any sales concession it earned to the fund's underwriter C The investor will be permitted to redeem the shares at POP D The investor will receive a full refund of the original purchase price
B If a customer purchases mutual fund shares and then redeems those shares within 7 business days after the date of the transaction, the dealer must refund the full concession to the underwriter that was paid to the dealer on the original sale. The underwriter must pay their share of the sales charge on the original sale back to the fund along with the refund received from the dealer. Note that the customer is not entitled to a refund of sales charges. The shares will be redeemed at the current NAV.
The letter of intent covers purchases made within a period of no more than: A 6 months from the date of the letter B 13 months from the date of the letter C 3 months from the date of the letter D 12 months from the date of the letter
B The LOI covers a maximum period of 13 months. It may be backdated 3 months, in which case the investor has 10 remaining months to complete the LOI.
A 19-year-old prospect claims to have read about dollar-cost averaging and would like to open an account to invest $200 a month, since that is the best way to assure a gain over the long term. How should a registered representative proceed? A Recommend that prospect deposit $100 a month into a growth fund and the other $100 into a money market to build emergency savings B Obtain customer information including goals and objectives, explain risks/rewards of investing, explain that dollar-cost averaging does not guarantee a gain, and only then proceed to opening an account C Inform the prospect that the minimum age to open an account is 21 D Gather the minimum required information to open the account, and mark the order 'unsolicited'
B The RR should take the time to get to know the customer and explain the risks and the rewards of investing. Dollar-cost averaging DOES NOT assure a gain or guarantee against a loss. Marking an order 'unsolicited' does not relieve the RR of the responsibility of correcting obvious misunderstandings.
All the following are advantages of mutual fund investing, except: A Systematic purchase and withdrawal plans B Reinvestment of dividend and capital gain distributions without charge C Distributions reinvested are always income tax-free D Liquidity
C Distributions are taxed whether taken in cash or additional shares. The exception would be if shares are held inside a tax-qualified account registration.
A person invests $10,000 into a corporate bond fund. What security do they acquire in this transaction? A Preferred stock B Convertible bond C Common stock D Corporate bond
C Regardless of what a mutual fund portfolio invests in, an investor who purchases a mutual fund acquires common shares of the fund. Therefore, all earnings are paid out to the investor in the form of a dividend.
A client bought shares in XYZ Fund on the record date. The fund's quarterly dividend was $.28 per share. The client has elected to re-invest dividends. This investor: A Will receive a check for the number of shares he owns multiplied by $.28 per share B Will have a lower proportional interest in the fund C Will purchase additional shares D Is not entitled to the dividends since the purchase was not made two business days prior to the record date
C The client elected to reinvest the distributions, so no check is sent. The ex-date for a mutual fund is usually the day after the record date; one business days prior to the record date is the ex-date for a regular corporation. Since the client elected to reinvest dividends, they will use the proceeds of the dividend distribution to purchase additional shares of the fund at NAV. Assuming the other investors are reinvesting, the investor will maintain their proportional interest in the fund as long as they reinvest as well.
A client invests $23,000 into ABC Bond Fund and signs a letter of intent for $25,000 to receive a lower sales charge. Which of the following can this client do to complete the letter of intent? A Invest $2,000 in a fund of the XYZ Growth Fund within the next 13 months B Liquidate $2,000 of shares and then 90 days later re-invest them in the same fund C Pay the fund $2,000 within 13 months, but not take any shares D Purchase $2,000 worth of ABC Bond Fund shares within the next 13 months
D A letter of intent is good for 13 months but can be backdated 90 days. During this time, either the actual amount shown on the letter of intent must be invested or the customer must pay the higher sales charge; otherwise, the escrowed shares will be liquidated. When the customer invests more money, they receive more shares. The investor must make actual contributions and not liquidate shares.
Which statement regarding distributions from open-end investment companies is correct? A Unrealized capital gains are distributed annually B Realized capital gains are distributed quarterly as earned C The ex-dividend date for all distributions is set by FINRA D The ex-dividend date is R+1
D Capital gains are distributed annually, not quarterly. Dividends are typically paid quarterly. Dividends are taxable in the year paid and may be qualified or ordinary dividends. The ex-dividend date is determined by the board of directors and is one day after the record date (R+1). Unrealized capital gains are not distributed.
An investor has $45,000 to invest in ABC Mutual Fund, which has a breakpoint at $50,000. The registered representative discloses the breakpoint schedule and the customer signs a letter of intent to meet the $50,000 breakpoint level. 3 months later the investor receives a capital gains distribution of $2,000 that is automatically reinvested. After another 3 months has passed, the fund pays $500 in dividends which again is reinvested. How much does this investor need to add to the mutual fund to complete the LOI? A $2,500 B $4,500 C $3,000 D $5,000
D The LOI can only be fulfilled with new money invested. While the LOI is not binding on the customer, if the customer wishes to complete the LOI an additional $5,000 must be deposited to reach the $50,000 breakpoint level.
Under a withdrawal plan: A An investor would be restricted to taking out only what his shares earned B An investor could take out any amount as long as it did not dip into principal C An investor would be restricted to earnings on his shares, plus capital gain D An investor could take out a specific amount, even though it exceeded the earnings on his shares
D The investor chooses how to withdraw the funds and is not restricted in that choice by how much the fund earns. Many withdrawal plans assume cashing out the entire fund.
All the following are contained in the prospectus, except: A Financial statements B Services offered C Investment policies and restrictions D Statement of additional information
D The prospectus offers background information on the fund's management and the various services offered to investors. Among other items, the prospectus contains a statement of objectives, the investment policies and restrictions, methods of purchase and redemption, sales charges and annual expenses, services offered, and financial statements. The statement of additional information (SAI) is a supplement to the prospectus that is made available only upon request to shareholders.
