SIE Chp 3: Investment Companies, Life Insurance Policies and other Packaged Securities

Sales Charge

(POP - NAV) / POP

creation unit

A big block of ETF shares that a large investor or market maker receives in exchange for providing the securities to fill the ETF fund. A creation unit usually consists of 50,000 shares but may be smaller or larger. The large investor then sells these shares in the secondary market to individual investors.

Deferred Annuity/Surrender Periods

A deferred annuity may prohibit access to funds for up to 10 years. If they need to withdraw they will pay the SURRENDER FEE

Open-end Management Companies

Also known as mutual funds, they offer public shares of a portfolio of securities in the form of a fund. When investors buy, new shares are issued by mutual fund. When investor sell, the shares are redeemed and expired. Thus, offer continuous issuance of new shares. Sold with prospectus. No secondary market for mutual funds

Closed-end management company

An investment company that issues a fixed number of shares in an IPO in an actively managed portfolio of securities. The shares may be of several classes; they are traded in the secondary marketplace, either on an exchange or over the counter. The shares' market price is determined by sup- ply and demand, not by net asset value. Syn. Publicly traded fund.

Signature Guarantee

An investor can obtain a signature guarantee from a financial institution that participates in a recognized signature guarantee program. The best source of a signature guarantee is a bank, savings and loan association, brokerage firm, or credit union with which the investor does business

Mutual Fund Prospectus Rules

Because mutual fund shares are issued new for each purchaser, all must be sold with a prospectus. The prospectus must be delivered prior to the point at which the customer acquires an interest in the fund, and it must be up-to-date. The SEC does not permit prospectuses that are in use for more than 9 months to have financial information in them that is more than 16 months old.

Suitability

Benefit of investing in UITs is folder is professionally selected and will not change to termination. This is also a disadvantage as market conditions can change.

Bond funds (fixed-income funds)

Bond funds range from absolutely safe (invested in U.S. Treasury bonds that pay low yields) to higher risk (invested in corporate bonds that pay higher yields). There are also different types of taxable and tax-exempt bond funds. Income from municipal bond funds typically avoid federal and sometimes state income tax. Bond funds do not mature like individual bonds—shares can be sold any time without considering bond maturity dates. Both the share price and yield should be considered when choosing a bond fund.

Prohibited Mutual Fund Practices

Breakpoint Sales, Late trading, Holding Customer orders, Holding customer payments (must send within 2 or 1 business days), Selling Dividends

Federal Regulations Regarding Variable Annuities

Considered securities under Securities Act of 1934, and thus must be registered with SEC and sold with prospectus. Securities Exchange Act of 1934 says these may only be sold by a broker-dealer and their registered representatives (with SEC and FINRA). Variable annuities must be kept in a separate account from the insurance company's account.

Income funds

Consists of stocks of well-established companies that pay solid dividends. Conservative, but generally produced higher returns than money market or bond funds. More volatile than money market and bond funds, so timeline for holding should be longer than a year

Structure of Mutual Fund

Contains CEO, CFO, COO, and a board of directors. B.O.D. is elected by shareholders which helps manage company. They choose/manage the investment advisor, custodian, and transfer agent and establish company's policy. 40% of board must be "non-interested personss"

Balanced Funds

Contains equities for appreciation and bonds for income. Objective is to lower volatility than equity fund but higher returns than bond fund. Diversification across stock and bonds

Growth funds

Contains stocks of growing companies. Typically reinvest profits into expansion, acquisitions, etc, and pay little to no dividends. High P/Es. Goal is for capital appreciation, long term horizon

Investment Company Act of 1940

Defines 3 types of Investment Companies: Face-amount Certificates, Unit investment trusts and Management Companies

Payout Phase

During the second phase, the customer begins to receive payments, either as a lump sum, periodic payments, or through annuitization. During annuitization the assets will be converted into a monthly income stream. The monthly payments will depend on the performance of the investments in the customer's separate account, the age and sex of the customer, and on the customer's choice of payment. If the customer annuitizes the contract, the customer can choose to receive fixed or variable payments for a series of years or for life.

Purchasing and Redeeming Mutual Fund Shares

Firms may not sell the shares to investors or nonmember broker-dealers at less than the POP. Member firms can only buy shares for customers' or their own accounts for investment purposes. Can't act at market makers, cannot redeem shares from customers for less than the NAV. MF companies must pay redemption proceeds within SEVEN days of receipt.

International Funds

Funds that only focus on non-US investments (Global funds do both). Risks include • Higher transaction costs. These have higher management expense ratios because more analysts who understand these markets need to be hired. • Currency risk. The dollar may strengthen against the foreign currency. This can be mitigated through currency futures, forwards, or options. • Liquidity risk. It may be harder to find a buyer for foreign investments when you want or need to sell. • Political risk. Foreign countries may be more likely to have political unrest that can influence the markets, creating more volatility.

Mutual Fund Fees

Have an Expense Ratio, which is total operational expenses/NAV. Introducing and terminating 12b-1 fees need majority vote of shareholders and BOD. All 12b-1 fees must be reapproved annually and reviewed quarterly by board. If no 12b-1 fee, firm can charge max of 8.5% of the POP. If 8.5%, they must offer breakpoints, Rights of Accumulation and reinvestment of divs at NAV

ETF Characteristics

Held by custodian who issues fixed number of shares, subject to tracking risk (doesnt exactly mimic index), sold through broker-dealers, price remains close to per-share NAV, most structured as open-end investments but resemble closed-end funds, can be bought and sold anytime throughout the day, no front or back end charges or management fees, just commissions, can buy as many or little shares as you want, CAN BE MORE EXPENSIVE THATN NO-LOAD FUND,

Death Benfit

If the annuitant dies during the accumulation period, before the insurance company has begun payments, a beneficiary will receive the payments. The payment the beneficiary receives will equal the total investments and any additional earnings from the annuity. If the annuity lost money, the beneficiary will receive the total invested money. The beneficiary is responsible for paying income taxes on the earnings.

Accumulation Phase

In the first phase, the customer contributes money to the annuity account. As the customer contributes more, the account grows in value. The account will also grow (or shrink) depending on the performance of the securities in the subaccounts.

Annuities

Investment vehicles used to provide steady income to an individual after retirement, often until death. It's a contract between an individual and insurance company. Only insurance companies can issue annuities, but they can be marketed by others only if they have a current state-issued life insurance license. Regulated at state level by the state insurance commissioner and Internal Revenue Code (IRC)

Automatic Reinvestment

Investors may receive divs and capital gains in form of check, or use to money to reinvest in more shares. Occurs at NAV and no sales charge. Subject to taxes, retirement accounts use this a lot

Municipal Fund Security Characteristics

It is exempt from the Investment Company Act of 1940, thus does not need Prospectus, register with SEC, or calculate and post a NAV. Income exempt from federal and often state and local taxes. MSRB defines 3 types: LGIPs, ABLE accounts, and 529 plans. Still subject to anti-fraud provisions of Securities Act of 1933

Non-Traditional ETFs

Leveraged and Inversed ETFs, they both use derivatives to profit from daily moves. Both are complex and high risk. Generally not suitable for non-institutional investors, especially if they plan on holding longer than one trading session

Investment Adviser (Portfolio Manager)

Manages fund's portfolio, on a short term contract paid annually, is usually a company instead of single person and registered under Investment Advisers act of 1940, paid % of funds value, does day-to-day trading and identifies tax status of distributions made to shareholders

Disadvantages of ETFs to Mutual Funds

No active management so portfolio can't change, ETF dividend reinvestment may not be permitted by broker-dealers and reinvesting takes more time than with mutual funds, Investors must have a brokerage account to buy or sell ETFs

ETN Characteristics

No claim on securities, more like a loan, receive cash payment on maturity, subject to credit risk but not tracking risk, can be traded on exchange before maturity, if issuer's credit declines so does the price of the ETN, no voting rights, taxed only at time of sale or maturity

Mutual Fund Share C

No front or back end charge, except for 1% back-end charge if sold within 1 year. Annual expenses highest among A and B. Better for investors holding under a year

Private Placement REITS

Not traded publicly, do not have to file with SEC, typically only sold to accredited investors, illiquid, higher overall risk,

Non-Listed REITS

Not traded publicly, must file with SEC. open to all investors, illiquid, higher fees (front-end 15%, management fees, property fees, etc), higher risk of company default, required prospectus and annual+quarterly reports, generally seek income from distributions

Board of Directors Rules

One class of directors must come up for reelection each year. For funds that charge 12b-1 fees, majority of directors must be unaffiliated with the fund. For non charge funds, 40% must be unaffiliated.

Fixed Annuities

Pay a rate of return guaranteed by an insurance company. Not considered securities and not at risk due to market. Regulated solely by state level

Variable Annuities

Pay a variable rate of return, depending on the investments chosen by the annuitant. These ARE classified as securities because of the variable nature of the investment. Regulated by SEC and FINRA, and each state. To sell these you need a securities license

Closed-End Funds Characteristics

Raise capital through IPO, no sales load but commissions, no cost of creating and redeeming shares, lower expense ratios, can have long-term strategy/be actively managed. Driven by supply and demand, said to be trading at premium or discount (but mostly discount). Demand is related to the distribution amount and NAV performance of fund. Can invest in greater amount of illiquid securities, typically focus on a sector, and are non-redeemable. They also pay distributions on a monthly or quarterly basis

Redemption of Mutual Fund Shares

Shares must be redeemed upon request. They must be redeemed within 7 calendar days from receiving a redemption order. Can place order through rep or writing, telephone, fax or website. Price is calculated at NAV after order

Fixed Annuity Characteristics

Similar to CDs, customer's investment is managed by insurance company. Insurance Company bears all risk, and they are obligated to pay the fixed rate. Have guaranteed rates of interest, typically in periodic payments which is appealable to people who want stable income stream. Guarantees both principal and interest. Low investment minimums (1000-10,000). Interest not taxable until payout. Because fixed, they have lower interest rates and are subject to purchasing power risk/inflation risk

Tax efficiency of ETFs

Since there is no active management, there are fewer transactions that may result in capital gains distributions. When investors redeem shares, a mutual fund may have to sell securities to come up with money which results in capital gains>>more taxes. When you sell an ETF, you sell to another investor thus no capital gains on multiple securities

Purchasing Annuities (3 Ways)

Single Premium deferred annuity which uses lump sum. Periodic payment deferred annuity using weekly, monthly or annually basis Immediate Annuity using lump sum and begins payout in 30 days THERE IS NO PERIODIC IMMEDIATE ANNUITY

Unit Investment Trust Characteristics

Sold in "units" (shares of beneficial interest) to "unit holders," organized under a trust indenture or similar instrument, no BOD, redeemable but fixed number of units, sold in $1000 blocks, sold with prospectus, not actively managed. Have a stated termination date, principal given at date and income distributed in periodic payments. Can be redeemed any day but then receive NAV when given to Trustee, company can reoffer units to new investors, but no active secondary market. Unit holders pay sales charges, but not expense ratio.

Underwriter (Sponsors, distributors or wholesalers?

Sponsor mutual funds (market and sell shares to public) either directly or through broker-dealers. Prepare sales literature for funds, recover costs through a sales charge. Does not have inventory of shares, instead underwriter makes sale> MF sells share to underwrite at NAV> UW adds a surcharge to customer's purchase

Diversified Fund

The Investment Company Act of 1940 defines diversified as any fund that has: • 75% or more of its assets invested in cash, cash items, or securities • Out of those 75% of its assets, a maximum of 5% of its assets held in any one company • Out of those 75% of its assets, a maximum holding of 10% of the voting securities of any one company

Joint Life with Last Survivor (Annuity Payout)

The insurer pays the annuitant an income during his lifetime while choosing a survivor beneficiary who will also receive payments from the same account for their lifetime. Payments made until both pass away. This has SMALLEST monthly checks.

Life with Period Certain (Annuity Payout)

The insurer pays the annuitant an income during his lifetime. There is a "period certain" where even if the annuitant dies, payments still go to beneficiary. This receives MEDIUM size checks.

Life Income (Annuity Payout)

The insurer pays the annuitant an income during his lifetime. When the annuitant dies, benefits stop. Typically shortest and least expensive for company, so annuitant receives LARGEST monthly check with this option.

Conversion Privilege

The investor can sell shares of one type of fund and buy shares of a different fund within the fund family at the NAV rather than the POP. That benefit encourages the investor to stay within the family. The IRS considers this type of move, even though it is within a family, to be a taxable event. All gains or losses are recognized on the date of the sale.

Surrender Period

The length of time that the investor must wait before withdrawing money from the annuity without penalty

Annuitant

The person who pays an insurance company, either as a lump sum or periodic payments.

Breakpoint

The point at which customers receive a discount on front-end sales charges for investing a certain amount of money at once.

Public Offer Price (POP)

The public offering price is equal to the per-share NAV plus a sales charge (if the fund is a "load" fund), or POP = NAV + sales charge. If the mutual fund is a "no-load" fund, POP = NAV.

Annuity Suitability

The recommended annuity depends on person's risk tolerance. They should never be sold to older customers due to surrender period. They are good retirement vehicles since IRS allows earning to grow tax-free, but contributions to IRAs and 401ks reduces one's taxable income, which annuities do not. No extra benefit in holding annuity in IRA/401k.

Variable Annuity Characteristics

These funds are kept in a separate account from Insurance Company, thus Investor bears all risk. If the account performs well, annuitant gets more money and vice versa. Has 2 phases (Accumulation Phase and Payout Phase). Annuitant makes contributions with after-tax dollars. Taxed deferred until withdrawal. 10% penalty if withdrawn before 59.5. Taxed at ordinary income tax rate.

Mutual Fund Market Timing

This is a practice whereby traders buy and sell mutual funds to profit from the differences between the daily closing NAV and the next day's NAV due to events that occur in between the two days (such as changes in the prices of stocks that are traded in overseas markets). Used for short term gains, but most firms impose short-term trading penalties to discourage this practice and not raise costs for the other investorss.

Indexed Annuities

Track an index and pay a rate of return based on performance of that index. Classified as FIXED ANNUITIES.

Summary of 529 Plans

Tuition, school fees, books, school supplies, school equipment, such as computers, and reasonable room and board expenses (for those students attending school at least half-time). After tax dollars (must be cash). Adults or non-relative can contribute, limit is very high. Beneficiary may be any age, may be transferred to another qualified beneficiary (family member of the original beneficiary) without tax consequences. Earnings tax free if used for education, withdrawing for non-education incurs 10% fee, penalty does not apply where a withdrawal is made because of the beneficiary's (1) death, (2) disability, or (3) receipt of scholarship payment or allowance. Used for College and graduate school education, and up to $10,000 annually for tuition at an elementary or secondary public, private, or religious school. Earnings may grow tax free and may change investments twice a year. May roll over to another 529 plan once a year, may transfer funds to ABLE account provided beneficiary is the same or same family member. CONTRIBUTOR IS OWNER OF ACCOUNT

LGIP Investment Objectives

Typically invest to protect the principal and provide investors with cash liquidity. Pool in short-term securities to avoid credit, liquidity and interest rate risk. Try to maintain a NAV of $1. These are referred to as stable NAV LGIPs. Other LGIPs may try to maximize returns within the constraints of being safe. Called Variable NAV LGIPs, they do not adhere to maintaining a $1 NAV. Also designed to help issuers of municipal bonds meet their yield restrictions under the Internal Revenue Code.

LGIP Operations and Fees

Typically maintain a minimum level of liquidity so participants can redeem shares and withdraw funds. Can redeem anytime but may have short wait periods. Often allow investors to invest/withdraw with checks or wire transfer and interest is earned daily. LGIPs can only invest in securities allowed under state law, and are low risk. Usually not insured or guaranteed by a government. When LGIPs administered by Management firm, fees and commissions may be collected.

Custodian

Usually a bank or stock exchange member broker-dealer, they hold the mutual fund's shares and money funds. Performs the accounts receivable and payable functions, receives proceeds from trade sales and released the required funds for purchase, maintains records of dividends and interest from investments, keeps company's assets segregated from other companies and restrict access to other officers in mutual fund company.

Free-Look Period

Variable annuities typically have a "free-look" period, which allows customers to cancel the policy within a certain amount of time at no charge. The amount of time for the free look may be 10 days or more, depending on the state.

Breakpoint Sales

When a rep doesn't advise or tell an investor about being near a breakpoint so the rep can earn more commission. This is prohibited by FINRA

Right of Accumulation (ROA)

When the value of his total investment reaches the next breakpoint, the investor is entitled to a lower sales load on the purchase of any additional shares.

Direct-sold Plan (529)

With these plans, an investor goes straight to the source by purchasing from the state or its primary distributor. A primary distributor is considered the plan's underwriter. Usually, this kind of plan is offered through the internet and has lower fees but does not provide investment advice. Sometimes, advisors will offer their customers the option to buy a direct-sold plan.

Management Company

a company that manages and trades the securities within a portfolio and does not have a set termination date.

Investment Company

a company whose primary business is to invest in and issue securities. It collects and pools money from a number of investors and invests it in a package of securities whose profits and losses are shared in proportion to the investors' ownership share of that package.

Municipal Fund Security

a fund of securities that is issued by a state or municipality. Investments in a municipal fund may consist of a wide variety of securities, including corporate stocks and bonds and government securities of every stripe. It is not to be confused with a municipal bond fund, which is a mutual fund consisting entirely of municipal bonds. A municipal fund security is different from a typical investment company because its issuer is a state or local government.

Unit Investment Trust

a holding company that purchases a pool of securities and holds them until a set termination date. At the termination date, both the unit investment trust and its securities will expire. The pool of securities does not change from the time that the trust was created, so the trust is considered unmanaged.

Letter of Intent (LOI)

a signed, nonbinding statement describing an investor's intent to invest enough over the next 13 months to reach the breakpoint. In response, the broker will charge the investor the lower sales charge on current purchases, based on her stated intent to reach the breakpoint in the next 13 months. The mutual fund will hold aside those "extra" shares in case the investor does not comply with the letter of intent. A letter of intent also may be backdated up to 90 days so a previous purchase can be considered part of an intended total amount of purchase. Reinvested funds do not count toward the amount stated in the letter.

College Savings Plan

a tax-free savings plan that offers families professionally managed portfolios to help meet anticipated college costs.. Subject to market return risk. Administered by states, often with record keeping and administrative services contracted out to mutual fund companies. Considered municipal fund securities==MSRB rules. Can only choose the types of portfolio, not the securities. 2 options: AGE-BASED and STATIC-CHOICE. Age-based means portfolio changes as enrollment date approaches while Static-choice portfolio stays the same.

Unsystemic Risk (Non-systemic risk)

a type of risk that is specific to a company or an industry.

12b-1 Fee

an annual marketing and distribution fee on a mutual fund and cannot exceed 0.25% of net assets for the company to call itself "no-load." This means that a no-load fund may not charge a fee greater than 25 basis points of net asset value.

Face Amount Certificate Company

an investment company that issues debt securities called face-amount certificates backed by assets, such as real property or other securities. Issuers of face-amount certificates promise to pay a stated amount (the face amount) to the investor at a specified time in the future. In return, investors pay the issuer a fixed amount of money, either as a lump sum payment or in installments. The rate of return is calculated by comparing the amount paid into the investment and the face amount received. This type of investment company is rare now because tax law changes have eliminated their tax advantages.

Dollar Cost Averaging

an investment strategy in which an investor makes regular, periodic purchases of the same dollar amount in the same security or securities. An investor who employs this strategy will end up purchasing more shares when the price of the security is low and fewer shares when the price is high.

Shareholders (Mutual Fund)

asked to vote on certain matters of importance to the mutual fund. This may include investment policies and objectives, a proposed contract with an investment adviser, changes in fees, the election of board members, or approval of an independent auditor. Shareholders "vote their shares," which means they get one vote per share for each issue. Shareholders may vote by proxy.

Blend funds

combine growth funds and value funds. This type of fund may appeal to investors who seek capital appreciation for the future and dividends for now, along with substantial diversification.

Growth and Income Fund (Combo Fund)

combines characteristics of the equity growth fund and the equity income fund. The growth and income fund bridges the needs for future growth and current dividends. These funds invest in a combination of stocks of companies with strong growth potential and well-established companies that provide decent dividends.

Face Amount Certificates

debt securities backed by assets such as real property or other securities. Not very common and rarely tested

ABLE Accounts

designed to allow disabled people and their families to save for the future without being penalized for having these savings. Under the Achieving a Better Life Experience Act, disabled persons can still receive federal supplemental security income benefits, if they have up to $100,000 savings within an ABLE account. In order to be eligible for an ABLE account, an individual's disability must begin before age 26.

Section 529 Plans

designed to encourage saving for future college costs. The plans are named after Section 529 of the Internal Revenue Code and are legally known as qualified tuition programs. 2 types of plans: Colleg Saving Plans and Prepaid Tuition Plans

Prepaid Tuition Plans

generally allow participants to purchase units or credits at participating colleges and universities to lock in current prices for future tuition and, in some cases, room and board. Performance of these investments depends on tuition inflation. Most are sponsored, and sometimes guaranteed by state governments and have residency requirements. Not subject to investment risk, just inflation risk.

Sector mutual funds

invest in a specific industry or sector of the economy and, therefore, are not as diversified as other types of mutual funds. Sector funds may have appreciation potential when there is an increased demand for the product or service the sector provides. They are also subject to higher risk and volatility than broader based funds. They may lead or lag the business cycle or react in opposition to it.

Value Funds

invest in companies whose stocks are trading for less than the portfolio managers think they are actually worth. These companies may be thought of as being out of favor. Even though their share prices may be depressed, they often keep paying dividends. Thus, their price-to-earnings ratios are relatively low and their dividend yields relatively high. Value funds are considered to be more conservative than growth funds because they invest in stocks that are perceived to be boring and to have low or no growth potential. Investors in value funds are betting that eventually the depressed stocks' prices will rise.

International Funds (Foreign Stock Funds)

invest in countries outside the investor's country of residence. Generally, these companies focus on long-term capital appreciation, although some also produce current income.

Equity Funds

invest in equity securities, also known as common stock. Equity funds may be divided into several types including growth, income, growth and income, value, or blend.

Money Market Funds

invest in high-quality, short-term debt, such as commercial paper, bankers' acceptances, Treasury bills, and repurchase agreements. They are nearly as safe and liquid as bank accounts, with a higher yield. Money market funds pay dividends based on prevailing short-term interest rates. Money market funds are perfect for investors who require liquidity but would like to earn more interest than if they kept their money in a bank account. Managed to maintain a stable net asset value of $1 per share.

Transfer Agent

issues new shares to buyers and cancels the shares that shareholders redeem. The transfer agent, also known as the customer services agent, distributes income to the shareholders and sends out the shareholder reports. The transfer agent can conduct transactions for investors if a registered representative is unavailable when needed. The custodian for a mutual fund may also serve as its transfer agent, but custodian functions should be independent of transfer agent functions.

Lifecycle Funds

known also as age-based funds or target-date funds, are a particular type of balanced fund. Lifecycle funds are more common in retirement accounts, as their asset allocation automatically adjusts to become more conservative as an investor's target date approaches. These funds vary in how they are structured and maintained and the level of fees that are assessed.

Underwriters of 529 Plans and ABLE Accounts

must report information about plans to the MSRB. Reports on descriptive information must be filed semiannually and performance data must be reported annually. A record of the filing must be kept for a minimum of six years. Underwriters of both direct-sold plans and advisor-sold plans must meet these requirements.

Dealer

registered broker-dealers who fill orders by purchasing shares from the sponsor at a discount and reselling them to investors at the public offering price. Any shares purchased for the dealer's own investment must be sold back to the mutual fund company, not to other investors.

Mutual Fund Share B

sold at NAV with no front-sales charge. Subject to back end charge if not held for certain number of years according to prospectus. B will convert to A if held long enough. Back-end charge assessed on appreciated value of shares. Annual fees higher for B than A, better for investors with smaller money but holding long time

Mutual Fund Share A

sold at POP of NAV + front end sales charge. Load comes off amount invested, reducing shares bought. Shares may include an annual maintenance fee (12b-1 fee): usually lower than B or C shares. Most appropriate for account with large enough investments to benefit from breakpoint

Net Asset Value (NAV)

the book value of the fund and is calculated by determining the fair market value of the securities in the fund and subtracting the fund's liabilities. The book value is then divided by the number of shares in the fund to yield the NAV per share. Reported to both FINRA and financial Media

Advisor-Sold Plan (529)

this kind of plan goes through an authorized investment firm and offers access to an investment professional who can advise the contributor, but the firm may have higher fees and additional charges. Advisor-sold plans are sold as different share classes, each having a different fee structure, that are similar to how mutual funds are sold (e.g., A shares, B shares).

Listed REITS

traded publicly, must file with SEC, open to all investors, may not receive regular distributions, share price may decline, subject to IRS reqs, prospectus required, quarterly and annual reports, liquid, lower fees, main SOI is capital appreciation

Local Government Investment Pools (LGIPs)

trusts established by state and local governments that offer municipal entities a place to invest their money. Government entities may use their surplus cash to purchase interests in a trust, which invests the assets in a portfolio of securities according to the trust's investment objectives and state laws. Only municipal governments and their instrumentalities may invest in these trusts. LGIPs are not open to investment by the public. Purpose is to encourage efficient management of surplus cash for government entities in low risk ways while offering daily liquidity and competitive rates of return. Can benefit from economies of scale, diversification, portfolio management and liquidity.

Real estate Investment Trust (REIT)

type of trust modeled on a mutual fund. Manager of an equity REIT buy, develop, manage, and sell a portfolio of income-producing properties. Sells shares of BENEFICIAL INTEREST. Allows investors the potential benefits of real estate with burden of owning and managing property. Can also be mortgage REITS, which make money on interest charged from loaning money to developers. REITS are not investment companies, but packaged securities. Do not pass through losses unlike RELP and DPP

Exchange-Traded Notes (ETNs)

unsecured debt usually issued by a bank that promises to pay an amount based on the performance of an index, minus fees. Unlike other debt securities, however, ETNs do not pay interest. They also do not offer principal protection.

Investment Company Act Regulations

• All investment companies must register with the SEC. • Registration statements must include a prospectus stating a company's investment objectives and financial conditions. • If an investment company wishes to set up additional funds, these funds must also be registered with the SEC. • Annual reports must be provided to the SEC and semiannual reports to shareholders. • These reports must include a balance sheet, an income statement, a list of securities owned, and a statement of recent changes in the portfolio.

REIT IRS Qualifications

• It must distribute at least 90% of its income to its shareholders. • Annually, at least 75% of the REIT's gross income must be real estate-related income (e.g., rents). • Annually, at least 95% of the REIT's gross income must come from real estate-related income or dividends and income from other sources (e.g., stock market investments). • At least 75% of total assets must be invested in real estate. • It must be managed by a board of directors or trustees. • It must have a minimum of 100 shareholders (the "100 Shareholder Test").