SIE: Unit 4

ACE, an open-end investment company, operates under the conduit, or pipeline, tax theory. Last year, it distributed 91% of all net investment income as a dividend to shareholders. Therefore, which of the following statements is true? A) ACE paid taxes on 9% of its net investment income last year. B) ACE paid taxes on 91% of its net investment income last year. C) ACE paid taxes on 9% of its net investment income and capital gains last year. D) ACE paid no taxes last year because it qualified as a regulated investment company under IRC Subchapter M.

A) ACE paid taxes on 9% of its net investment income last year. ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%.

The Windmill Growth Fund has breakpoints at $10,000, $25,000, and $50,000. Your customer places an unsolicited purchase through you for $47,000. You place the trade as requested without question or comment. This action is A) a rules violation. B) acceptable in all situations. C) unsolicited trade are not allowed in mutual funds. D) acceptable because the transaction is unsolicited.

A) a rules violation. This trade, though unsolicited, would still require the representative to disclose the existence of the breakpoint. Unsolicited trades are allowed in mutual funds. The representative's duty is to disclose the existence of the breakpoint, failure to do so is a breakpoint sale.

Under the Investment Company Act of 1940, which of the following is not considered an investment company? A) Unit investment trust B) Hedge fund C) Face-amount certificate company D) Separate account within a variable annuity

B) Hedge fund Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). The separate account within a VA is a type of open-end management company. Hedge funds are organized as private investment companies (often limited partnerships), which are excluded under the definition of investment company under the Investment Company Act of 1940.

If a fund sponsor allows an investor to move funds from one fund to another within its fund family, this is called A) a 12b-1 waiver. B) an exchange privilege C) a reinvestment right. D) a right of accumulation.

B) an exchange privilege This is an example of an exchange (or conversion) privilege.

All of these are part of the expense ratio of a mutual fund except A) legal and accounting costs. B) management fees. C) CDSC. D) a 12b-1 fee.

C) CDSC. The Contingent Deferred Sales Charge (CDSC) is charged against the proceeds of a sale of the fund's shares, not against the fund's assets.

Class B mutual fund shares are also called A) deferred-load shares. B) CDSC shares. C) reverse load shares. D) back-end load shares.

D) back-end load shares. Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the back end. Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after five years. At this time, they convert to Class A shares.

The investment return of a variable annuity comes from A) the assumed rate stated in the policy documents. B) the insurance company's general account. C) computing the excess of the premiums received over the mortality experience. D) the performance of the selected subaccounts within a separate account.

D) the performance of the selected subaccounts within a separate account. A key feature of the variable annuity is that most of the premium is invested into the insurance company's separate account rather than the general account. Within the separate account, a number of subaccounts may be selected, depending on the investor's objectives. It is the performance of these subaccounts that provides the annuity's investment return.

Under the IRC Subchapter M, if the WWF Fund only distributes 85% of its net investment income to its shareholders, then which of these is true? I. The fund must pay taxes on the undistributed 15% of net II. investment income. III. The fund must pay taxes on 100% of the net investment income. IV. The shareholder pays no tax if the income is reinvested. The shareholder must pay taxes if the income is received in cash or reinvested. A) II and IV B) I and III C) II and III D) I and IV

A) II and IV To avoid triple taxation according to the IRC Subchapter M, an investment company must distribute at least 90% of its net investment income. Since WWF Fund only distributed 85% of its net investment income, it must pay taxes on 100% of the net investment income. Shareholders always pay taxes on taxable income whether received in cash or reinvested.

Which of these would not be included in a mutual fund's list of expenses? I. Shareholder records and service II. Investment adviser's fee III. Broker-dealer sales charges IV. Which of these would not be included in a mutual fund's list of expenses? A) III and IV B) I and III C) I and II D) II and IV

A) III and IV Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter, or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. These are expenses to the investor.

Which of these would not affect the NAV per share of a mutual fund share? A) Portfolio securities that had to be sold for a big capital loss B) The fund pays its monthly operating expenses like utility bills C) The fund receives a dividend from one of the portfolio stocks D) The portfolio's market value undergoes a large increase

A) Portfolio securities that had to be sold for a big capital loss Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.

All of these are true regarding no-load shares except they A) have sales charges associated with sales and redemptions. B) are redeemed with no charges or fees of any kind. C) offer more return-per-dollar invested versus load funds if investing results are the same. D) are sold by the fund with no sales charges or fees of any kind.

A) have sales charges associated with sales and redemptions. No-load shares have expenses that are not considered sales charges. Some broker-dealers may charge fees for transactions, but these fees are not from the fund.

When a customer chooses to annuitize a variable annuity, all of these are factors the insurance company will use in calculating the initial payout amount except A) historic inflation rate. B) balance of the separate account. C) gender of the annuitant. D) age of the annuitant.

A) historic inflation rate. Insurance companies do not consider inflation when making this calculation. The components are GAAPI: gender, age, account balance, payout option, and interest rate (AIR).

A mutual fund's public offering price is $10.50. An investor who wishes to invest $1,000.00 in the fund is able to purchase A) Partial shares are not allowed. B) 95 shares with $2.50 left. C) 95.238 shares. D) 96 and owe $8.00.

C) 95.238 shares. Mutual funds may be purchased in even dollar amounts and partial shares may be issued.

Which of these would be unlawful regarding the use of a mutual fund prospectus? A) Failing to highlight a small section the customer has specifically asked about B) Sending a prospectus to someone who has shown no interest in the fund C) Calling an investor's attention to a section that may be interesting D) Leaving a typographical error in the text unmarked

C) Calling an investor's attention to a section that may be interesting A prospectus for any security, not just for a mutual fund, may not be marked; highlighted; or otherwise altered in any way; nor may steps be taken to call an investor's attention to some passage or section that might be of special interest, even if the potential customer asked that it be done.

An investor can take advantage of intraday price changes due to normal market forces when investing in which of these? I. Closed-end funds II. Exchange-traded funds III. Hedge funds IV. Open-end funds A) II and III B) I and IV C) I and II D) III and IV

C) I and II Both closed-end funds and ETFs trade in the marketplace based upon supply and demand. Open-end funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday. Information on ETFs can be found in Unit Five under Learning Objective 5.l.

A mutual fund has been in existence for 15 years. The prospectus must disclose the fund's performance A) broken out as an average over the last 10 years. B) for each year over the last 10 years. C) over the last 1, 5, and 10 years. D) over the last 1, 5, 10, 15, 20, and 25 years.

C) over the last 1, 5, and 10 years. The prospectus of a mutual fund must show the fund's performance over the last 10 years or the life of the fund, whichever is shorter. The data must be shown as the last year's performance, the performance over the last 5 years, and the performance over the last 10 years. With this fund, the 15-year performance need not be shown.

A letter of intent may be backdated to include a prior purchase up to A) 6 months. B) indefinitely. C) 13 months. D) 90 days.

D) 90 days. LOIs may be backdated up to 90 days. The obligation under the LOI must be met within 13 months from the date of the letter.

Under the Investment Company Act of 1940 all of these are examples of management companies except A) A growth fund option for a VA. B) A Windmill Income Fund, an exchange-listed:closed-end fund. C) An S&P 500 Index Trust ETF. D) A Windmill Income UIT.

D) A Windmill Income UIT. Unit investment trusts are investment companies, but not management companies under the act. Closed-end funds, ETF's, and separate accounts are all types of management companies.

Which of these would cause a change in the net asset value of a mutual fund share? A) The fund takes a new position B) Many shares are redeemed C) Securities in the portfolio are sold for a capital gain D) The market value of the portfolio declines

D) The market value of the portfolio declines A decline in the market value of the portfolio would reduce the assets of the fund without changing the number of outstanding shares. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Buying or selling securities for a capital gain simply replaces securities in the portfolio, with an equivalent amount of cash, leaving the NAV unchanged.

One characteristic of an open-end investment company that distinguishes it from a closed-end one is that A) it may avoid taxation by distributing all of its net investment income to shareholders. B) it may be either diversified or nondiversified. C) there are a wide variety of objectives available for investors to select from. D) there is a continuous public offering.

D) there is a continuous public offering. The key difference between open-end investment companies and closed-end investment companies is the fact that new shares are continuously being offered for open-end companies. In the case of the closed-end, once the IPO is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives.