Unit 14 -Types of Pooled Investments
In 1940, Congress passed the Investment Company Act. Among the provisions of this law was the listing of the classifications of investment companies. Included in that listing would be all of the following EXCEPT A) unit investment trusts B) holding companies C) management investment companies D) face amount certificate companies
Answer: B) holding companies Holding companies are not included in the definition stated in the Investment Company Act of 1940.
If an investor is looking for an open-end investment company with an objective of providing current income to its shareholders, she would most likely choose A) a venture capital fund B) a growth fund C) a hedge fund D) an income fund
Answer: D) an income fund Income funds provide the highest current income of the choices offered. The other choices would generally not hold many income-producing securities in their portfolios.
Which of the following investments is the most liquid? A) Money market funds B) Variable annuities C) Foreign stock funds D) Common stock
Answer: A) Money market funds Money market funds are the most liquid investment. In virtually all cases, they come with check-writing privileges.
Which of the following are characteristics of a money market mutual fund? I. Share are offered without a sales charge II. There is a redemption fee III. All purchasers must receive a copy of the prospectus IV. The letter of intent must be signed within 16 months A) II and IV B) I and III C) II and III D) I and IV
Answer: B) I and III Money market funds are offered without sales loads or redemption fees. As with all mutual funds, a prospectus is required.
A registered investment company whose portfolio consists of equity securities and the portfolio does not change in response to market conditions is probably A) a passively-managed mutual fund B) an ETN C) a unit investment trust D) a closed-end investment company
Answer: C) a unit investment trust Unit investment trusts are registered investment companies with a fixed portfolio. That is, at the time of organization, the portfolio is purchased and because there is no ongoing management company, there are basically no changes made.
Which of the following investments is required by law to have at least 75% of its assets represented by real estate assets such as real property or loans secured by real property, cash, and US government securities? A) Real estate investment trust B) Mutual fund with the name, MNO Real Estate Investments Fund C) Real estate money market fund D) Real estate sector fund
Answer: A) Real estate investment trust REITS have a requirement that at least 75% of their assets include real property or loans secured by real property as well as cash and US government securities. Specialized (or sector) funds are generally required to have at least 25% of their assets in the area of specialization.
The Investment Company Act of 1940 prohibits registered open-end investment companies from engaging in any of the following practices EXCEPT A) issuing common stock B) selling short or purchasing securities for the company's portfolio on margin C) owning more than 3% of the outstanding voting securities of another investment company D) opening a joint account with another investment company
Answer: A) issuing common stock That is the one thing that open-end investment companies must do is issue common stock. All the other activities are prohibited.
Which of the following individuals would be considered a noninterested person in a mutual fund? A) A member of the board of directors who does not hold another position within the investment company B) A shareholder who owns 10% of the fund's shares C) A person who holds a position with the fund's underwriter D) A member of the board of directors who is also employed as the investment adviser
Answer: A) A member of the board of directors who does not hold another position within the investment company The Investment Company Act of 1940 defines an interested person as someone employed by or who 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.
Which of the following is not included in the calculation of a mutual fund's NAV per share? A) Accrued management fees B) Accrued sales charges C) Closing values of portfolio assets D) Accrued custodian bank fees
Answer: B) Accrued sales charges Sales charges have nothing to do with a mutual fund's net asset value. The NAV is computed by subtracting all liabilities (it is the investor who pays the sales charge, not the fund) from the fund's assets. The principal asset is the portfolio and that is valued as of the close of the markets, generally 4pm Eastern Time.
If an investor wants to invest in the electronics industry but does not want to limit his investments to only one or two companies, which type of fund would be most suitable? A) Money market B) Bond C) Specialized D) Hedge
Answer: C) Specialized A specialized or sector fund invests 25% or more of its assets in a particular region or industry.
Why are "country" funds organized as closed-end funds? A) So that additional capital may easily be raised B) The United Nations Investment Act of 1952 requires that they all be closed-end C) Because redemption at net asset value within 7 days is assured D) Because it is often difficult to liquidate the foreign securities to get their value into the U.S.
Answer: D) Because it is often difficult to liquidate the foreign securities to get their value into the U.S. There are a number of funds that invest exclusively (or predominantly) in the shares of companies domiciled (and traded) in a single country. Not all securities markets are as liquid as those in the US, and many countries have currency restrictions limiting the amount of money that may be taken out of the country at any one time. Therefore, organizing as a mutual fund is not very practical. With no need to redeem shares, closed-end companies are the obvious solution.
When advising an investor on the purchase of mutual funds, the registered representative should instruct the client to compare open-end mutual funds with the same objective for all of the following EXCEPT A) portfolio turnover B) liquidity C) services offered D) costs
Answer: B) Liquidity Shares in an open-end investment company (mutual fund) are liquid. By federal law, all mutual funds are required to redeem shares at their net asset value within 7 days and, therefore, that should not be a consideration in comparing mutual funds with the same objective. Sales loads, management fees, and operating expenses reduce an investor's return. Most of these fees continue throughout the holding period and have a significant impact on performance. Portfolio turnover is significant as gains in the portfolio will likely all be short-term gains, which are usually taxable to the investor at a higher rate than long-term capital gains. Services that mutual funds offer include retirement accounts, investment plans, check-writing privileges, telephone transfers, conversion privileges, withdrawal plans, and others.
The dollar amount of purchase at which sales charges are reduced in the purchase of open-end investment company shares is known as A) the leverage point B) the breakpoint C) the load point D) the basis point
Answer: B) the breakpoint Large purchases of investment company shares receive reduced sales charges at given minimums of investment. These are known as breakpoints.
ABC is a FINRA member broker-dealer. Among other functions, it serves as the principal underwriter of the XYZ Mutual Fund. Which of the following transactions of ABC would be prohibited? A) ABC tenders, from its investment account, 500 shares of the XYZ Mutual Fund for redemption B) ABC purchases, for its investment account, 500 shares of XYZ Mutual Fund C) ABC purchases some securities directly from XYZ's portfolio D) All of these
Answer: C) ABC purchases some securities directly from XYZ's portfolio It would be a violation of the Investment Company Act of 1940 for any affiliated person, such as the principal underwriter, to purchase any security from an investment company other than shares of the fund itself. Investing in the fund's shares would be permitted, not prohibited.
Which of the following statements correctly expresses requirements under the Investment Company Act of 1940? I. A registered open-end investment company using a bank as custodian must choose one that has FDIC coverage II. If an affiliated person of a registered investment company wishes to borrow money from the fund, there must be at least 300% asset coverage III. No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing. IV. No registered investment company may acquire more than 3% of the shares of another investment company A) I and II B) I and IV C) II and III D) III and IV
Answer: D) III and IV The Investment Company Act of 1940 requires that all advisory contracts contain a provision that the contract may be terminated upon no more than 60 days' notice in writing, choice III. The Act prohibits any registered investment company from owing more than 3% of the shares of another investment company, choice IV, making D the correct answer. An affiliated person cannot borrow from the fund, and it is not a requirement that a custodian bank have FDIC insurance.
As defined in the NSMIA, federal covered securities would include I. open-end investment companies registered under the Investment Company Act of 1940 II. closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC III. Bulletin Board bonds listed on the OTC Link where the company's common stock trades on Nasdaq IV. bonds issued by the Province of Ontario
Answer: I, II and III. Under the NSMIA, federal covered securities include all investment companies registered under the Investment Company Act of 1940, regardless of where they trade. Any stock listed on Nasdaq is federal covered, and that makes any security equal to or senior (like their bonds) also federal covered, regardless of where they trade. Canadian government and municipal securities are not federal covered (although under the Uniform Securities Act, they are exempt securities).
A similarity between the capitalization of closed-end and open-end management investment companies is that both A) can issue common and preferred stock B) are traded on listed exchanges or in the OTC market C) compute net asset value per share D) raise capital through a continuous public offering of shares
Answer: C) compute net asset value per share The only similarity here is that both kinds of management investment companies compute NAV. Open-ends must do it daily and closed-ends can compute daily or weekly.
When comparing mutual funds, one of the factors to consider is A) the amount of sales charge levied on reinvested capital gain distributions B) the length of time it takes for the fund to redeem shares C) the fund's net asset value per share D) the length of time the fund manager has been managing the fund
Answer: D) the length of time the fund manager has been managing the fund Tenure in the job can be an important consideration when evaluating and comparing mutual funds. All funds must redeem in 7 days, and no fund can levy a sale charge on reinvested capital gains.
Louis owns an investment that is an unmanaged portfolio in which the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the investment portfolio terminates. This statement best describes which type of investment? A) Closed-end investment company B) Hedge fund C) Open-end investment company D) Unit investment trust
Answer: D) unit investment trust A unit investment trust (UIT) is a type of investment company whose units are sold in the secondary market and is generally unmanaged, or passively managed as the money manager initially selects the securities to be included in the portfolio and then holds those securities until they mature or the UIT terminates.
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 renewal must be approved by either majority vote of the board or majority vote of the outstanding shares, as well as majority vote of the noninterested members of the board. B) The renewal may be executed orally, provided it is done within 2 years of the initial contract C) The renewal must state the adviser's compensation D) The contract must be terminable upon no more than 60 days' notice
Answer: B) The renewal may be executed orally, provided it is done within 2 years of the initial contract 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 2 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.
When advising an investor on the purchase of mutual funds, the agent should instruct the client to compare open-end mutual funds with the same objective for all of the following EXCEPT A) services offered B) liquidity C) costs D) portfolio turnover
Answer: B) liquidity Shares in an open-end investment company (mutual fund) are liquid. By federal law, all mutual funds are required to redeem shares at their net asset value within 7 days and, therefore, that should not be a consideration in comparing mutual funds with the same objective. Sales loads, management fees, and operating expenses reduce an investor's return. Most of these fees continue throughout the holding period and have a significant impact on performance. Portfolio turnover is significant as gains in the portfolio will likely be short-term gains, which are usually taxable to the investor at a higher rate than long-term capital gains. Services that mutual funds offer include retirement accounts, investment plans, check-writing privileges, telephone transfers, conversion privileges, withdrawal plans and others.
A management company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) selling at a discount B) selling at NAV C) an open-end investment company D) selling at a premium
Answer: D) selling at a premium When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The NAV per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 outstanding shares, which is a NAV of approximately $32.55. The price of $36.38 is a premium over the NAV. And we know that this can't be an open-end investment company because if it was, the $3.83 sales charge ($36.38 - $32.55) represents 10.5% of the asking price...well in excess of the maximum 8.5% permitted.
One way in which closed-end management investment companies differ from open-end investment management companies is that A)they are federal covered securities B)their portfolio may contain common stock, preferred stock and debt securities C)they were in existence prior to 1940 D)they trade at a price independent of their net asset value
Answer: D) they trade at a price independent of their net asset value (NAV) Unlike open-end companies (mutual funds) where the price is based on the net asset value (NAV), closed-end companies trade at a market price based on supply and demand which could be above, below or the same as the NAV. Both are federal covered, both can have equity and debt in their portfolios (although only closed-end companies can issue senior securities) and both were in existence prior to passage of the Investment Company Act of 1940.
