Investment Companies - Overview/Management Companies

What is the minimum capital required for a sponsor to start their own fund?

$100,000

What is the max for the 12b-1 Fee?

.75% (¾ of 1%) of average annual net assets.

What % of the Board of Directors of a fund must be outside of the fund?

40%

What is longest a fund can take to pay a customer at redemption?

7 calendar days

What is the maximum sales charge for 12b-1 funds?

7 ¼%

What is the 75-5-10 Rule?

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

What rule does a diversified fund follow?

75-5-10 Rule

Breakpoints

A breakpoint is a reduced sales charge for a large dollar purchase. FINRA sets breakpoint schedules that it considers to be "fair and reasonable." Mutual funds may lower the sales charges percentages in these breakpoints, but cannot exceed them. - Basically a wholesale discount

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 much more expensive to a customer that has a large dollar amount to invest over a long time horizon, because the one-time up-front sales charge of a Class A share reduced by a breakpoint for a large dollar investment is usually less costly than incurring annual 12b-1 fees over a long time span.

Management Company

A management company is an investment company organized as a corporation, issuing shares of stock. The investment company uses an "investment adviser," or manager, to decide which securities to place in the portfolio. The manager is free to "manage" the portfolio, buying and selling, consistent with the fund's investment objective.

Unit Investment Trust:

A unit trust is a type of investment company organized under a "trust indenture" rather than being set up as a corporation. Corporations can issue shares; whereas trusts issue "shares of beneficial interest" representing an undivided interest in a "unit" of specified securities.

What is the main marketplace for ETFs?

AMEX (NYSE-MKT)

What is FINRA's rule regarding fees of mutual funds?

All fees combined (including the redemption fee) cannot exceed 8.5%

Formula for mutual fund current yield after ex-date

Annual Income / Offering Price + Prior Year Distributions

What are some fund expenses?

Annual Management Fee Shareholder Servicing Fees Custodial Fees Printing Fees Legal + Audit Fees Administrative Fees 12b-1 Distribution Fees

Rights Of Accumulation

As an investor builds a position in a mutual fund, his accumulated position counts towards the breakpoint.

Sales Charge Percentage formula

Ask - Bid / Ask

Why are they called variable annuities?

Because the amount of the annuity or payment(s) varies, depending on the performance of the mutual fund shares purchased, these are called "variable annuities."

FINRA prohibits the following practices

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

How can smaller investors still get a piece of the hedge fund pie?

By investing in a mutual fund that invests in hedge funds, though they generally have a minimum $25,000 investment amount, cutting out the truly small investor

Class A Shares

Class A shares impose a higher "up-front" sales charge, but typically have no, or very low (about ¼%), annual 12b-1 fees. These shares are most suitable for long-term investment since the up-front sales charge is a one-time event that will be recovered over time through a better rate of return achieved by the lower annual 12b-1 fee. After the up-front charge is recovered, the lower 12b-1 fee will enhance returns as long as the investor stays in the fund.

Class B Shares

Class B shares impose a contingent deferred sales charge that declines to "0" the longer the investor stays in the fund, but impose a higher (about ½%) annual 12b-1 fee. These shares are most suitable for intermediate term investment.

Class C Shares

Class C shares impose no up-front sales charge similar to Class B shares, and the "rear load" is smaller when the investor leaves. However, these shares have the highest (about ¾%) annual 12b-1 fees. These shares are only suitable for short term investment since the higher 12b-1 fee will result in a major "drag" on returns as long as the investor stays in the fund.Class C shares impose no up-front sales charge similar to Class B shares, and the "rear load" is smaller when the investor leaves. However, these shares have the highest (about ¾%) annual 12b-1 fees. These shares are only suitable for short term investment since the higher 12b-1 fee will result in a major "drag" on returns as long as the investor stays in the fund.

CDSC

Contingent Deferred Sales Charge

ETFS

EXCHANGE TRADED FUNDS - represent shares of ownership in portfolios of common stock that track the performance of a specific index.

How and when is Net Asset Value Computed (NAV)?

Every day, the fund computes 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.

What are the 3 types of investment companies?

Face-amount certificate company Management company Unit investment trust

True or False: Breakpoints can be achieved by investors banding together in their mutual fund purchases

False. Breakpoints are applied on a customer by customer basis.

Systematic Withdrawal Plans

Fixed Dollar Fixed Shares Fixed Percentage Fixed Period

What are the two types of UITs (Unit Investment Trusts)?

Fixed Trusts and Participating Trusts.

What types of funds are there?

Growth Fund Growth and Income Income Fund Balanced Fund Index Fund Specialized Fund (Sector Fund) Special Situations Fund

Letter Of Intent

If a customer wishes to purchase many shares of a fund over the course of a year, they can sign a "letter of intent" and you can give them the breakpoints for each purchase. But if he does not follow thru, then the charges will be recalculated and the breakpoints will be revoked. You can also backdate the letter up to 90 days and get the breakpoint for the previous purchase. This can also be met by appreciation of the assets in the fund.

Regulated Fund Under Subchapter M

If a fund distributes at least 90% of it's income to shareholders it only has to pay taxes on the remaining %. Also, there are surcharges imposed if a fund does not Distribute 97% Of Net Investment Income And 98% Of Capital Gains

Rule 12b-1

If opted, it distributes the sales fees of new investors across all the existing shareholders

What does no load mean?

If the fund is a "no-load" fund, there is no sales charge and customers can buy at net asset value. No-load funds are sold directly by mutual fund sponsors who do not use selling groups or salesmen.

How does the arbitrage mechanism keep the price at NAV?

If the fund is trading at a discount, designated large institutional investors are permitted to buy the fund shares (at the discount price), typically in minimum 50,000-100,000 share blocks, and sell (short) the equivalent shares of the stocks in the underlying portfolio. These institutional investors are then permitted to exchange the purchased ETF shares for the underlying stocks in the portfolio, which can be used to cover their short positions. This action pushes up the price of the ETF shares, and it will stop when the price reaches NAV.

What is the Maximum Sales charge?

If the fund sponsor must compensate a selling group or salesmen, the fund will impose a "sales charge" on top of the net asset value. Under FINRA rules, the maximum sales charge on mutual fund purchases is 8 ½% of the Public Offering Price.

What is the close-end structure used for?

Illiquid securities such as municipal bonds and Third world investments

How long is the investment adviser (fund manager) contracted for?

Initially two years and is subject to sharholder vote every year after that.

Participating Unit Investment Trust:

Instead of the trust selecting individual securities, the trust invests in the shares of a management company - specifically mutual fund shares. In this way, purchasers of participating trusts are indirectly buying mutual fund shares.

Specialized Fund (Sector Fund)

Invests in a particular industry or geographic area. For example, energy funds or gold funds are specialized by industry. These are also called "Sector Funds." The Australia Fund and the Asia Fund are specialized by geographic area (both invest in common stocks of companies operating in that geographic area).

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.

Growth Fund

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

Investment Adviser

Manages fund within objective Contract approved by shareholders Receives management fees

Open-End Management Company

Mutual Fund - The shares are non-negotiable. They cannot be traded. Instead, the shares are redeemable with the fund.

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.

Formula for sales charge with a breakpoint

NAV / 100% - Sales Charge%

How often can capital gains be distributed by a fund?

Once a year

Who can use hedge funds?

Only the very wealthy (accredited) investors

What are ETFs registered as? Open-end or Close-end funds?

Open-end

Why are Participating trust structures used?

Participating trust structures are used when investors buy mutual funds within an insurance company "wrapper" to fund variable annuity contracts.

How often are dividends of funds distributed?

Periodically

Custodian bank

Safeguards fund assets Can act as Transfer Agent and Paying Agent Receives custodial fees

Selling Group

Sells fund at public offering price on initial offering Earns selling consession Continuously offers open-end shares One time offer of closed-end shares

How often are management companies supposed to send financial statements to shareholders?

Semi-annually

What are the most successful ETFs?

Spiders - SPDR SPDRs - Standard and Poor's 500 Depository Receipts, which are often referred to as "Spiders." Diamonds - DIA DIAs - Dow Jones Industrial Average (30 Stocks), often referred to as "Diamonds." Qubes - QQQ QQQs - NASDAQ 100 Index, often referred to as "Qubes."

What is unique about Money Market NAV?

The NAV is alway set at $1. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each.

What must a fund do to break the 8.5% rule?

The fund must offer: Breakpoints Letter of intent Rights of accumulation

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. For example, if the fund held overseas stocks, that might slow up the computation of NAV for the fund company - however the sophisticated hedge fund investor might build its own software to compute NAV faster than the fund company - and would place buy orders for shares that it found to be undervalued and sell orders for fund shares that it found to be overvalued.

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 (typically at 4:00 PM ET). Any such "late" orders are not supposed to be processed at that day's closing NAV; rather, they should be processed at the following day's NAV. Such late trading is prohibited under the Investment Company Act of 1940. Some mutual fund companies have accepted redemption orders past the 4:00 PM cut-off, allowing sophisticated traders to take advantage of after-4:00 PM ET market close news announcements - an advantage that the regular fund shareholders did not have. This late trading is now an explicitly prohibited activity for both the fund company and the investor.

What is the Prospectus?

The registration statement which details the objective of the fund, the Board of Directors, the fees involved, the track record of the sponsor, etc.

Fixed Unit Investment Trust:

The trust selects a portfolio of securities (usually bonds), which are placed in trust. Once the portfolio is selected, it is not changed - no buying or selling takes place in the trust. There is no "management." The trust then sells "units" of the fixed portfolio to investors. As interest payments are made on the bonds, they are passed to the unit holders. As bonds mature, the principal is repaid to the unit holders. When all the bonds have matured, the trust self-liquidates.

What is the fund sponsor?

The underwriter or investment firm. They must register with the SEC before the fund can be sold.

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 a recognized index, such as the Standard and Poor's 500 Index. Such a fund's performance will track that of the index. Because the investment adviser is not researching and selecting the securities to be purchased, the management fees are lower than for other funds.

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.

Expense Ratio formula

Total Expenses / Total Net Assets

Types Of Income Funds

U.S. Government Securities fund Municipal Bond fund Preferred Stock fund Corporate Bond fund Money Market Securities fund

Closed-End Management Company:

Under this structure, the fund has a one-time issuance of stock. The stock is then listed on an exchange and trades like any other negotiable security. Thus, they are called "publicly traded funds." The fund usually invests in bonds, with the shareholders receiving income distributions from interest earned as well as capital gains. Under this structure, the shares are not redeemable. The shares are negotiable, and can be sold on the exchange where they are listed at the prevailing market price.

INVESTMENT COMPANY DEFINITION

Uses money from individuals to purchase securities that produce a desired outcome (e.g. capital gains or income) - Like a mutual fund

Variable Annuity

Variable annuities are generally used as retirement planning vehicles. The purchase of "units" is made until retirement age. At retirement, the investor can "cash out" of the investment either as a lump sum payment, in periodic payments, or in the form of an annuity.

Face-Amount Certificate Company

Virtually obsolete. Investors payed a monthly amount to the investment company and the company invests the funds in the highest quality obligations such as U.S. Government debt and AAA municipal and corporate debt. The certificate promises the investor a guaranteed rate of return so that at a fixed date. The total payments are less than the face amount, with the difference being the compound interest earned on the investments.

How are mutual funds sold with forward pricing?

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. Similarly, if a customer wishes to redeem a mutual fund, he or she receives that day's closing Net Asset Value.

Are taxes due if dividends are reinvested?

Yes

Why do closed-end funds sometimes sell at a premium?

because they give (or are expected to give) a superior return relative to the market rate of return.

Why do closed-end funds sometimes sell at a discount?

because they give a lesser rate of return relative to the market; or there is greater uncertainty surrounding the types of investments held in the fund.

DOLLAR COST AVERAGING

the investor agrees to invest the same dollar amount periodically in fund shares (for example, $100 every month, or as another example, $500 every 3 months). This actually can generate in more shares at cheaper prices overall.

Shareholders in a management company have the right to:

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