Chapter 4 SIE
All the following are true regarding the trading of closed-end management company shares, except: A. Shares are redeemed through the fund B. Shares trade at, above, or below NAV C. share prices are determined by supply and demand D. Shares trade in the secondary market
Answer: A Closed-end shares are traded in the secondary market on either an exchange or over-the-counter. Pricing is determined by market value (supply and demand) after the IPO may trade above (premium) or below (discount) the NAV per share. Closed-end shares are not redeemed through the fund.
When must all customers be provided with the most current mutual fund prospectus? A. Prior to or at the time of confirmation B. Within 3 business days after the confirmation of the trade C. At the time the mutual fund shares are delivered D. No later than 7 calendar days after the mutual fund was first discussed
Answer: A Federal rules require that all customers be provided with the most current copy of a fund's prospectus (traditional mail or electronic delivery) at or before the time of confirmation.
Which of the following can shareholders of a mutual fund do? I automatically reinvest all distributions of the fund II Transfer ownership of the shares III invest any amount above specified minimums in additional full shares and fractional shares IV Liquidate a portion of invested capital in a fund without affecting the diversification of the investment A. I, II, III & IV B. I, III, & IV C. I & IV D. III & IV
Answer: A Investors may transfer ownership of their shares to another investor by following the fund's administrative procedures. The other three re shareholder's rights, which are explained in the prospectus.
What is the maximum sales charge for an open-end investment company according to FINRA's regulations? A. 8.5% B. 5% C. 7.25% D. 9%
Answer: A Mutual fund companies are permitted to charge a maximum of 8.5% on purchases. To charge the maximum, the fund must offer breakpoints and rights of accumulation.
What ratio is used as a method for measuring a mutual fund's annual expenses against the other average net assets to show how efficiently the fund is operating in comparison to others? A. Expense B. Dividend and capital gain C. Capital allocation D. Efficiency
Answer: A The expense ratio is a method for measuring the annual expenses against the average net assets and shows how efficient the fund is operating
A mutual fund has a POP of $9, a NAV of $8.50, and an underwriter's concession of $0.10. How many shares could be purchased if an investor has $2,000 to invest? A. 222.2 B. 251.6 C. 248.4 D. 219.8
Answer: A The public offering price is $9. If the investor has $2,000 to invest, they will receive 222.2 shares. $2,000 ÷ $9 = 222.2 shares.
What is an advantage of limiting mutual fund investments to a single fund family? A. Exchange privileges B. Check-writing privileges C. Automatic reinvestment D. Systematic withdrawal
Answer: A If shares are exchanged within the same fund family, the investor will purchase the new fund shares at NAV, without paying a sales charge. An exchange privilege is one advantage of mutual fund investing within a fund family since no sales charge is assessed when the money is moved. Another major advantage of using 1 family of funds is rights of accumulation. Exchanges within the same fund family are also called net transactions.
To be defined as an investment company, what is the company required to have? A. A clearly defined investment objective B. An attorney C. Approval of the SEC D. At least 100 different securities
Answer: A An investment company must have at least $100,000 in net assets and a clearly defined investment objective under which it will operate. The SEC msg provide a registration effective date, but never approves or disapproves of any security. There is no requirement for the number of different securities or an attorney.
Many mutual fund families currently offer Class A, B, and C shares. Which of the following statements concerning these different share classes is correct? A. All share classes will have the same YTD return B. The share classes may have differing NAVs, POPs, and expense ratios C. All share classes will have the same yield D. The share classes will have different NAVs and POPs but identical expense ratios
Answer: B Most funds offer multiple classes of shares issued against the same underlying portfolio. For example, you may have the ABC Growth Fund Class A, B, and C shares. While the portfolios of each class of shares contain the same holdings, their NAVs, POPs, and expense ratios may differ slightly due to the timing and amount of the different sales charge and cost deductions. The differing NAVs and POPs of each share class will result in slightly different annual yields and total returns.
An open-end management company that invests in a portfolio mirroring the S&P 500 index, with shares that can be purchased and redeemed from the underwriter at net asset value, is best described as: A. A class A fund B. A no-load fund C. An ETF D. A unit investment trust
Answer: B Open-end funds that are purchased and redeemed from the underwriter at NAV are typically no-load funds. An ETF is an exchange-traded product that can be traded throughout the day, they are not redeemed with the underwriter. A unit investment trust is not an open-end management company. The Class A share structure has a front-end load that is assessed at the time of purchase (NAV + SC).
Who is responsible for the preparation of mutual fund retail communication? A. Custodian B. Underwriter C. Transfer agent D. Fund manager
Answer: B The underwriter is responsible for the preparation of retail communication
Which type of investment company is established or organized under a trust indenture, is supervised by a board of trustees, and traditionally invests in a fixed portfolio that may consist of equity securities (stocks) or debt securities (bonds)? A. Shares of beneficial interest company B. Unit investment trust C. Management company D. Registered investment advisory company
Answer: B A unit investment trust is established or organized under a trust indenture that is operated by a board of trustees who establishes its investment objective and supervises the operations, which is traditionally a fixed portfolio that may consist of equity securities (stocks) or debt securities (bonds).
Exchanges within the same fund family are also called: A. Rights of accumulation B. Net transactions C. Breakpoint sales D. Front-end loads
Answer: B Exchanges within the same fund family are called net transactions or switches.
Who makes the investment decisions for an investment company? A. Registered representative B. A professional investment manager or investment advisor C. The board of directors D. A bank or insurance company
Answer: B Investment companies also hire a professional investment manager or investment advisor to make investment decisions and ensure proper diversification for the portfolio based on research and monitoring of economic and market conditions.
Mutual funds are required to furnish all the following reports, except: A. Unaudited annual reports to shareholders B. Unaudited semi-annual reports to shareholders C. Audited annual reports to shareholders D. Audited annual reports to the SEC
Answer: B Mutual funds are required to furnish audited annual reports to the SEC and shareholders as well as the unaudited semiannual reports to shareholders.
Which of the following does not require a majority vote of shares? A. An increase in 12b-1 fees B. An increase to the amount of any declared dividend C. Change from an open-end to a closed-end fund D. A change in the fund's stated investment objective
Answer: B Shareholders never vote on dividend payouts. All the other choices require shareholder vote.
Under the investment company Act of 1940, a management investment company is diversified if it meets which of the following rules? A. 70-5-25 B. 75-5-10 C. 80-10-25 D. 90-25-50
Answer: B Under the investment company act of 1940, an investment company is defined as diversified if it meets the 75.5.10 test. To meet the requirements of this test at least 75% of the funds assets must be invested in cash and securities, no more than 5% of the total invested assets may be invested in any one issuer, and no more than 10% of the voting stock of one issuer may be owned.
All the following are advantages of mutual fund investing, except: A. Reinvestment of dividend and capital gain distributions without charge B. Systematic purchase and withdrawal plans C. Distributions reinvested are always income tax-free D. Liquidity
Answer: C Distributions are taxed whether taken in cash or additional shares. The exception would be if shares are held inside a tax-qualified account.
Exchanges within the same fund family are also called: A. Churning B. Twisting C. Switches D. Arbitrage
Answer: C Exchanges with in the same fund family are also called net transactions or switches. The date of the exchange will determine the investor's cost basis on the purchase of the new fund.
An investor deposited $5,000 into an open-end investment company. 12 month later, the shares were worth $11,000. The investor deposited an additional $1,000 and received a reduced sales charge. This investor has most likely used the fund's: A. Statement of intention B. Conversion privilege C. Rights of accumulation D. Combination privilege
Answer: C Rights of accumulation provide shareholders with reduced sales charges on any new purchases after their accounts have accumulated to a certain value either through appreciation or additional contributions. Investor can receive A reduced sales charge on initial investment if they sign a letter of intent; however nothing in the question indicated the client signed an LOI. The conversion privilege allows an investor to convert from one fund to another fund in the same family without the sales charge.
A fund is showing a NAV of $10, and the fund has a POP of $10.87. The prospectus of that fund shows the sales charge to be 8%. Which explanation below is correct? A. The POP equals the net assert value plus 8% of $10 B. The POP includes a management cost that normally runs from 0.5% to 1.5% C. The sales charge is calculated as a percentage of the POP and not the NAV D. The POP includes transaction costs above the sales charge
Answer: C The sales charge is always expressed as a percentage of the POP, not the NAV
Which the following statements is true regarding the statement of additional information? A. The SAI must be supplied to all purchasers of mutual fund shares B. It must be delivered to customers only C. The SAI must be supplied upon request D. It is always part of the prospectus and must be delivered at or before the time of confirmation
Answer: C The statement of additional information contains supplementary information on fund holdings, transactions, and fee's. There is no requirement for this to be provided to each customer. This document must be furnished upon request.
A mutual fund may offer reduced sales charges as an incentive to investors who purchase class ____ shares A. C B. No-load C. A D. B
Answer: C A mutual fund may offer reduced sales charges as an incentive to investors who purchase class "A" shares
Which of the following actions is permissible by a RR? A. During an appointment with a potential mutual fund investor, the RR underlines the investment objective of the fund found in the prospectus to point out that the fund's objective matches the investor's objective B. When meeting with a potential mutual fund investor, A RR highlights key information in the prospectus so the prospect will remember the discussion later when discussing with their spouse C. After an appointment with a potential client, the RR prepares a summary of the prospectus to take home to review before making an investment decision D. When meeting with a potential mutual fund investor, the RR reviews the prospectus with the individual and provides a copy of the prospectus via email
Answer: D Customers must be provided with the most current copy of the fund's prospectus , which can be mailed or sent electronic delivery , at or the paper version of the same document . Registered representatives are prohibited from altering this document in any way , including before the time of confirmation . If a prospectus is delivered via electronic mail , it must have all the required information available in highlighting , underlining , or preparing a summary of its contents .
All the following statements describe the expenses of a unit investment trust, except: A. Low commission costs incurred by the trust due to the fixed nature of the portfolio B. Low overall expenses as compares to mutual funds C. Minimal management fees in the expense ratio due to the lack of active management D. High expense of employing research analysts to help select the fund's holdings daily
Answer: D Because of a UIT's passive structure, their expenses are usually lower compared to a managed fund, such as a mutual fund or a closed-end fund. UIT's do not use teams of research analysts to help with the day-to-day management of the fund simply because the portfolio is set and will not need to be constantly reevaluated against current market conditions.
What is one advantage an investment company offers? A. Guaranteed profits B. Principal protection C. Income tax-free returns D. Instant diversification
Answer: D Diversification of the portfolio is one advantage of an investment company offering since most investors cannot match this through individual stock or bond purchases. It is also referred as not putting all of one's eggs in one basket.
When must all customers be provided with the most current mutual fund prospectus? A. Within three business days after the confirmation of the trade B. No later than 7 calendar days after the mutual fund was first discussed C. At the time the mutual fund shares are delivered D. Prior to or at the time of confirmation
Answer: D Federal rules require that all customers be provided with the most current copy of a fund's prospectus (traditional mail or electronic delivery) at or before the time of confirmation.
An investor is informed that their initial deposit is within 10% of the fund's breakpoint. The investor does not currently have the additional money to qualify for the breakpoint but expects to have it soon. The investor should be informed of all the following, except: A. The investor may sign a letter of intent to deposit more funds within 13 months B. If the additional money is not deposited within 13 months, the original purchase will be charged the full load C. A letter of intent is non-binding on the investor D. They will not receive a reduced sales charge until the first breakpoint is met
Answer: D Letters of intent (LOIs) are designed to maintain good relations with shareholders. Almost all funds offer them, regardless of the loads they charge. They are good for 13 months and are non-binding on the investor. This means that if the additional money is not deposited within 13 months, the investor will only pay the price they would have paid if they did not sign the letter. There is no penalty for not fulfilling an LOI. However, once an LOI is signed, the breakpoint referred to in the letter is available on all dollars invested and not just the ones after the first breakpoint is reached.
All the following are activities of the custodian for a mutual fund, except: A. Safekeeping of securities B. Receiving funds raised through securities sales C. Collecting dividends from issuers D. Recommending selling the worthless securities
Answer: D The custodian is responsible for the safekeeping of a fund's cash and securities. It will also collect dividends from issuers of the securities that the fund holds. The custodian does not take part in any trading activity.
All the following are expenses that could be paid from the fund's initial sales charge, except: A. Compensation to the underwriter B. Sales literature expenses C. Compensation to the broker-dealer D. Compensation to the investment advisor
Answer: D The sals charge us compensation for the broker-dealer, underwriter, and RR. The RR and their firm sell the shares to the public. The underwriter does the marketing of the fund's shares. Part of the sales share covers the underwriter's expenses for the marketing of the shares. Not portion of the sales charge pays for fees, which are paid to the investment adviser. Investment advisory fees are deducted from the fund's net assets, not from the initial sales charge. The advisory fees are generally an annual fee of 1/2 of 1% of the daily net asset value.
What is the name of the fee that can be paid by the fund, out of it assets, to cover distribution expenses and sometimes shareholder service expenses? A. 401(k) B. 403(b) C. 72(t) D. 12b-1
Answer: D 12b-1 fees can be paid by the fund out of its assets to cover distribution expenses and sometimes shareholders service expenses
What is the maximum amount of time that a letter of intent can be backdated? A. 180 B. 270 C. 120 D. 90
Answer: D A letter of intent may be backdated up to 90 days.
Which of the following can only issue common stock to raise capital? A. U.S. government B. Corporation C. Municipality D. Open-end management company
Answer: D An open-end management investment company may only issue common stock to raise capital to operate. The U.S. government and municipalities only issue debt. Corporations can choose to issue preferred stock and/or bonds after the issuance of common stock.
Which of the following typically acts as the custodian for a mutual fund? A. Broker-dealers B. Investment advisory firms C. FINRA or the SEC D. Trust companies or commercial banks
Answer: D The custodian is the organization, such as a trust company, commercial bank, or similar financial institution that physically safeguards the securities ( stocks, bonds, and certificates) and cash owned by the fund
Charge a front-end load
Class A Shares
Charge a back-end load (contingent deferred sales charge or CDSC)
Class B shares
Level-load: no front-end load/low back-end load (redemption fee)
Class C shares
where do these statements apply to? 1. Can be backdated up to 90 days 2. Appreciation does not count 3. Good for a total of 13 months 4. Reduced sales charge from day 1
Letter of Intent
where do these statements apply to? 1. Appreciation counts 2. cannot be backdated 3. Reduced sales charge on new money only 4. Must be offered for at least 10 years
Rights of Accumulation (ROA)
