SIE Unit 4

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

A A decline in the market 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

TEST TOPIC ALERT 3

A prospectus may not ever be altered in any way. This means no highlighting, writing in, or taking any measure to bring attention to any specific passage or section is permitted

Managed investment companies (closed and open end)

Actively manages a securities portfolio to achieve a stated investment objective A managed investment company is either closed end or open end. Both closed and open end companies sell shares to the public in their initial public offering (IPO); the primary difference between them is that a closed-end company's initial offering of shares is limited (it closes after a specific authorized number of shares have been sold) and an open end company is perpetually offering new shares to the public (it is continually open to new investors

TEST TOPIC ALERT 2

Closed-end investment companies may issue common stock, preferred stock, and debt securities

face-amount certificate (FAC)

Contract between investor and an issuer where issuer guarantees payment of a stated sum/installments to the investor at some set date -In return for this future payment, the investor agrees to pay the issuer a set amount of money, either a lump sum or in periodic installments. If the investor pays for the certificate in a lump sum, the investment is known as a fully paid FAC Issuers of these investment are FAC companies. Very few FAC companies operate today

TEST TOPIC ALERT 1

The most important thing to remember about FACs is that they are investment companies as defined under the Invesment Company Act of 1940

Class C (level-load) shares

Typically have a one-year, 1% contingent deferred sales charge, a .75% 12b-1 fee and a .25% shareholder services fee. These fees never go away, C shares are commonly referred to as having a level load. Appropriate for investors who have short time zone horizons because the annual charge make them expensive to own if investing for more than 4-5 years

Comparison of open-end and closed-end investment companies:

* Variable annuities have subaccounts that are defined as either UITs or open-end management investment companies

Load funds

*Class A shares are best for investors with large investments (to get breakpoints) and no loaner time frames (reading he one-time cost over several years *Class B shares are best for investors with smaller investments and long time frames (to get past the back-end loads *Class C shares are best for investors with short time frame horizons (at least one year, but not more than five years)

Characteristics of mutual funds

-A professional investment adviser manages the portfolio for investors -Mutual funds provide diversification by investing in different companies or securities -Most funds allow a minimum investment, often $100 or less to open an account, and they allow additional investments of as little as $25 -An investment company may allow investments at reduced sales charges based on the amount of the investment -An invest retains voting rights similar to those extended to common stockholders, such as the right to vote for changes in the board of directors (BOD), approval of the investment adviser, Changs in the fund's investment objective, changes in sales charges, and liquidation of the fund -Mutula funds must offer reinvemsent of dividends and capital gains at NAV (without a sales charge), but these reinvestments are taxable -An investor may liquidate a portion of his holdings without distributing the portfolio's balance or diversifications -Tax liabilities for an investor are simplified because, each year, the fund distributes a Form 1099 explaining taxability or distributions -A fund may offer reinstatement provisions that allow investors who withdraw funds to reinvest up to the amount withdrawn within 30 days with no new sales share. This provision must be in the prospectus and is available one time only -Many mutual funds are part of a related (branded) family of funds or mutual find complex. Switches between funds int he same family are taxable events. -Under the Investment Company Act of 1940, the maximum sales charge allowed is 8.5% of the POP Investors can purchase the same underlying mutual fund shares in several ways. Generally, investors can purchase Class A shares, Class B shares, and Class C shares. The differences among these shares are how much and in what way investors will pay sales shares (loads) and related expenses. In essence, these sales charges are the way the distribution services that a fund's underwriter provides are paid for. Some fund companies market their shares directly to the public without the assistance of underwriters. In these instances, the companies offer what are called no-load funds-funds without no sales charges

Annuities

-An insurance contract designed to provide retirement income. -The term annuity refers to a stream of payments guaranteed for some period of time. -The actual amount to be paid out may or not be guaranteed, but the stream of payments is guaranteed -Because an annuity can provide and income for the rest of someone's life the contract has a morality guarantee- a promise to pay the annuitant no matter how long that person lives. When you think about a retiree's greater fear, it is typically outliving his income. This product can take away that fear Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. For this potential advantage, the investor takes on this risk, the product is considered a security. Individuals who are both insurance-licensed and securities licensed are eligible to beneficiaries to receive the greater of the contribution amount or the current value if the owner dies during the accumulation period -The premium payments for variable annuities are invested in what is called a separate account. The separate count is made up of various sub-accounts that behave like the diversified portfolios of mutual funds. These accounts will have various objectives to choose from, such as growth, income, or growth and income. The returns in the separate account are not guaranteed, and therefore, a loser of principal. is possible -There is no limit to the annual contribution amounts on commercial (nonqualified) contracts. Qualified variable contracts are used in some employer-sponsored retirement plans and are funded with pretax contributions, but these are limited to annual maximums similar to those found in 401(k) plans

Calculating NAV

-NAV changes daily because of changes in the market value of the securities in a. fund's portfolio Because mutual funds do not trade in the secondary market, the value of shares is not determined by supply and demand, but rather by formulation. Everything begins with NAV per share. To calculate the NAV of a fund share, the fund starts with its total assets and subtracts out its total liabilities: total assets- total liabilities = Net asset of the fund The fund then divides the net assets by the number of shares outstanding. This gives the NAV per share. Net Assets of the fund/shares outstanding = NAV per share EX: The ABC fund has total assets of $100 million and $5 million in liabilities. If it has 10 million shares outstanding, what is its NAV per share? Net assets: $100 million (total assets) - $5 million (total liabilities) = $95 million total Nav NAV per share: $95 million/$10 million shares outstanding = $9.50 per share

General rules of them regarding suitability of variable annuities

-Variable contracts are considered most suitable for someone who can fund the contract with cash. In other words, enticements to purchase a variable annuity by cashing out a life insurance policy or an existing annuity (either of which might come with high surrender charges) is considered abusive and is not a suitable recommendation. Refinancing a home or withdrawing equity from a home to fund a purchase is never considered suitable -Variable contracts are not suitable for anyone who might need the lump sum of cash invested in the variable annuity at a later time for any reason. Anticipating buying a home, needing cash for your children's college education, or any other upcoming expense would need to be considered outside the variable annuity investment -Growth in a variable annuity is tax deferred until withdraw, so they are generally considered suitable for placement in a tax-favored account like and iRA -Variable annuity contracts are insurance company prodcyys that invest in a portfolio of securities via their separate accounts. If someone has a low risk of tolerance or is wary of the stock market, a variable annuity is not likely a very suitable recommendation for their individual -Maximum contributions to all other retirement savings vehicles available to an individual should be made before a variable annuity is considered a suitable recommendation. In other words, they are best used as supplements to retirement income one can already anticipate, like pensions and IRA or 401 (k) distributions

An investor is purchasing $48,000 of the Windmill Alternative Energy Fund. The fund has a breakpoint of $50,000. The least appropriate action would be to A. Place the order B. Explain breakpoints C. Explain letters of intent D. Discuss combination privilege

A All the other options introduce breakpoints to the customer. Not disclosing the breakpoint would make this a breakpoint. sale

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

A A key feature of the variable annuity is that most of the premium is invested in the insurance company's separate account rather than the general account. Within the separate account, there are a number of sub accounts that may be selected, depending on the investor's objective. -It is the performance of these sub accounts that provides the annuity's investment return

When is growth within a variable annuity taxed? A. At withdrawal B. Annually C. After age 59 and 1/2 D. At retirement

A Growth within a variable annuity is taxed when the funds are withdrawn. -All growth is tax deferred until it is taxed out of the annuity

Combination Privilege

A benefit offered by a mutual fund whereby the investor may qualify for a sales charge breakpoint by combining separate investments in two or more mutual funds under the same management. A mutual fund sponsor frequently offers more than one fund and refers to these multiple offerings as its family of funds. -An investor seeking a reduced sales charge may be allowed to combine separate investments in two or more funds within the same family to reach a breakpoint

Closed-End Investment Companies

A closed-end company will raise capital for its portfolio by conducting a common stock offering, much like any other publicly traded company that raised capital to invest in its business. -In the initial offering, the company registers a fixed number of shares with SEC and offers them to the public with a prospectus for a limited time through underwriters. -Once all the shares have been sold, the fund is closed to new investors. Many times, a fund is elected to be a closed-end company because the sector in which it intends to invest has a limited number of securities available. Closed-end investment companies may also issue bonds and preferred stock

Exchange Privilege

A feature offered by a mutual fund allowing an individual to transfer an investment in one fund to another fund under the same sponsor without incurring an additional sales charge. Many sponsors offer exchange or conversion privileges within their families of funds. -Allow an investor to convert an investment in one fund for an equal investment in another fund in the same family, usually without incurring an additional sales charge. This exchange is considered a taxable event, so there may be tax consequences

Summary Prospectus

A mutual fund can be provide investors with a summary prospectus that may include an application that investors can use to buy the fund's shares -A standardized summary of key information taken from the fund's full or final prospectus. Investors who receive the summary have the option. of either purchasing fund shares using the application found therein or requesting a full (statutory) prospectus. An investor who purchases fund shares on the basis of the summary prospectus must be able to access a full prospectus no later than the confirmation of the sale. Delivery must be made online There are some very specific requirements for a summary prospectus. The following must be included on the cover page or at the beginning the summary prospectus -The funds name and the class or classes of shares -The exchange ticker symbol for the fund's shares -A legend, which must appear on the cover page, that refers to the summary nature of the prospectus and the availability of the fund's full (statutory) prospectus, with a legend providing a toll-free number to request paper delivery of a prospectus or a website where one may be downloaded Additionally, the summary must provide specific information in a particular sequence, such as investments, risks, and performance; fee tables; investment objectives; investment strategies and any related risks; the portfolio holdings and details regarding management; shareholder information; and any financial highlights

Letters of Intent (LOI)

A person who plans to invest more money with the same mutual fund company may immeditalet decrease overall sales charges by signing a letter of intent (LOI). In the LOI, the investor informs the investment company of the invention to invest the additional funds necessary to reach the breakpoint within 13 months The LOI is a one-sided contact binding on the fund only. However, the customer must complete the investment to qualify for the reduced sales charge, The fund holds the extra shares purchased from the reduced sales charge in escrow. A customer who deposits the money to complete the LOI receives the escrowed shares. Appreciation and reinvested dividends do not count toward the LOI If a customer has not completed the investment statement within 13 months, he will be given the choice of sending a check for the difference in sales charges or cashing in escrowed shares to pay the difference A LOI may be backdated up to 90 days. The 13 month LOI period beings on the date of the letter. Any purchases that occurred on or after the date of the letter will be adjusted to reflect the better breaking EX: Referring back to the example breakpoint schedule a customer investing $5,000 is well short of the $10,000 breakpoint. The customer expects to invest an additional $20,000 in the next year. In this situation, the customer might sign an LOI promising an amount that will qualify for the breakpoint within 13 months form the date of the letter. An additional $20,000 within 13 months qualifies the customer for the reduced sales charge

Mutual Funds

A pool of investor's money invested in various securities determined by the fund's stated investment objective. -Mutual funds offer guaranteed marketability; if an investor wants to sell shares previously purchased in a mutual fund, it is the mutual fund that stands ready to buy them back. Mutual funds, therefore, are redeemable securities DO NOT TRADE IN THE SECONDARY MARKET -Each investor in the mutual fund's portfolio owns an undivided interest in the portfolio. All investors in an one-end fund are mutual participants; no single investor has a preferred status over any other investor because mutual funds issue only one class of common stock. Each investor shares mutually with other investors in gains and distributions derived from the investment company portfolio -Reinvestments of dividend and capital gains distributions are typically done at NAV (the investor does not pay a sales charge) and provide a compounding effect to an investor's return -Mutual funds permit shareholders to reinvest at NAV, but remember that all distributions (whether reinvented or taken) are taxable. Reinvestments will add to the investor's cost basis in the fund. -Each investor's participation in the fund's performance is based on the number of shares owned. Mutual shares may be purchased in either full or fractional shares-unlike corporate stock, which may only be purchased in full shares. Because mutual fund shares can be fractional, the investor can think in terms of dollars rather than number of shares owned Ex: Suppose a mutual fund's shares are priced at $12.34 per shares an investor wishes to invest $4,000. Given the share price and the amount the investor wants to invest, the purchase will before 324.150 shares ($4,000/12.34=324.150) In other words, the investor does not need to specify purchasing any specific number of shares (e.g., 323, or 324, or 325). Instead, the investor can simply decide on how much money she wants to invest, and however many shares that dollar amount will purchase will be the number of shares the investor will now on. An investment company's portfolio is ELASTIC. Money is lea constantly being invested or paid out when shares are purchased or redeemed. The mutual fund portfolios val

Suitability

A variable annuity can be a very important part of one's financial well-being if utilized correctly. However, there are suitability issues to consider. Variable annuities are meant to bring supplemental income into the household a at time in one's life when the income is needed Therefore, seeing supplemental income for retirement, not preservation of capital, should be the reason for considering a variable annuity.

Rights of Accumulation

Allow an investor to qualify for reduced sales charges. The major differences are the rights of accumulation: -Are available for subsequent investments (the reduced sales charges will not apply to initial transactions) -Allow the investor to use prior share appreciation to qualify for breakpoints -Do no impose time limits The customer may qualify for reduced charges when the total value of shares previously purchased and shares currently being purchased exceeds a certain dollar amount. For the purpose of qualifying customers for rights of accumulation, the mutual fund bases the number of securities owned on the higher of current NAV or total purchases made to date Rights of accumulation also an investor to combine previous investments in the fund with today's investment to determine today's sales charge. Referring back to the sample breakpoint schedule, once an investor accumulates $5,000 in the fund, each additional investment, no matter how small, qualifies for the lowest sales charge- in this case, 2%

Unit Investment Trust (UIT)

An investment company that sells redeemable shares in a professionally selected portfolio of securities. It is organized under a trust indenture, not a corporate charter. -Do not have boards of directors; they have trustees UITs create a portfolio of debt or equity securities designed to meet the company's objectives. They then sell redeemable interests- also known as units or shares of beneficial interest- in their portfolio of securities. Each share is an undivided interest int he entire underlying portfolio -A UIT may be fixed or combined. - A debt-fixed UIT typically purchases a portfolio or bonds and terminated when the bonds in the portfolio mature. -An equity fixed UIT purchases a portfolio of stocks and because stocks don't have a maturity date, terminates at an arbitrary predetermined date. Because a fixed UIT do not generally assess management fees because there is no need to hire an investment adviser to monitor and trade positions within the portfolio. -Nonfixed UITs, called contractural plans, purchase shares of an underlying mutual fund. They are non-fixed because the underlying assets (mutual funds) change investments. (Have not appeared on the exam) *FACs and UITs are not managed; once the portfolios are composed, they do not change *FACs and UITs do not trade in the secondary market; they are redeemable only through an issuer

Annuitization

An investor who reaches retirement may choose to annuitize her contract. -This is a one time irreversible election to give up ownership of the assets of the annuity in return for a lifetime income guaranteed by the insurance company. -The amount of the income is detained by the insurance company based on the annexation's (sex. age, amount, payout type, and assumed interest rate). Though there are annuities that may adjust the rate for inflation, it is not part of this initial calculation. Although annuitants of variable annuities can choose a gaunrteed monthly income for life, the amount of monthly income received is dependent on the performance of the separate account. Monthly income either increases or decreased, as determined by the separate account' performance *A fixed annuity differs from a variable annuity. Though both are insurance company products and both guarantee a stream of income for life, a fixed annuity simply promised a stated rate of return. Therefore, it is the insurance company who is at risk to provide the rate of return it promised. The investor assumes no investment risk with a fixed annuity. With no investment risk for the investor to shoulder, the product is not considered a security

Life Insurance-Based Products

Annuities and life isnrance (whole and term) are not investment products; they do not have a variable component an do not appear on the SIE. Variable life insurance is a type of security and requires securities liens to sell. However, variable life is currently not tested on the SIE. The variable annuity (VA) is a securities product that is tested on the SIR

Omitting Prospectus (Rule 482)

Another term for a fund advertisement. -Does not contain enough information to qualify as a full and fair disclosure. -Sometimes called a tombstone ad -Delivery of an omitting prospectus is not sufficient to solicit a trade -You cannot justt hand them an ad and say, "Give me a check"

Taxation

As states, variable annuities are defined to be a supplement to a customer's retirement savings. Growth within the separate account is not subject to taxation until it is withdrawn. Once withdrawn, it is considered ordinary income for the year of the withdrawal. *Note that on an exam, a variable annuity will be non qualified (not held in a qualified plan like a 401 (k), unless the question specifies otherwise -When a person withdrawn the entire amount of the annuity, any growth is taxed as income that year -If an owner annuities the variable annuity (converts the lump su, into a life income), a prison of the regular payment is considered income and part is considered return of principal. This principal portion is called the exclusion ratio *Return of principal is not taxable -However, if the owner withdraws a portion of the variable annuity on a random basis, the growth (the part subject to taxation) comes out firs. All the growth in the separate account must be withdrawn before any of the principal. Also if the annuity is under the age of 59 and 1/2, the taxable portion of a withdrawn is subject to a 10% penalty.

Which of the following would be a suitable objective for recommending a variable annuity? A. Saving for college education B. Supplemental retirement savings C. Primary retirement savings D. Saving for a down payment

B Annuities are designed to supplement an investor's retirement. Investors should maximize use of qualified retirement accounts before investing in a VA. -Annuities should not be used for pretreatment goals like education and a home purchase

Pipeline (or Conduit) Tax Theory

Because an investment company is organized as a corporation or a trust, one might assume that its earning is subject to tax when often they are not. Consider, however, how an additional level of taxation would shrink a dividend distributions value Triple Taxation (taxes applied at the corporate, fund, and investor level) of investment income may be avoided if the mutual fund qualifies under Subchapter M of the Internal Revenue Code (IRC). -If a mutual fund acts as a conduit or pipeline, for the distribution of net investment income (NII), the fund may qualify as a regulated investment company, subject to tax only on the amount of investment income the fund retains. The investment income distributed to shareholders escapes taxation at the mutual fund level Subchapter M requires a fund to distribute at least 90% of its NII to shareholders. The fund then pays taxes only on the undistributed 10%. If the fund distributes 89%, it pays taxes on 100% of NII. Ex: The Windmill Balanced Fund holds a mix of stocks and bonds. In the current year, it received $500,000 in dividends from stocks and $600,000 in interest from bonds. Over the year, it has had $100,000 in expense -The fund must distribute $900,000 (90% of NII) to avoid taxes on the amount it distributes to shareholders. It will still pay taxes on the NII it retains. If the fund distributes less than $900,000, the tax bill is based on the entire NII ($1,000,000). The fund's shareholders pay tax on the amount they receive

Breakpoints are good for customers; Breakpoint Sales are not

Breakpoint sales is a term used in the securities industry to mean sales just below the breakpoint at which the investor would pay a lower sales charge. Allowing a sale occur in an amount just below a breakpoint can reviewed as an effort by representatives to make higher sales charges -This is inconsistent with just and equitable principles of trade. FINRA does not define near or jsut below a breakpoint or say how close a purchase can be to a breakpoint without triggering a violation. Therefore, members must make certain customers are advised of a fund's breakpoint schedule. The rule is in place because- members- and indirectly, MRs- could earn more concessions dollars on a smaller customer investment (with a higher sales charge) than on a larger customer invemsnvet (with a lower sales charge) *It is not the investor's order below the breakpoint that is violation. It is the representative failure to disclose the breakpoint that triggers a breakpoint sale violation

In order to qualify as a conduit, a mutual fun must pay out a minimum of A. 90% of gross investment income B. 90% of net expense C. 90% of net investment income D. 95% of net investment income

C An investment company must distribute a minimum of 90% of net investment income in order to qualify for the tax break given to conduits

The decision to annuitize a variable or fixed annuity may be reversed within how many days of election? A. 30 days B. 7 days C. 0 days D. 90 days

C Annuitization is a one-time irrevocable action

Class A shares are best for investors with A. larger investment amounts and short time frames. B. smaller investment amounts and long time frames. C. larger investment amounts and long time frames. D. smaller investment amounts and short time frames.

C The one-time cost and lower expense rations make Class A shares better for investors with larger investments (to get breakpoints) and long time frames (to not spread the impact of the front-end cost over many years)

Under the Investment Company Act of 1940, all of the following are examples of management companies except A. The S&P 500 index fund B. The growth fund option for a VA C. The Windmill Income UIT D. THe Windmill Incom Fund, an exchange-listed closed-end fund

C Unit investment trusts are investment companies, but not management companies, under the act. Closed-end funds, ETFs, and separate accounts are all types of management companies

Class B (back-end load) shares

Class B shares have a back-end sales load, also called a Contingent Deferred Charge (CDSC). A back end sales charge is paid at the time an investor sells shares previously purchased (has them redeemed). The sales load, a declining percentage charge reduced annually ( 8%, first year, 7% next year and so on) is applied to proceeds of any shares sold into that year. The back-end load is usually structured so that it drops to zero after an extend holding period-usually no longer than 5-7 years -At that time, the shares are converted to Class A shares, and no sales charge would be applied at the time of redemption *With Class B shares, the full investment amount is available to purchase shares because no sales charge is appleid at the time of purchase, but it is instead deferred to the time of redemption. If an investor wants to invest $10,000 the entire amount is available to purchase shares. -While it might seem appealing to pay sales charges later- at the time of redemption instead of at the time of purchase as with Class A shares-Investors must consider that Class B shares often have higher expense than Class A shares

Investment Companies

Corporation or trust that pools investors money together and invests in that money in securities on their belief -Investors are able to pool their money and have the investment company invest it based on a clearly defined objective, such as growth or income -By investing these pooled funds as a single large account that is jountly owned by every investor in the company, the investment company is able to invest in many different securities and therefore reduce the overall risk associated with investing in only one or a fee -These pooled investments can totally hundreds of millions or even billions of dollars. They are a very popular investment vehicles because it is common for them to allows minimum investments of only $100 dollars or less. -While investing $100 many times might n to purchase a single share of stock or one bonds, the ability to pool $1000 with thousands or millions of investors gives the individual investor a great advantage: Purchasing power in a marketplace -Like compare issuers investment companies raise capital by selling shares to the public. Investment companies must abide by the same registration and prospectus requirements imposed on their issuers by the Securities Act of 1933. Investment companies are subject to regulations regarding how their shares are sold to the public, they are regulated by the Investment Company Act of 1940

When a customer chooses to annualize a variable annuity, all of the following factors the insurance company will use calculating the initial payout amount except A. Age of the annuitant B. Sex of the annuitant C. Balance of the separate account D. Historic Inflation Rate

D Insurance companies do not consider inflation when making this calculation The comments are SAAPI: Sex, age, account balance, payout option, and interest rate

Which of the following would not be included un. a mutual fund's list of expense I. Shareholders records and service II. Investment adviser's fee III. Broker-dealer sales charges IV. Underwriter's sales loads A. I and II B. I and III C. II and IV D. III and IV

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

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 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 this 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

Expense Ratios

For a mutual fund, an annual percentage the fund takes as payment. Expense ratios of different funds can be compared to find the best value. -Compares the management fees and operating expenses, including any 12b-1 fees, with the fund's net assets. All mutual funds, both load and no load, have expense ratios. The expense ratio is calculated by diving a fund's expense by its average net assets. Stock funds generally expense rations between 1% and 1.5% of a fund's average net assets. Typically, more aggressive funds have higher expense ratios. For bond funds, the ratio is typically between 0.5% and 1% A fund's expense ratio includes the following: -Manager's fee -Administrative fees (trading, transfer agents, accountants, attorneys, etc.) -BOD's costs -12b-1 fees This list is not exhaustive. The fund's expenses are a direct charge against the assets of the fund and are a drag on the fund's returns. Everything else being equal, a fund with higher expense will provide lower returns *The expense ratio does not include sales charges or loads EX: A fund with an expense ratio of 1.25% deducts $1.25 for every $100 of the fund's assets annually

Full or statutory prospectus

Full and fair disclosure document that provides a prospective investor with the material information needed to make a fully informed investment decision If a prospectus is used to solicit a sale, it must be distributed to an investor before or during the solicitation. The front of a mutual prospectus must contain key information in plain English in a standardized order. Information that must be presented in this clear and consists format included the fund's objective, investment policies, sales charges, management expenses, and services offered. -The prospectus also discloses 1-, 5-, and 10-year performance histories, or performance over the life of the fund, whichever is shorter EX: If a fund has been in existence for 8 years, the prospectus will show performance for one, five, and eight years; if the fund has been in existence for only four year, it will show one and four years. -The delivery of any type of sales literature is considered a solicitation of sale and therefore must be accompanied or preceded by the delivery of a prospectus

Open-End Investment Companies (Mutual Funds)

Issues only one class of security, which is common stock (no preferred shares or bonds) It does not specify the exact number of shares it intends to issue but registers an open offering with the SEC. -In other words, mutual funds conduct a continuous primary offering of common stock. Which this registration type, they can raise an unlimited amount of investment capital by continuously issuing new shares -When investors want to sell their holdings in a mutual fund, the fund itself redeems those shares at the fund's current NAV -In this respect, mutual fund shares are like FACs and UITs in that they do not trade in the secondary market -When an investor sells shares back to the fund (the fund is redeeming shares), the fund sends the investor money for the investor's proportionate share of the fund's net assets -Therefore, a mutual fund's capital shrinks when investors redeem shares, but so does the number of outstanding shares; the value of each share does not fall as a result od the redemption. When a client acquires mutual fund shares, she pays the current public offering price (POP) Mutual funds are prices by the end of each business day, with sellers receiving the next calculated NAV and buyers paying the next calculated POP. All transition requests must be entered by 4:00pm ET. Any requests to buy or sell that are entered after 4:00pm will receive the next business days NAV or POP For example, a seller who places an order after the close (4:00pm EST) on Friday will receive Monday's NAV when liquidating her shares *You should understand that while mutual funds only issue common shares to their shareholders, the funds themselves can purchase common stock, preferred stock, and bonds for their investment portfolios. As noted, each fund has a stated investment objective, and which types of securities the fund portfolio purchases has largely to do with fulfilling that objective *There are other types of open-end management companies besides mutual funds. However, most test questions are based on mutual funds

Statement of Additional Information (SAI)

Mutual funds (Open and Close End) must have a SAI available for delivery within in 3 business days of an investor's request with no charge. -Investors can obtain a copy of the SAI by calling or writing to the investment company, by contacting a broker-dealer (BD) that sells the investment company shares, or by contacting the SEC While a prospectus is always sufficient for the purpose of selling shares, some investors may seek additional information not found in the prospectus. This additional information is not considered mandatory to make an informed investment decision, but it may be useful to the investor The SAI affords the fund an opportunity to have expanded discussions on matters such as the fund's history and polices. It will also typically contain the fund's consolidated financial statements indluding -balance sheet -statement of operations -income statement -portfolio list at the time the SAI was compiled

Closed-End Investment Company

Often called publicly traded funds -After the stock is sold in the initial offering, anyone can buy or sell shares in the secondary market (on an exchange or over the counter) in transactions between private investors -Supply and demand determine the bid price (price at which an investor can sell) and the asking price (price at which an investor can buy) Closed-end fund shares may trade above (at a premium to) or below (at a discount to) the shares net asset value (NAV). Simply put the fund's NAV is its assets minus its liabilities. The NAV per share is the fund's NAV divided by the number of outstanding shares

Breakpoints

Quantity discounts on open-end management company shares (mutual funds) - the greater the dollar amount of a purchase, the lower the sales charge. There is no industry standardized breakpoint schedule, so they can vary across mutual fund families. *Breakpoints only apply to Class A shares Ex: Use this sample breakpoint table, assume a customer had $23,000 to invest. At that level of investment, the sales charge would be 6.5%. Being close to the $25,000 breakpoint, a registered representative (RR) would be required to inform the customer that for $2,000 more, the investment amount would qualify for the next breakpoint, reducing the sales charge to 4% *Most mutual funds allow investors to combine orders among related accounts in order to achieve breakpoints. Individuals, spouses, and minor children may all combine in order to accomplish this. Corporations likewise may do those among the different divisions and subsidiary companies. one group, investment clubs, may not get breakpoints

No-Load Shares

Some companies market their shares directly to the public eliminating the need for Underwriters and thus sales charge used to compensate them. As the name no load implies, the fund does not share any the of sales charge, and the shares are purchase at NAV. However, not every the of fee passed on to shareholders is considered to be a sales charge. No-load funds are permitted to charge fees that are not considered to be a sales charges, such as purchase fees, account fees, exchange fees, and redemption fees. Although a redemption fee is deducted from redemption proceeds jsut as in a deferred sales load, it is not considered a sales load because it is generally much smaller and often a fixed dollar amount instead of a percentage of the redemption

1035 Exchange

The funds in an annuity may be transferred to another annuity with no tax implications. -This transfer would be free of taxes, but any surrender fees due under the contract would still be paid

Dividends: Socks and Mutual Funds

The process for distribution of dividend from mutual finds is somewhat different, and it is important to understand the differences The dates involved in a cash dividend from as tock are in the DERP order to account for trading on the secondary market, where settlement created a delay between the day of the trade takes places and the day the customer is an owner of record. You will most likely recall that mutual fund shares, the transaction is made directly with the fund, so the trade is completed (settled) the day it is executed Purchasers of mutual fund shares become owners of record on the day the buy take space. Sellers of mutual funds cease to be owners on the day the trade takes place The result of the trade and settlement taking place on the same day is that you may buy the fund and receive the dividend as an owner of record on the same day. So when is the dividend no longer available to owners? The day after the record date. The ex-dividend dare for a mutual fund is the day after the record date *For mutual funds, the order of the steps for the distribution of dividend is declaration date- (record and payable date)- ex-dividend date *Also note that the ex-dividend date for a mutual fund is set by the fund's BOD, not FINRA or an exchange

Separate Account

The separate count is made up of various sub-accounts that behave like the diversified portfolios of mutual funds. These accounts will have various objectives to choose from, such as growth, income, or growth and income. The returns in the separate account are not guaranteed, and therefore, a loser of principal. is possible -If the investment manager if an insurance company is responsible for selecting the securities to be held in the separate account, the separate account is directly managed and must be registered under the Investment Company Act of 1940 as an open-end managed investment management responsibility to another party, the separate account is indirectly managed and must be registered as a UIT under the Investment Company Act of 1940. -The assets in the separate account may be invested in one or more subaccounts that are managed separately. It is the performance of this subaccount that determines the annuity's investment performance -All fees directly related to the product must be disclosed to a variable annuity buyer. These product-specific charges include administrative fees, investment advisory, fees, and custodial fees. -Buyers must also be made away of any surrender chargers associated with the product

Forward Pricing

The valuation process for mutual fund shares, whereby an order to purchase or redeem shares is executed at the price determined by the portfolio valuation calculated after the order is received. Portfolio valuations occur at least once per business day. The NAV of a fund share is the amount the investor receives upon redemption. It must be calculated at least once per business day, and one of those calculations must occur after the close of trading in the U.S. exchanges. A typical fund calculates its NAV at the end of each business day (4:00 pm ET). The price the customer receives is the next NAV calculated after receipt of his redemption request. This practice is known as forward pricing; we always have to wait until the next calculation to determine the value of the shares redeemed or, for the matter, the number of shares purchased The purchase price of a fund share is called the public offering price (POP). For the class of fund shares known as front-end loaded shares (Class A shares), it is simply the NAV plus the sales charge: NAV + SC= POP. Note that the SC is expressed as a percentage of the POP The sales charge is paid as compensation to the underwriters for marketing or bringing the shares to the public. Remember, sales charges can be levied at the time of purchase (front-end load), at the time of redemption (back-end load), or over the course of ownership (level load). There can also simply be no sales charge (no load), meaning that shares are both purchased and redeemed at NAV

Class A (front-end load) shares

With these sorts of mutual funds, the investor pays up front and this is the most common type of paying mutual funds shares. The sales charges are paid at the time an investor buys shares, and the sales charge is taken from the total amount investment. Front-end loads are the most common ay of paying for mutual fund shares Ex: Suppose a fund company offers a fund with a 5% sales charge and an investor wants to invest $10,000. Because 5% of the $10,000 investment must be allocated to the sales charge, only $9,500 is actually going to purchase fund shares ($10,000 x 0.05= $500 sales charge; $10,000 invested-$500 sales charge=$9,500 available to purchase shares