Chapter 4: questions Investment Companies

Q: 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

Investors may transfer ownership of their shares to another investor by following the fund's administrative procedures. The other three are shareholder's rights, which are explained in the prospectus.

Q: Before offering its shares to the public, a mutual fund must have

According to the Investment Company Act of 1940, to register as a mutual fund, an investment company may not sell its securities to the public unless it has net worth of at least $100,000 and at least 100 shareholders

Q: All the following are advantages of mutual fund investing, except:

Distributions reinvested are always income tax-free Distributions are reportable for tax purposes in the year they are payable, whether reinvested or paid in cash. Mutual fund investors have the privilege of reinvesting dividends at NAV.

Q: Exchanges within the same fund family are also called:

Exchanges within the same fund family are also called net transactions since no sales charge will be assessed on the new fund when the money is moved.

Q: Many mutual fund families currently offer Class A, B, and C shares. Which one of the following statements concerning these different share classes is correct?

Most funds may 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.

Q: What is the maximum sales charge for an investment company according to FINRA's Conduct Rules?

Mutual fund companies are permitted to charge a maximum of 8.5% on purchases. In order to charge the maximum, the fund must offer breakpoints & rights of accumulation.

Q: When must all customers be provided with the most current mutual fund prospectus?

Prior to or at the time of confirmation 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.

Q: A shareholder owning 525 shares of the ABC mutual fund may NOT do which of the following?

Redeem the shares at the previous day's price Shares are always purchased/redeemed at the next calculated NAV. Mutual fund shares that have been owned fully paid for at least 30 days may be pledged as collateral. Investors may redeem any amount of their shares at any time. The fund provides each investor a 1099 at year end reporting tax information.

Q: A registered representative is meeting with a potential investor and is discussing the costs associated with investing in mutual funds. Which of the following statements is appropriate for the registered representative to make?

Sales of mutual funds to any member of the public cannot be discounted beyond the amounts stated in the prospectus. The breakpoint schedule for the fund will be found in the prospectus. Shares must be offered at the public offering price.

Q: An investor is informed that her 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 of the following, EXCEPT:

She will not pay a reduced sales charge until she reaches the first breakpoint 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, she will only pay the price she would have paid had she not signed 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.

Q: The investment adviser to a mutual fund is generally compensated by:

The investment adviser's management fee is based upon a percentage of net assets under management. The adviser's compensation is a direct operating expense (included in the NAV calculation) while the underwriter's concession is a marketing expense included in the sales charge.

Q: Mutual funds are required to furnish all the following reports, except:

Unaudited annual reports to shareholders Mutual funds are required to furnish audited annual reports to the SEC and shareholders as well as semiannual reports to shareholders

Q: Which type of investment company is established or organized under a trust indenture, is operated by a Board of Trustees who supervise the operations, and traditionally invests in a fixed portfolio that may consist of equity securities (stocks) or debt securities (bonds)?

A Unit Investment Trust (UIT) 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).

Q: All the following are advantages to investing in an investment company, except:

An investment company offers principal protection with above average returns Investment companies must have a clearly defined investment objective under which it will operate, investors can match their own investment objectives with the investment company's objective. Diversification is one of the main advantages of an investment company offering, since most investors can't achieve this by investing on their own. Another advantage investment company offerings give to small individual investors is full-time professional money management. Investment companies hire experts who have resources to monitor the day-to-day activity in the market resources. Most investors do not have the time, resources, or expertise to manage their own investments, and it is unlikely an individual investor can outperform a professional money manager.

Q: Which one of the following is most commonly known as a mutual fund?

An open-end management company is most commonly known as a mutual fund. It continuously offers to sell and stands ready to redeem its shares every business day during normal trading hours of the exchanges using the forward pricing rule. A closed-end fund has a one-time offering of shares and does not stand ready to redeem its shares.

Q: What are the primary advantages of investing in an investment company?

Diversification is one of the main advantages of an investment company offering, since most investors can't achieve this by investing on their own. Another advantage investment company offerings give to small individual investors is full-time professional money management. Investment companies hire experts who have resources to monitor the day-to-day activity in the market resources. There is market exposure but with that the investor is exposed to market risk as well as other potential risks, so the investor will not have principal protection nor guaranteed rates. The growth is not tax-deferred.

Q: Ted has invested a total of $39,000 in the ABC Fund over the past 11 years. The fund has a standard sales charge of 5% and offers a breakpoint of 4% on investments above $50,000. Ted's account has a current market value of $52,000. If he were to invest an additional $1,000 in his account, what sales charge would be levied on the new purchase?

Due to the account's appreciation, Ted would typically be charged 4% Appreciation is often considered when calculating a sales charge under rights of accumulation (ROA). In this case, even though Ted has only invested $39,000, he may be entitled to the reduced sales charge since his account is currently worth in excess of $50,000

Q: The ABC Fund currently invests in micro-cap offerings in the bio-technology arena. The fund would like to alter its primary investment objective and begin investing in more well-established small to mid-cap holdings. What must occur prior to the fund changing its objective?

In order to alter any fundamental investment policy, such as its primary investment objective, a fund must obtain the approval of its shareholders. Each share (not each shareholder) receives one vote, so the votes of a majority of the fund's outstanding shares is needed for the change to occur. The shareholder voting process is the notification to the existing shareholders. Future prospectuses will be updated so that anyone buying new shares will have full and fair disclosure.