Series 65: Unit 3 Quiz 1

Which of the following are characteristics of a money market mutual fund? 1. Shares are offered without a sales charge. 2. There is a redemption fee. 3. All purchasers must receive a copy of the prospectus. 4. The letter of intent must be signed within 16 months.

Shares are offered w/o a sales charge and all purchasers must receive a copy of the prospectus

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 load point. B. the leverage point. C. the breakpoint. D. the basis point.

The breakpoint Large purchases of investment company shares receive reduced sales charges at given minimums of investment. These are known as breakpoints.

Among the characteristics of exchange-traded funds (ETFs), what distinguishes them from mutual funds is that A. they are registered with the SEC. B. they are traded on listed exchanges. C. their portfolio may be designed to mimic an index. D. their NAV is computed daily.

They are traded on listed exchanges

A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A. 5 B. 7 C. 3 D. 10

7 The seven-day redemption rule is required by the Investment Company Act of 1940.

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A. a closed-end company. B. a unit investment trust. C. a utilities fund. D. a growth fund.

A unit investment trust A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed; it is not traded.

The most common form of organizational structure for venture capital investment is the A. limited liability company. B. limited partnership. C. venture capital fund of funds. D. corporate venture capital funds

Limited partnership The most common structure for venture capital is the limited partnership. This is true for virtually all private equity including hedge funds.

In a mutual fund portfolio, you might find all of the following except A. junk bonds. B. a short stock position. C. preferred stock. D. index options.

A short stock position

A new customer has a $35,000 CD maturing in two weeks. With the objective of maximizing his income on capital invested, he wishes to invest the proceeds in a mutual fund. Which of the following types of funds should be recommended? A. A growth fund B. A venture capital fund C. A sector fund D. An income fund

An income fund

A sector fund is one where the assets are A. concentrated in a particular industry or geographical area. B. invested in special situations. C. invested in other mutual funds. D. invested in emerging growth companies.

Concentrated in a particular industry or geographical area Sector funds (specialized funds) target at least 25% of their investments toward a specific industry or geographical location.

Which of the following would be least likely to be organized as a limited partnership? A. Index ETF B. Venture capital fund C. Hedge fund D. Private equity fund

Index ETF On the exam, ETFs are generally organized as open-end investment companies (but are not mutual funds). The exam always considers the other choices to be structured as limited partnerships.

A hedge fund and a traditional mutual fund are similar in that A. both offer performance incentives to the fund manager. B. both use long and short positions, swaps, and arbitrage. C. both typically have low initial investment requirements. D. their portfolio managers are required to adhere to the fund's stated objective.

Their portfolio managers are required to adhere to the fund's stated objective Both hedge funds and mutual funds have stated objectives. It is expected by owners that the management will follow those objectives. Only the hedge fund always has performance incentives, and only the mutual fund has a low initial investment requirement. Mutual funds are prohibited from selling short.

All of the following statements regarding exchange-traded funds (ETFs) are correct except A. ETFs may be passively managed. B. ETFs trade based on supply and demand for the shares rather than their NAV. C. ETFs can be bought on margin. D. ETFs may not be sold short.

ETFs may not be sold short

Which of the following investments is the most liquid? A. Common stock B. Variable annuities C. Money market funds D. Foreign stock funds

Money market funds Money market funds are the most liquid investment. In virtually all cases, they come with check-writing privileges.

Disregarding any potential redemption or CDSC fees, an investor tendering shares of an open-end investment company for redemption will receive A. the next computed public offering price. B. the next computed net asset value plus a portion of the sales load. C. the next computed net asset value. D. the last computed net asset value.

The next computed NAV

Equity investments made for the launch or early development of a business are known as A. venture capital. B. speculation. C. private equity. D. investment banking.

Venture capital Equity financing associated with the early development of a business is called venture capital. Private equity is more commonly used with existing businesses that are already in the operating stage. Venture capital is speculation, but as is always the case on this exam, where there is a second choice that could be correct, always select the choice that deals most directly with the question. Investment bankers help take the company public after the venture capitalists have brought it to the point where the IPO will be a success.

One of your customers called you on Wednesday at 8:00 am ET and asked you to buy $10,000 of the Liberty Balanced Fund Class A shares. If the Wednesday morning financial pages show the fund's NAV to be $45.83 and the POP to be $48.24 and the Thursday morning quote shows the NAV as $46.22 and the POP as 48.65, what is the price per share for this purchase? A. $48.24 B. $45.83 C. $46.22 D. $48.65

$48.65 Mutual fund pricing is based on the forward pricing rule. That is, the price is based on the next calculated net asset value per share after the order is received. That calculation is always done after the 4:00 pm ET close of the market. Therefore, an order received anytime on Wednesday before 4:00 pm will be executed based on the NAV calculated at that time. That 4:00 pm price will be shown in the financial section of Thursday morning's newspapers. Remember, when purchasing shares, the price is always the POP.

In which type of real estate investment does an investor have a reasonable expectation of receiving periodic distributions in the form of dividends? A. A real estate investment trust (REIT) B. Rental real estate C. The purchase of a primary residence D. Undeveloped land

A real estate investment trust (REIT) A REIT is an indirect form of ownership of real estate. For tax purposes, at least 90% of the REIT's taxable income is distributed to investors in the form of a taxable dividend. Unlike DPPs, there is no flow-through of losses.

A manager of a venture capital fund would be most interested in investing in A. a company interested in going private. B. a young, promising company. C. a company listed on a major stock exchange. D. a well-established company going through management changes.

A young, promising company Venture capitalists prefer to get involved in the earlier stages of a company's development. This would certainly not be a company listed, nor would it be likely that the company is already publicly traded.

Nurturing growth of the enterprise would be the objective of which of the following types of investments? A. Private fund B. 529 plan C. Investment adviser D. Growth fund

Private fund Private funds invest in companies where the objective is to use their money and business acumen to grow the company to the point where the fund's holding can be sold at a large profit. Growth funds are looking for growth but take no role in the operations of the companies in which they invest. An investment adviser would like to see portfolio values grow, but you don't invest in an investment adviser. A 529 plan, just like a growth fund, does not take an active role in management.

An investment adviser registered with the SEC could have all of the following as advisory clients except A. the XYZ Growth Fund. B. Mildred, an accredited investor. C. the ABC Unit Investment Trust. D. the DEF Life Insurance Company.

The ABC Unit Investment Trust Be careful. Unit investment trusts (UITs) do not have investment advisers. Any of the other choices could have advisory accounts.

All of the following statements are features of hedge funds except A. they are generally organized as private investment partnerships or offshore investment corporations. B. they generally have relatively low minimum initial investments. C. they frequently employ speculative strategies to maximize returns. D. they are usually composed of a wide array of global investments.

They generally have relatively low minimum initial investments

A registered investment company whose portfolio consists of equity securities and does not change in response to market conditions is probably A. a unit investment trust. B. a closed-end investment company. C. a passively managed mutual fund. D. an ETN.

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.

A 45-year-old client has just received an inheritance and would like to invest $100,000 into a growth mutual fund offered by your firm. The client intends to use the money to supplement retirement. You should probably recommend the purchase of A. Class C shares B. Class A shares C. Class B shares D. a fixed annuity

Class A shares

If a couple has a long-term growth objective and is willing to accept a reasonable amount of risk, which of the following mutual funds is most suitable for them? A. Common stock fund B. Corporate bond fund C. Money market fund D. Municipal bond fund

Common stock fund

The shares of the LMN closed-end management investment company are selling at $45, while LMN's net asset value (NAV) is $40. It would be most accurate to say that LMN's shares are trading at A. a 12.5% premium to NAV. B. an 11.1% premium to NAV. C. an 11.1% discount to NAV. D. a 12.5% discount to NAV.

A 12.5% premium to NAV The shares are selling at a $5 premium to the NAV. Mathematically, this is $5 divided by the $40 NAV, or a 12.5% premium.

When an open-end management investment company computes its net asset value per share, each of the following occurrences would have an impact except A. a greater value of shares being redeemed than purchased. B. a drop in the value of equity securities held in the fund's portfolio. C. a capital gains distribution. D. interest payments made on debt securities held in the fund's portfolio.

A greater value of shares being redeemed than purchased

An individual seeking capital and possible guidance with a start-up would most likely seek funding from A. a venture capital fund. B. an open-end investment company. C. a hedge fund. D. a unit investment trust.

A venture capital fund A venture capital fund, typically organized as a limited partnership, seeks out opportunities to get in on the ground floor. In additional to an ownership position, usually at least 10%, the venture capitalists provide managerial input. Because these start-ups are rarely publicly traded, they are of little interest to the other investment company choices.

Which of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than one year? A. Class B B. Class A C. Class 1% D. Class C

Class C It is the Class C shares that have no front-end load, but they do have a 1% CDSC for a period of one year.

According to the Investment Company Act of 1940, an open-end investment company must compute its NAV A. weekly. B. annually. C. monthly. D. no less frequently than once per day.

No less frequently than once per day Mutual funds must calculate the value of fund shares at least once per business day; funds may calculate the value more often and will disclose this fact in the prospectus.

Which of the following securities trade on regulated stock exchanges with their prices being determined by supply and demand? 1. Closed-end investment companies 2. Exchange-traded funds 3. Face-amount certificate companies 4. Mutual funds

Closed-end investment companies and exchange-traded funds Both closed-end funds and exchange-traded funds (ETFs) trade on stock exchanges with their prices being determined by supply and demand just like any other stock.

One of your clients wishes to invest in a fund of hedge funds. You could tell him which of the following? A. Shares of these funds are easy to redeem. B. These funds purchase a large amount of preferred stock. C. He can expect to make a profit whether the markets trend up or trend down. D. Expenses for these funds tend to be higher than those for other funds.

Expenses for these funds tend to be higher than those for other funds

Which of the following statements is not true? A. The sale of open-end investment company shares is a continuous public offering and must be accompanied by a prospectus. B. Open-end investment companies must have a minimum of $1 million in assets to have a public offering. C. Mutual fund shares may not be purchased on margin because their shares are always public offerings of new shares. D. Mutual funds may be used as collateral in a margin account if they have been owned for more than 30 days.

Open-end investment companies must have a minimum of $1 million in assets to have a public offering Minimum assets of $100,000 are required.

Under the Investment Company Act of 1940, which of the following statements is true about an investment company that wishes to contract with an outside investment adviser to manage its portfolio? A. The initial contract must be approved by either the board of directors or a majority vote of the outstanding shares. B. The contract must provide for a minimum notice of at least two weeks if the contract is to be terminated. C. The contract between the investment company and the investment adviser must be in writing. D. The investment adviser must be under common control with the investment company.

The contract btwn the investment company and the investment advisor must be in writing

Which of the following investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure? A. Open-end management investment companies B. Face-amount certificate companies C. Unit investment trusts D. Closed-end management investment companies

Closed-end management investment companies Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds).

When reading the prospectus for a fund, you notice that it states that the fund may make portfolio purchases on margin, take short positions, and use arbitrage techniques. This is most likely what type of fund? A. Closed-end B. Exchange-traded C. Index D. Hedge

Hedge Margin trading and selling short are techniques commonly found in hedge funds rather than in open-end or closed-end management funds or ETFs. Because hedge funds are considered private funds, exempt from registration, the offering document is called the private placement memorandum.

Pricing of a closed-end fund is determined by A. net asset value. B. supply and demand for the shares. C. net asset value plus a commission. D. net asset value plus a sales charge.

Supply and demand for the shares Shares of closed-end funds are traded in the secondary market, where prices are determined by supply and demand. The NAV of a closed-end fund is computed and not determined by the market price or trading price. Closed-end funds do not have sales charges but do have commission charges added to the market price.

Which of the following individuals would be considered a noninterested person in a mutual fund? A. A person who holds a position with the fund's underwriter B. A shareholder who owns 10% of the fund's shares C. A member of the board of directors who is also employed as the investment adviser D. A member of the board of directors who does not hold another position within the investment company

A member of the board of directors who does not hold another position within the investment company

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A. Closed-end investment company B. Open-end investment company C. Unit investment trust D. Hedge fund

Closed-end investment company A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market.

Under the Investment Company Act of 1940, SEC Rule 12b-1 allows a fund to charge distribution and sales expenses to net assets as a percentage of the total assets. Normally, the cost of distribution of the shares is paid by the underwriter out of the sales load paid by the individual purchaser. For a fund to impose 12b-1 charges, which of the following conditions apply (applies)? 1. The board of directors has sole approval authority. 2. The majority of the outstanding shares has sole approval authority. 3. Both the board and the majority of outstanding shares must approve it. 4. A distribution plan must be written.

Both the board and the majority of outstanding shares must approve it and a distribution plan must be written For the fund to impose 12b-1 charges, the distribution plan must be in writing and approved by a majority of the outstanding shares, as well as a majority of the board of directors, including a majority of directors classified as outside directors.

An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid? A. Cash value from a universal life insurance policy B. QRS Money Market Mutual Fund C. XYZ International Stock Mutual Fund D. CDL Common Stock Mutual Fund

QRS Money Market Mutual Fund Money market funds generally come with a check-writing privilege, offering investors the opportunity to convert the asset to cash at once. Although all mutual funds are readily redeemable, under the Investment Company Act of 1940, the fund has seven days to redeem. One must request the cash value from the insurance company.

Which of the following is not a characteristic of hedge funds? Hedge funds A. reward the portfolio manager's performance with high fixed management fees. B. are privately organized and generally unregistered. C. invest in private equity, real assets, derivatives, and structured products. D. use leverage, short positions, and concentrated positions.

Reward the portfolio manager's performance w/ high fixed management fees Hedge funds attempt to attract the top managers because they offer performance-based fees, which vary based on fund performance. The typical fee structure is 2% + 20% where 2% is the fixed fee and 20% of the profits is the performance portion. The other choices are true. You can assume that any hedge fund on the exam is organized as a private limited partnership and is not registered on the federal or state level. One of the reasons hedge funds are considered alternative investments is that a portion of their portfolio generally consists of alts, such as private equity and structured products. Unlike mutual funds, hedge funds can use leverage and sell short. In addition, it is not unusual to find as much as 25 to 30% of the hedge fund's portfolio concentrated in the securities of a single issuer.

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investments and must distribute at least what percentage of its taxable income to shareholders annually in the form of dividends? A. 90% B. 50% C. 70% D. 75%

90% Under SEC rules, to qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investments and must distribute at least 90% of its taxable income to shareholders annually in the form of dividends. Don't confuse this with the requirement to have at least 75% of its income from real estate or 75% of its assets invested in real estate-related assets.

As defined in the Investment Company Act of 1940, the term investment company would not include A. a unit investment trust. B. a holding company. C. a face-amount certificate company. D. a management company.

A holding company Holding companies are not included in the definition of investment company.

Which of the following are features of Class C mutual fund shares? 1. Typically charge no front-end load 2. Typically charge a front-end load 3. Typically impose lower CDSCs than Class B shares for a shorter period 4. Typically convert to Class A shares after they are held for a defined period

Typically charge no front-end load and typically impose lower CDSCs than Class B shares for a shorter period Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, because the level load never discontinues.

A customer with no other mutual fund investments wishes to invest $47,000 in the XYZ Technology Fund. If the Class A shares are eligible for a breakpoint sales charge discount at the $50,000 investment level, the action least appropriate for an agent is to A. inform the customer that he can reduce his sales charge by investing an additional $3,000. B. place the order as instructed. C. inform the customer that he can reduce his sales charge by combining purchases in other funds offered by XYZ group. D. inform the customer that he can reduce his sales charge through a letter of intent.

Place the order as instructed If a customer intends to invest an amount just below a breakpoint threshold, he should be informed of the breakpoint discount, as well as the various methods by which he can receive it.

A client owning shares of a closed-end investment company entering an order to liquidate the position would receive a price based on A. the next computed net asset value per share. B. the offering price computed after the order is received. C. supply and demand for the shares. D. the previous net asset value per share.

Supply and demand for the shares Closed-end investment company shares are traded in the same manner as any other corporate stock. That is, the price received when selling or the price paid when buying is determined by supply and demand and has no direct relation to the net asset value. If this question was asking about an open-end investment company, the choice would be the next computed NAV, not offering price (that is the price when the investor is buying, not selling).

One way in which closed-end management investment companies differ from open-end investment management companies is that A. they were in existence prior to 1940. B. they trade at a price independent of their net asset value. C. they are federal covered securities. D. their portfolio may contain common stock, preferred stock, and debt securities.

They trade at a price independent of their net asset value 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, can have equity and debt in their portfolios (although only closed-end companies can issue senior securities), and were in existence prior to passage of the Investment Company Act of 1940.

Net asset value per share for a mutual fund can be expected to decrease if A. the fund has made dividend distributions to shareholders. B. the fund has experienced net redemptions of shares. C. the securities in the portfolio have appreciated in value. D. the issuers of securities in the portfolio have made dividend distributions.

The fund has made dividend distributions to shareholders If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.

Which of the following statements regarding secondary trading in the private equity market is true? A. A trade in a secondary market may be motivated by the desire for increased access to future deals in the primary market. B. Secondary trading generally causes investors to have to wait over a longer time period to generate returns from their private equity investment. C. Secondary trading makes it more difficult for investors to make strategic shifts in the private equity allocations within their portfolios. D. Secondary markets are a form of distressed securities markets wherein limited partners sell securities with troubled performance histories.

A trade in a secondary market may be motivated by the desire for increased access to future deals in the primary market

When shares of a closed-end investment company are purchased by an investor, the price paid is based upon A. the current asking price. B. the net asset value. C. the current bid price. D. the net asset value plus commission.

The current asking price Closed-end investment company shares are priced based on supply and demand. The ask is the price that investors will pay for purchasing shares, and the bid is what investors receive when selling. Investors will also pay a commission because this is what the broker charges for executing the transaction. Shares of open-end investment companies are bought and redeemed based on NAV, but that is not so of closed-end companies.

If you were describing an investment that trades on an exchange with a price set by supply and demand, rather than its underlying value, it would be A. a hedge fund. B. an open-end fund. C. a forward contract. D. a closed-end fund.

A closed-end fund The stock of closed-end investment management companies trades on exchanges and, like any other exchange security, is priced based on supply and demand. Although closed-end funds compute their NAV, market forces determine price.

All of the following statements regarding a closed-end investment company are true except A. it differs from a mutual fund. B. it sells at the market price based on supply and demand. C. it is a type of management company. D. it may redeem its own shares.

It may redeem its own shares A closed-end investment company does not redeem its own shares. The term mutual fund refers to an open-end management investment company that issues redeemable shares. Please note that there is a type of closed-end fund called an interval fund. At stated intervals, the internal fund offers to redeem shares. Unless that exception was stated in the question, closed-end shares are never redeemable.

What can you tell about these investment companies from the information below? NAV Ask Company A 12.34 12.85 Company B 15.45 14.90 A. Company A must be open-end; Company B must be closed-end. B. Company A is closed-end and Company B is open-end. C. Company A can be either open-end or closed-end; Company B must be closed-end. D. Company A and Company B can be either open-end or closed-end.

Company A can either be open-end or closed-end; Company B must be closed-end All open-end investment companies sell at NAV plus a sales charge (if any). Therefore, the asking price can never be less than the NAV. Closed-end company asking prices are determined by supply and demand, so their prices are independent of the fund's NAV.

An investor interested in obtaining the benefit of professional portfolio management has been tracking a particular investment company for the past several months. In so doing, it becomes obvious that the market price of the shares moves in direct relation to the computed NAV. This investor must be following A. a money market fund. B. an open-end fund. C. a balanced fund. D. a closed-end fund.

An open-end fund Because closed-end funds trade in the secondary markets, their price is determined by supply and demand. On the other hand, open-end investment companies (mutual funds) always trade based on their NAV. Although money market funds are open-end, the market price of their shares doesn't move. Additionally, when the exam uses an adjective to describe a fund (balanced, common stock, etc.), it is always an open-end company (mutual fund).

Which of the following statements regarding a unit investment trust is not true? A. It invests according to stated objectives. B. It is considered an investment company. C. It charges no management fee. D. Overall responsibility for the fund rests with the board of directors.

Overall responsibility for the fund rests w/ the board of directors A unit investment trust (UIT) has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware of which of these? 1. ETFs can be purchased throughout the trading day. 2. ETFs use forward pricing, as all mutual funds do. 3. Real-time quotes are available for ETFs. 4. The NAV calculated at the end of the day, plus a sales charge, will equal the trading price.

ETFs can be purchased throughout the trading day and the NAV calculated at the end of the day, plus a sales charge, will equal the trading price ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have a NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions.

A client is interested in purchasing a REIT and asks you what the differences are between a listed REIT and an unlisted REIT. You could respond that all of the following are differences except A. liquidity. B. suitability requirements. C. fees and expenses. D. regulatory oversight.

Fees and expenses The internal operating costs of a REIT, such as management fees and administrative expenses, have nothing to do with where units of the REIT are traded. One of the major risks inherent in an unlisted REIT is lack of liquidity. As a result, there is a greater stringency when it comes to suitability, and this leads to stronger oversight by the regulators.

In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by A. the SEC. B. majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board. C. FINRA. D. the principal underwriter of the fund.

Majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board When it comes to management investment companies (open-end or closed-end), renewal of the investment adviser's contract is approved annually by the fund's board of directors or a majority vote of the outstanding voting shares. The initial contract must be approved by both the board of directors and a majority vote of the outstanding shares. In both of these cases, initial and renewal, a majority vote of the noninterested (outside) members of the fund's board of directors is also required.

One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares A. outstanding will vary in number at any point in time. B. are traded in the secondary markets rather than on an exchange. C. may be priced at a premium or discount relative to its net asset value. D. are purchased and redeemed based on supply and demand.

Outstanding will vary in number at any point in time Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing. It is the closed-end company, traded in the secondary markets, whose share prices are based on supply and demand which causes them to be bought or sold at a premium or discount to the NAV.

Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A. the Securities and Exchange Commission (SEC). B. a majority of the board of directors. C. a majority of the outstanding shares. D. the fund's investment adviser.

A majority of the outstanding shares Changes in investment policy require a vote of the majority of outstanding shares for approval.

One of the questions investors should ask when evaluating a mutual fund is about the tenure of the fund manager. This refers to A. the length of time the manager has managed the fund. B. the fund's performance for the past 1, 5, and 10 years. C. the length of time the manager has been registered. D. the inability to discharge the manager.

The length of time the manager has managed the fund A fund manager's tenure refers to the length of time that person has managed the fund's portfolio. Unlike the academic term, which generally means that the individual may not be terminated without just cause, management contracts for an investment company must be renewed each year (after the initial 2-year contract), so it is relatively easy to remove the manager.

Which of the following are the most common characteristics of a REIT? 1. It is traded on an exchange or over the counter. 2. It is professionally managed. 3. It passes through both gains and losses to investors. 4. It is a type of limited partnership.

It is traded on an exchange or over the counter and it is professionally managed A REIT shares some features with a limited partnership, but it is a different type of business entity. REITs are traded on exchanges and OTC and are professionally managed. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide pass-through of losses. Please note: NASAA has recognized that, over the past few years, there has been an enormous growth in non-traded REITs. Non-traded REITs don't trade, so there is little or no liquidity. Unless something in the question refers to a non-traded REIT, assume that all REITs are publicly traded either on the stock exchanges or OTC.

One of your advisory clients meets the financial requirements for investing in a hedge fund. Having read so much about their outstanding performance, he asks you to describe any negatives to adding one to his portfolio. You could respond that A. the designed strategy of many hedge funds is to generate positive returns in both rising and falling markets. B. as part of an asset allocation class, hedge funds may reduce overall portfolio risk and volatility and increase returns. C. with a large variety of available investment styles, investors have a plethora of choices to assist them in meeting their objectives. D. expenses tend to run very high, diminishing the funds' performance.

Expenses tend to run very high, diminishing the funds' performance

The Investment Company Act of 1940 allows a majority vote of the outstanding shares of a registered investment company to authorize the fund to do all of the following except A. change the objectives of the fund. B. change from an open-end to a closed-end investment company. C. change the nature of its business and cease to be an investment company. D. invest in securities consistent with the fund's objectives.

Invest in securities consistent w/ the fund's objectives Shareholder approval is not necessary to authorize the fund to invest consistent with the fund's objectives; it is required as part of the contract with the fund's investment adviser. Under the Investment Company Act of 1940, a vote of the majority of outstanding shares may approve changing from an open-end to a closed-end company, changing the investment objectives of the fund, and deciding to cease to be an investment company.

All of the following are characteristics of exchange-traded funds except A. they may not be sold short. B. large investors known as authorized participants buy or sell shares on an in-kind basis. C. they are generally tax efficient. D. they usually trade at or near their net asset value.

They may not be sold short ETFs trade like stock and can be sold short. They are tax efficient compared to mutual funds, and large investors conduct trades by making in-kind exchanges, whereby they give or receive shares of stock that are in the fund. Perhaps you did not know that fact, but this is an example of the exam throwing in something very technical where the correct answer is quite simple. ETFs generally trade near net asset value (NAV), if not at NAV.

When an agent explains mutual funds to a prospective investor, which of the following statements may be made? A. Mutual funds must make payment within seven days of a redemption request and guarantee a return of the original investment. B. Mutual fund shares are liquid and may be switched from fund to fund without tax liability. C. A fund always redeems shares at NAV, with little chance of a financial loss. D. The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.

The redemption value of mutual fund shares fluctuates according to the fund's portfolio value Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds liquid, investors are not guaranteed to receive an amount equal to the original investment.

Which of the following best describes a 12b-1 fee? A. A fee charged to all mutual funds to cover the expense of FINRA regulation B. A fee charged by some mutual funds to redeem shares that have been held less than one year C. A fee charged by some mutual funds to cover sales and distribution expenses D. A fee imposed against a mutual fund company for violating SEC rules

A fee charged by some mutual funds to cover sales and distribution expenses A 12b-1 fee may be charged by mutual funds that do not charge the maximum permissible sales load. SEC Rule 12b-1 allows a mutual fund to serve as distributor of its own shares and charge a percentage of the average net assets for distribution and sales-related expenses.

The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from this requirement are A. open-end management investment companies. B. closed-end management investment companies. C. face-amount certificate companies. D. unit investment trusts.

Face-amount certificate companies The two investment companies offering redeemable securities, open-end funds and UITs, must compute their NAV on a daily basis. Closed-end funds can do it daily; many compute every Friday. The concept of NAV makes no sense with a FACC.

Which of the following are true of a REIT? 1. It can qualify for special tax treatment under Subchapter M of the Internal Revenue Code if it distributes at least 90% of its taxable income. 2. It may loan money for commercial construction projects. 3. It generates income by the spread between rental income, the combined mortgage interest, and operating expenses of the property. 4. It is only suitable for an investor who has annual earnings of at $120,000, or who has a net worth in excess of $500,000, or who is able to benefit from the flow-through of losses.

It can qualify for special tax treatment under Subchapter M of the Internal Revenue Code if it distributes at least 90% of its taxable income and it may loan money for commercial construction projects and it generates income by the spread between rental income, the combined mortgage interest, and operating expenses of the property

Which of the following activities would have an effect on the NAV of a mutual fund? 1. The sale of securities from the portfolio 2. Automatic reinvestment of dividends by the shareholders 3. Market appreciation of portfolio securities 4. Market decline in the value of portfolio securities

Market appreciation of portfolio securities and market decline in the value of portfolio securities The formula to determine NAV is assets minus liabilities divided by shares outstanding. The sale of securities from the portfolio will replace the asset (securities) with an equal value of the asset (cash) and will have no effect on the NAV. The reinvestment of dividends will also not affect the NAV, because the shares going out are offset equally by the cash coming in. Market appreciation or decline will, however, affect the NAV because asset value will either increase or decrease, but liabilities and shares outstanding will remain unchanged.

Which of the following may be done only with the approval of the shareholders of an investment company? 1. A change from diversified to nondiversified status 2. The purchase of particular bonds on the open market 3. Personnel changes in the transfer agent's organization 4. A change in the fund's objectives

A change from diversified to undiversified status and a change in the fund's objectives Any substantive change in an investment company's form, structure, investment objective, or business operation must be approved by a majority vote of the outstanding shares. Bond purchases are left to the fund's portfolio manager, and the transfer agent is trusted with its organization's personnel changes.

An investor receives a prospectus for a management investment company. In the section on purchasing shares, it states that investors purchase shares at the next calculated net asset value per share (NAV). Furthermore, when shares are redeemed, the investor receives the next calculated NAV after receipt of the redemption request. The prospectus details a number of expenses, including management and custodial fees. There is also a 0.15% 12b-a charge. More than likely, the investor is reading the prospectus of A. a no-load fund. B. a front-end load fund. C. a back-end load fund. D. a closed-end fund.

A no-load fund One of the features of a no-load fund is that shares are purchased at the prevailing NAV; there is no sales load. There is also no load when shares are redeemed. Another clue is that the 12b-1 charge is only 0.15% because the term no-load cannot be used if that charge exceeds 0.25%. Although Class B shares (back-end load) are also purchased at NAV, there is a back-end load (CDSL) so the investor does not receive the entire NAV. It certainly is not a front-end load (Class A) fund purchase because those shares are purchased at NAV plus the sales load. This is not a closed-end fund because those do not redeem, and the purchase price is based on supply and demand, not NAV.

Among the provisions of the Investment Company Act of 1940 designed to protect the interests of investors is the provision that A. any change in fundamental investment policy must be approved by stockholders B. selection of company investments must be approved by SEC C. for diversification purposes, an investment company may own up to 10% of the shares of another investment company D. communications with the public must be approved by FINRA before its use

Any change in fundamental investment policy must be approved by stockholders One of the requirements of the Investment Company Act of 1940 is that an investment company cannot change its investment policy without approval of a majority vote of the shareholders. For example, the board of directors of a growth fund could not change the fund's investment objective to income without that approval. This has the effect of offering protection to the investors that they won't be "blindsided" by the board or the portfolio manager. On this exam, you shouldn't expect to see anything "approved" by the SEC as a correct answer. An investment company may own up to 3% of another investment company, not 10%. Even though FINRA rules do require approval of investment company communications with the public, such approval is not part of the Investment Company Act of 1940.

A client of yours has been investigating a particular mutual fund. She mentions that she saw a blurb on the internet that the fund has had net redemptions over the past six months and asks you to explain how that might affect the fund's performance. You should explain which of these? 1. This is a good thing because now, with less money to invest, the fund's adviser is able to be more selective. 2. Performance will probably suffer because the fund's adviser will have to sell positions prematurely in order to meet redemption requests. 3. This would be a good time to buy because the supply of shares exceeds the demand. 4. Many of the fund's expenses are relatively fixed, so with less assets in the fund, the expense ratio will probably increase.

Performance will probably suffer b/c the fund's adviser will have to sell positions prematurely in order to meet redemption requests and many of the fund's expenses are relatively fixed, so w/ less assets in the fund, the expense ratio will probably increase

An investor is looking for a pooled investment product that can provide rental income as well as potential capital gains. You would most likely recommend A. a mortgage REIT. B. an equity REIT. C. a growth mutual fund. D. a GNMA pass-though.

An equity REIT When you see "rental," you immediately think of renting real estate. Of the two basic types of REITs, an equity REIT is the one that owns property. Rental income is received from the users of those properties. As an owner of real estate, there is always potential to sell the property for a gain. Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond. A stock offers the possibility of income through dividends and a bond through interest. But, it is only the stock (equity) where there is a real potential for capital gain.

Which of the following statements about closed-end investment companies are true? 1. Investors in closed-end investment companies may trade only in full shares. 2. Shares in closed-end investment companies may trade at more or less than the net asset value of the shares. 3. A closed-end investment company offers a fixed number of shares and does not continually offer new shares in response to investor demand.

Investors in closed-end investment companies may trade only in full shares, shares in closed-end investment companies may trade at more or less than the net asset value of the shares, and a closed-end investment company offers a fixed number of shares and does not continually offer new shares in response to investor demand. A closed-end investment company makes an initial public offering of stock, and once those shares have been purchased, no more shares are available from the company until it offers a new issue. Investors may purchase shares of a closed-end investment company on an exchange or over the counter at whatever price the market demands. This price may be more or less than net asset value. Investors may not buy or sell fractional shares but may trade only in full shares.

Which of the following statements about open-end investment companies are true? 1. Open-end investment companies are also known as mutual funds. 2. Open-end investment companies continually offer shares for sale to the public. 3. The price at which an open-end investment company will sell shares to the public is based on the share's net asset value (NAV).

Open-end investment companies are also known as mutual funds, open-end investment companies continually offer shares for sale to the public, and the price at which an open-end investment company will sell shares to the public is based on the share's net asset value (NAV) An open-end investment company is also known as a mutual fund. One of the distinguishing characteristics of open-end companies is their continuous offering of new shares. The price at which open-end investment companies sell shares to the public is always based on the NAV per share. To that is added any sales charge or load indicated in the prospectus.

Which of the following statements concerning hedge funds are true? 1. Purchasers of hedge funds are generally required to be accredited investors. 2. Short sales by the fund are not allowed. 3. It is not uncommon for there to be a lock-up period that may last for as long one year or even longer. 4. It would be unusual for the fund managers to have an ownership interest in the fund.

Purchasers of hedge funds are generally required to be accredited investors and it is not uncommon for there to be a lock-up period that may last for as long as one year or even longer Purchasers of hedge funds are usually required to be accredited investors. Hedge funds often have high liquidity risk due to the lock-up provision, which can restrict an investor's ability to liquidate the position. An advantage of hedge funds is their ability to sell securities short during bear markets, adopt risky arbitrage strategies, and otherwise take direct steps to maximize returns in both up and down markets. In almost all cases, the fund managers have a significant ownership position in the fund, or as the phrase goes, they have "skin in the game."

Which of the following clients would be the best candidate(s) for a hedge fund? A. Marcy, age 23, recent college graduate, student debt, low net worth, entry-level position at a local law firm B. Howard, age 78, widowed, conservative risk taker, $250,000 net worth, lives on a fixed income C. Ted and Alice, late 50s, no dependents, semiretired, $5 million net worth, moderate risk takers, diversified holdings D. Bob and Carol, mid 30s, two young kids, homeowners, $50,000 net worth, long-term investment perspective

Ted and Alice, late 50s, no dependents, semiretired, $5 million net worth, moderate risk takers, diversified holdings The best choice for a hedge fund is Ted and Alice. They have no dependents, have high net worth, have diversified holdings, and exhibit a moderate risk tolerance. A hedge fund is generally an unregistered, privately offered, managed pool of capital for wealthy, financially sophisticated investors. The other clients would not be considered candidates for a hedge fund based on net worth and investment objectives.

Which of the following statements regarding letters of intent used in connection with mutual fund purchases are true? 1. The letter can cover a period totaling 16 months. 2. The letter may be backdated 90 days. 3. Some shares purchased are held in escrow until the letter is completed. 4. During the period covered by the letter, the customer may not redeem his shares.

The letter may be backdated 90 days and some shares purchased are held in escrow until the letter is completed Letters of intent permit investors to qualify for a reduced sales charge on the purchase of mutual fund shares over time. They are valid for 13 months and may be backdated by up to 90 days to include previous purchases. The investor is not legally obligated to comply with the terms of the letter, so some shares purchased at the reduced sales charge are held in escrow. These shares are liquidated to repay the reduction in sales charge if the contract is not completed.

Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of the majority vote of A. the noninterested directors. B. the board of directors. C. the outstanding shares and a majority of that portion of the board of directors that is considered noninterested members. D. the outstanding shares.

The outstanding shares and a majority of that portion of the board of directors that is considered noninterested members When it comes to retaining the services (hiring) of a person (or persons) to manage the portfolio of a mutual fund, there are three parties involved in the approval process. Those three parties are - the shareholders, - the fund's board of directors, and - that portion of the fund's board consisting of noninterested members. (Remember, the board must be at least 40% noninterested, which is sometimes stated as a maximum of 60% interested.) This question asks about the initial contract. That contract is always for two years and requires the approval of a majority vote of the outstanding shares (the shareholders) and a majority vote of that group of board members who are noninterested. You should also know that, when it comes to renewal (done annually after the initial two-year contract), once again, a majority vote of that group of board members who are noninterested is required, along with either a majority of the total board or a majority of the outstanding shares. The one constant is the approval of the noninterested board members.

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 contract must be terminable upon no more than 60 days' notice. B. 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. C. The renewal must state the adviser's compensation. D. The renewal may be executed orally, provided it is done within 2 years of the initial contract.

The renewal may be executed orally, provided it is done within 2 yrs 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 two 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.

You have a client who originally invested $25,000 into the ABC Growth Fund. Over the past five years, there have been no distributions and the value of the shares is now $35,000. If the client should ask about exchanging the entire holding for shares of the ABC Income Fund, you would explain that A. there is a long-term capital gain of $10,000. B. taking advantage of the exchange privilege results in taxes being deferred until the liquidation of the account. C. the new shares would be acquired at the public offering price. D. the new shares will have the same cost basis as the old ones.

There is a long-term capital gain of $10,000 The exchange privilege permits shares of one fund in the family (the ABC Fund Group) to be exchanged for shares of another at net asset value, not the public offering price. However, for tax purposes, it is considered a sale and a purchase, so there would be a capital gain realized on any difference between the cost basis and the proceeds. In this case, the new shares would have a new cost basis of $35,000.

Which of the following statements correctly describe similarities between exchange-traded funds and closed-end investment companies? 1. There are a limited number of outstanding shares. 2. They are traded on registered stock exchanges. 3. They trade at prices that are not dependent upon but are close to their net asset value. 4. Investors pay commissions to purchase and liquidate their positions.

They are traded on registered stock exchanges and investors pay commissions to purchase and liquidate their positions Both exchange-traded funds (ETFs) and closed-end investment companies are traded on exchanges; therefore, investors pay a commission when purchasing and liquidating shares. Only closed-end investment companies have a limited number of shares. Closed-end funds may trade at significant premiums or discounts from their NAV, while ETFs rarely stray far from the NAV.

One of your customers called you on Wednesday at 8:00 am ET and asked you to buy $10,000 of the Liberty Balanced Fund Class A shares. If the Wednesday morning financial pages show the fund's NAV to be $45.83 and the POP to be $48.24 and the Thursday morning quote shows the NAV as $46.22 and the POP as 48.65, how many shares did the customer receive? A. 207.297 B. 218.198 C. 205.550 D. 216.357

205.550 Mutual fund pricing is based on the forward pricing rule. That is, the price is based on the next calculated net asset value per share after the order is received. That calculation is always done after the 4:00 pm ET close of the market. Therefore, an order received anytime on Wednesday before 4:00 pm will be executed based on the NAV calculated at that time. That 4:00 pm price will be shown in the financial section of Thursday morning's newspapers. Remember, when purchasing shares, the price is always the POP. That makes the math $10,000 ÷ $48.65 which rounds to 205.550

There are certain requirements for an investment to qualify as a REIT. Which of the following is not one of them? A. At least 75% of the REIT's annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. B. At least 90% of the REIT's taxable income must be paid out as dividends to investors. C. At least 75% of the REIT's taxable income must be paid out as dividends to investors. D. At least 75% of the assets must be invested in real estate-related assets, cash, and U.S. government securities.

At least 75% of the REIT's taxable income must be paid out as dividends to investors In order to qualify as a REIT, the REIT must distribute at least 90% of its taxable income, not 75%. At least 75% of the assets must be invested in real estate-related assets such as real property or mortgages. The same is true of the REIT's annual gross income.

In order to qualify as a REIT, A. a mortgage REIT must have at least 75% of the assets in government-insured mortgages. B. at least 75% of the assets must be invested in real estate-related assets, cash, and U.S. government securities. C. at least 75% of the taxable income must be paid out as dividends to investors. D. at least 90% of the assets must be invested in real estate-related assets.

At least 75% of the assets must be invested in real estate - related assets, cash, and U.S. government securities A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its taxable income to investors, not 75%.

Jasper is considered an affiliated person of the Tahor Clean Energy Mutual Fund. Under the Investment Company Act of 1940, Jasper is prohibited from all of the following except A. buying securities from the fund's portfolio. B. selling stock to the fund for its portfolio. C. being elected to the fund's board of directors. D. borrowing from the fund (money or property).

Being elected to the fund's board of directors There is no problem with an affiliated person being elected to the fund's board of directors. Under the act, as many as 60% of the board members may be affiliated persons (the law states that at least 40% must be noninterested parties). Affiliated persons may not have any dealings with the investment company (outside of contractual obligations and the purchase or redemption of shares of the investment company), such as buying securities, furniture, real estate, or other property from the company or selling such property to the company.

Which of the following statements correctly describes a mutual fund or open-ended investment company? A. Each investor's account value is based on the number of shares owned multiplied by the fund's net asset value. B. Shareholders are not taxed on the earnings of the fund because taxation takes place at the entity level. C. In contrast to a closed-end investment company, a mutual fund will eliminate systematic risk. D. Marketability is limited because a willing buyer must be found in the secondary marketplace.

Each investor's account value is based on the number of shares owned multiplied by the fund's net asset value An investor's account value in a mutual fund is based on the number of shares multiplied by the fund's net asset value. As long as the fund distributes a certain percentage of its income, there is no taxation at the entity level; rather, shareholders pay tax on the distributions. Guaranteed marketability of fund shares is ensured.

Which of the following is the least suitable mutual fund transaction? A. Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence B. Encouraging an investor in his early 30s to invest in an emerging markets mutual fund C. Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund D. Encouraging an investor in a high tax bracket with an income objective to invest in a municipal bond fund

Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, because the client might be subject to substantial additional sales charges.