Checkpoint Exam U14
A client of yours recommends your services to his mother, who is 80 years old. She lives on Social Security ($2,215 per month) and has a home with a net value of $186,000. She has lost a large amount of money that she had placed into a high-risk technology fund about 10 years ago. The fund is part of a family that has a wide range of funds with varying objectives. With only $27,000 left in that account, what would you suggest as the best option for her? A) Move her to a lower-risk fund that is in the fund family B) Ask her attorney what the best choice would be C) Sell all of the account and select a more appropriate fund in a different family D) Leave the funds where they are and hope for a recovery
A) Move her to a lower-risk fund that is in the fund family Obviously, this client invested in a fund that is not suitable for someone in her situation. Because families of funds offer the exchange privilege (exchanging shares from one fund to another at NAV), it is generally considered an unfair business practice to move to another fund and potentially incur a new sales charge. U14LO10
By their very nature, pooled investment vehicles offer investors A) diversification B) guaranteed returns C) current income D) tax deferral
A) diversification Most pooled investment vehicles invest in a broad range of investments, giving their investors diversification. U14LO10
Which of the following is the least suitable mutual fund transaction? A) Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund B) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence C) Encouraging an investor in his early 30s to invest in an emerging markets mutual fund D) Encouraging an investor in a high tax bracket with an income objective to invest in a municipal bond fund
B) 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. U14LO4
Which of the following are features of Class C mutual fund shares? I. Typically charge no front-end load II. Typically charge a front-end load III. Typically impose lower CDSCs than Class B shares for a shorter period IV. Typically convert to Class A shares after they are held for a defined period A) II and III B) I and III C) II and IV D) I and IV
B) I and III 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. U14LO4
A sector fund is one where the assets are A) invested in emerging growth companies B) concentrated in a particular industry or geographical area C) invested in other mutual funds D) invested in special situations
B) 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. U14LO10
If XYZ Mutual Fund has an expense ratio of 1.85% that includes a 12b-1 fee of 0.30%, which of the following statements are TRUE? The fund may use the 12b-1 fee to pay for mailing sales literature. Advertising materials may state that the fund is no-load. Management fees may be paid from the 12b-1 fee. The fund's prospectus is required to disclose the fee. A) I and II B) I and IV C) II and III D) III and IV
B) I and IV 12b-1 fees may only be used to cover promotional expenses, not fund management expenses. The amount of the fee must be disclosed in the prospectus. Funds that charge 12b-1 fees of more than 0.25% cannot call themselves no-load funds. U14LO4
Jasper Whitlock is considered an affiliated person of the Tahor Clean Energy Mutual Fund. Under the Investment Company Act of 1940, Mr. Whitlock is prohibited from all of the following EXCEPT A) being elected to the fund's board of directors B) borrowing from the fund (money or property) C) buying anything from the fund, except shares of the fund D) selling anything to the fund, except shares of the fund
A) 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. 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. U14LO1
The investment adviser under contract to a regulated, diversified, open-end investment company does NOT A) change investment objectives that he believes are in the best interest of the investors B) investigate the tax status of potential investments C) attempt to fulfill the fund's investment objective by means of careful investing D) make sure the fund invests in such a manner as to retain its diversified status
A) change investment objectives that he believes are in the best interest of the investors The investment adviser is responsible for making investments according to the objective stipulated by the investment company. These decisions should maintain and reflect the diversified status of the fund and should identify the tax status of potential investments. The fund's objective may be changed only by majority vote of the outstanding shares (i.e., by the owners of the company, not the portfolio manager). U14LO1
A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) selling at a premium. B) selling at a discount. C) selling at NAV. D) an open-end investment company.
A) selling at a premium. When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the net assets are the $100 million portfolio value minus the liabilities of $10 million for the unpaid securities plus the $5 million in accrued management fees. That leaves $85 million divided by the 2,611,437 shares outstanding, which is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price, well in excess of the maximum 8.5% permitted. U14LO3
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 between the investment company and the investment adviser must be in writing. C) The contract must provide for a minimum notice of at least 2 weeks if the contract is to be terminated. D) The investment adviser must be under common control with the investment company.
B) The contract between the investment company and the investment adviser must be in writing. One of the requirements of the Investment Company Act of 1940 is that the contract between a management investment company (open- or closed-end) must be in writing. The initial contract must be approved by a majority vote of the outstanding shares and the "noninterested" members of the board of directors. It is renewed annually by either a majority vote of the outstanding shares or the board of directors, as well as a majority of the directors who are considered to be noninterested parties. If the adviser and investment company had to be under common control, then there would be no way to engage an outside adviser. The contract must call for a maximum 60-day termination clause; there is no minimum. U14LO1
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) the principal underwriter of the fund C) 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 D) FINRA
C) 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. U14LO1
Which of the following statements regarding REITs are NOT true? I. Investors receive flow-through benefits of income as well as loss . II. Hybrid REITs own properties, as well as make loans on others. III. Equity REITs are prohibited from using leverage to acquire properties. IV. REITs are easily traded in the secondary market. A) II and III B) I and IV C) II and IV D) I and III
D) I and III It is not true that REITs offer flow-through of losses; they are not DPPs. As with most real estate purchasers, leverage, usually in the form of a mortgage, is used to acquire property. A hybrid REIT contains the features of both an equity REIT and a mortgage (debt) REIT, and most REITs trade on the exchanges or Nasdaq. Note: Even though there has been an increase in the number of non-traded REITS, unless something in the question indicates that, the question will be dealing with publicly traded REITS. U14LO10
Which of the following statements concerning hedge funds is TRUE? I. Purchasers of hedge funds are generally required to be accredited, investors. II. Short sales by the fund are not allowed. III. It is not uncommon for there to be a lock-up period that may last for as long one year or even longer. IV. It would be unusual for the fund managers to have an ownership interest in the fund. A) I and IV B) II and IV C) II and III D) I and III
D) I and III 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." U14LO6
A new customer has a $35,000 CD maturing in 2 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) An income fund B) A venture capital fund C) A growth fund D) A sector fund
A) An income fund An income fund is just what the name implies; it invests for income (receipt of interest and/or dividends) that it can then distribute to investors in the form of dividends. U14LO10
Last year, the bond market was profitable and ABC fund had 70% of its assets in bonds. Next year, the fund's managers expect the equity market to outperform and will adjust the fund's portfolio so that 60% of its assets will be invested in stock. ABC is most likely A) an asset allocation fund B) a specialized fund C) an income fund D) a growth fund
A) an asset allocation fund A mutual fund whose portfolio managers have the flexibility to allocate between different investment classes is known as an asset allocation fund. U14LO10
Which of the following is NOT a characteristic of hedge funds? Hedge funds A) offer managers high fixed fees. B) are privately organized and generally unlisted. C) invest in private securities, real assets, derivatives, and structured products. D) use leverage, short positions, and concentrated positions.
A) offer managers high fixed fees. Hedge funds tend to attract the top managers because they offer performance-based fees, which vary based on fund performance. U14LO6
Asset-based sales charges will generally be lowest when holding which of the following mutual fund share classes? A) Class C shares B) Class A shares C) Class B shares D) Class T shares
B) Class A shares Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class T shares always have a 12b-1 charge. U14LO4
From the standpoint of diversification, which of the following would be considered the most conservative? A) A growth fund B) A balanced fund C) A sector fund D) An income fund
B) A balanced fund Balanced funds invest in a variety of investment vehicles; therefore, they have more diversification. Because of the diversification, they are better protected against downturns in the financial markets and are more conservative than the other choices listed. U14LO10
Clients should be aware of the potential effects of volatility on their portfolios. Which of the following would most likely have the lowest volatility? A) A large-cap fund B) A money market fund C) A balanced fund D) A government bond fund
B) A money market fund Money market funds traditionally maintain a stable net asset value resulting in no market volatility. U14LO10
What can you tell about these investment companies from this information? A) Company A and Company B can be either open-end or closed-end. B) Company A can be either open-end or closed-end; Company B must be closed-end C) Company A must be open-end; Company B must be closed-end. D) Company A is closed-end and Company B is open-end.
B) Company A can be either open-end or closed-end; Company B must be closed-end All open-end investment companies sell at NAV plus 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. U14LO3
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 net asset value plus a portion of the sales load B) the next computed net asset value C) the last computed net asset value D) the next computed public offering price
B) the next computed net asset value When an investor redeems (or purchases) open-end investment company shares, the investor receives the next computed net asset value (NAV) of those shares. This is known as the forward pricing rule. U14LO3
Programs allowing for the direct pass-through of losses and income to investors include all of the following EXCEPT A) oil and gas drilling direct participation programs B) S corporations C) REITs D) new construction real estate direct participation programs
C) REITs REITs allow for the direct pass-through of income but not losses. The other choices are forms of business which allow for pass-through of income and losses. U14LO9
To calculate the amount to be received on redemption of open-end investment company shares, which of the following would be used? A) The offering price, plus the redemption fee B) The NAV, plus the redemption fee C) The NAV, minus the redemption fee D) The offering price, minus the redemption fee
C) The NAV, minus the redemption fee The mutual fund will redeem shares at the NAV. Redemption fees or deferred sales loads, if any, are subtracted from the proceeds sent to the investor. U14LO3
The tax consequence of transferring proceeds from one fund to another within the same family of funds is: A) no gain or loss is recognized until the redemption B) gains are taxed and losses are deferred C) on the date of the transaction, any gain or loss is recognized for tax purposes D) losses are deducted and gains are deferred
C) on the date of the transaction, any gain or loss is recognized for tax purposes An exchange is the sale and then a purchase of a new security and is therefore a taxable event. U14LO10
Under the Investment Company Act of 1940, the reporting requirements investment companies must comply with include filing a report with the SEC annually, or more frequently if required sending semiannual reports to shareholders notifying shareholders of changes in the portfolio as those changes occur A) I and III B) II and III C) I, II, and III D) I and II
D) I and II Investment companies must file reports with the SEC at least annually (more frequently if required) and send at least semiannual reports to shareholders. They are not required to notify shareholders of changes in the portfolio as they occur. U14LO1
