Series 6: Chapter 4

Differences between mutual funds and ETFs:

- ALL ETFs are passively managed and have lower management fees - Most mutual funds are actively managed and have higher fees - ETFs can be traded throughout the day - Mutual funds are only traded at the end of the day and based on forward pricing - ETF investors are charged commission for purchases and sales - Mutual fund investors pay a sales charge for purchases and redemption

3a. Open-End Management Company : Mutual Fund

- Also known as a mutual fund. - NAV and POP and forward pricing refer to the way that open-end funds are quoted and priced. - Open-end funds continuously offer new shares to investors in the primary market, giving the fund the ability to raise an unlimited amount of money. - Unlimited - Continuous Primary Offering - Only offers common stock. (common shares) - NEVER trade in the secondary market - New shares are purchased at the Public Offering Price. (POP) - Purchases are made in full or fractional shares. - Shares can only be redeemed by the investment company. - Investors redeem shares with the fund at the Net Asset Value (NAV). - Mutual fund buyers are always purchasing new shares and must receive a prospectus at or before the time of sale. - A prospectus must precede or accompany the original sale to each investor as required by the Securities Act of 1933. - When an investor continues to invest money into the same fund, the prospectus delivery requirements are met by sending the investor an updated prospectus annually. - Mutual fund shares can NOT be bought on margin (credit) - Must be purchased on a cash settlement (or same day) basis, since all purchases are part of a primary offering - Once mutual fund shares have been owned for 30 days, the shares can be used as collateral in a margin account.

529 Savings Plans

- Direct sold : the investor purchases the plan directly through their state's 529 Plan website or through the mail. These types of plans usually are offered as no-load but may have annual fees. - Advisor sold : offered through broker-dealers in the state and often have different investment options. Individual states choose the advisor(s) that will offer the plans in their state. - They are considered municipal fund securities regulated by the MSRB - Maximum contributions are determined by the individual plan or state - Contributions are nondeductible - No taxation on earnings used for qualified education - Account balances may be transferred to another relative - No income limits for eligibility

Exchange-Traded Funds (ETFs)

- ETF's are passively managed - ETF's have lower ongoing expenses. - They are Exchange-listed product investing in a portfolio of stocks that tracks a particular index, such as the S&P 500. - providing diversification that mirrors a specific index. - Trade in the secondary market. - Shares of ETFs are NOT typically redeemable; investors liquidate by selling them in the secondary market. - These funds are typically listed on an exchange - These funds generally maintain a fixed portfolio - ETF's can be traded during the day (Intraday) -ETFs represent a "basket" of securities - ETFs, in certain circumstances, are permitted to create additional shares. Therefore, ETFs are registered as open end funds under the Investment Company Act of 1940.

Municipal Fund Securities

- Funds or trusts that are offered by individual states or local governments. - Include Section 529 Plans, ABLE Programs, and Local Government Investment Pools. - Program disclosure document is used with the sale of municipal fund securities

Local Government Investment Pools (LGIP)

- Investment pools that are established by state or local government entities to allow for the investment of public funds - Investment for Government entities - The MSRB regulates sales of LGIP issues when they are sold by broker-dealers. - The pools are NOT subject to the Investment Company Act of 1940 (don't have to be registered) - The public cannot invest in an LGIP - The objectives include safety of principal and daily liquidity, like money market funds.

1. Face Amount Certificate Company

- Investors purchase a debt certificate, known as a Face Amount Certificate at a discount and receive a predetermined rate of interest on the investment. - Investors who choose to redeem their certificates prior to maturity will receive a reduced "surrender value," instead of the face value. - When purchasing a face amount certificate, investors may invest with a lump sum or through periodic payments. -backed by a security interest on assets such as real property.

3. Management Investment Company (management company)

- Management companies are further broken down into two subcategories: Open-End and Closed-End Management Companies. - operates under the direction of a board of directors. (BOD) - issues shares of undivided interest to investors. - The portfolio of securities held by the management company is selected and managed by a professional investment adviser: portfolio manager

Section 529 Plans

- Municipal Fund Securities - investor can contribute up to $15,000 per year into a 529 plan without incurring a gift tax. - A gift tax is a tax assessed to the donor if they contribute more than what the IRS allows - There are 2 basic types of 529 Plans: 529 Prepaid Tuition Plans and 529 Savings Plans.

3b. Closed-End Management Company

- Only full shares may be purchased - Fixed offering - IPO : Limited offering of shares : The number of outstanding shares is fixed - Can offer common stock, preferred stock and/or bonds (debt securities). - Closed-end funds are NOT redeemable securities. They are not redeemed through the fund. - An investment advisor to manage the fund's assets - Trade in the secondary market : on either an exchange or over-the-counter - Often referred to as publicly traded funds. - Pricing is determined by (current) market value: supply and demand - investors are charged a commission for the purchase or sale. -shares can trade above or below the NAV per share. - Buyers of closed-end funds in the secondary market do not receive a prospectus. That is because information about the shares are already public. - Shares sold during IPO only are sold by prospectus - Bid and Ask are Continuous pricing and are how closed end funds are quoted and priced.

2. Unit Investment Trust: UIT

- The trust is operated by a Board of Trustees. - UIT units are referred to as shares of beneficial interest - UITs typically invest in a fixed portfolio of securities. - UIT has no manager. - Investors do not pay a management fee. - Units are redeemable with the issuer - UITs have a predetermined end date - UITs are not actively managed

529 Prepaid Tuition Plans

- They allow plan owners to lock-in today's tuition prices for the future. - There is no risk to the principal amount invested. - The plan returns, however, are based on in-state public tuition averages. - students need to attend an in-state public college. If the student attends an out-of-state college or a private institution, they only receive the average of the in-state colleges' annual tuition.

Hedge Funds

- often structured as a limited partnership and is mainly available to accredited investors. - Unregistered - they are not offered to the general public and do not have to register with the SEC. - it is still subject to the antifraud provisions of SEC Rule 10b-5, the catch-all fraud rule. Information is provided to investors in a private offering memorandum. - They are private placement offerings and they do not trade. - Investment for accredited investors - LACK of transparency - The maximum number of investors is limited to 99, with a maximum of 35 investors being non-accredited or all investors being qualified purchasers. - they can only be liquidated on specific dates : have bad liquidity, Illiquid - High investment minimums and fees

Interval Funds

- these funds are permitted to continuously offer their shares based on the fund's NAV. - do not trade in the secondary market. - The fund periodically offers to buy back, or repurchase, its shares every 3, 6, or 12 months as stated in the prospectus. - Shareholders are not required to accept these offers, which are called tender offers. - Interval funds are classified as closed-end funds because the shares are not redeemed daily.

Other Pooled Investments

1. Exchange-Traded Funds (ETFs) 2. Hedge Funds

Types of Investment Companies

1. Open End 2. Closed End

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?

A majority of the fund's outstanding shares must approve of the change 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.

When an investor does not own specific securities in a portfolio, but he or she does own a specific number of shares of the mutual fund portfolio, it is referred to as:

A mutual fund's issued shares are the pro rata value of the net asset value of all the securities held by the fund in its investment portfolio. Shareholders own that value, not any specific portion of those securities, which is why it is called an undivided interest. So if a mutual fund shareholder owns 10% of the fund, they do not own directly 10% of each security in the mutual fund portfolio.

Who makes the investment decisions for a management company?

An investment adviser

Registration Requirements

An investment company AND its new issues of securities must be registered with the SEC under the requirements of the Securities Act of 1933. A registration statement must be filed, and a prospectus must be provided to all investors.

Who is the sponsor of 529 plans

Congress authorized the creation of qualified tuition programs to be sponsored by the state

Non-diversified Investment Company

Fails to meet the 75-5-10 test. (An investment company that specializes in a single industry is not necessarily a non-diversified company. Some investment companies choose to concentrate their assets in an industry or a geographical area)

A customer of a broker-dealer purchases shares of a mutual fund through the broker-dealer. Under what circumstances may credit be extended on the shares?

II The customer has owned the shares for 30 days or more Credit may be extended on mutual fund shares held more than 30 days. However, credit may not be extended on the purchase of new mutual fund shares through a broker-dealer, and the broker-dealer may not try to get around the restrictions by arranging for loans by others.

Suitability and Disclosure

In the case of all ETFs, and especially leveraged ETFs, it is vital that the proper customer disclosures are made. The customer must be made aware of all costs, risks, and tax consequences associated with these types of investments. As always, the investment in ETFs must meet all suitability standards

Inverse ETFs

Inverse ETFs use derivatives to receive a return from the opposite or inverse move of an underlying index. For example, the S&P 500 Inverse Fund will make money when the S&P 500 goes down in price. This strategy is used instead of shorting stock in a margin account. They are often referred to as "short" funds. The use of derivatives adds to the expense and riskiness of these funds.

Inverse Leveraged ETFs

Inverse Leveraged ETFs use a combination of leverage and the inverse fund concept. These are often called "ultra short" funds, since they are trying to obtain a return that is a multiple of the Inverse ETF.

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.

Diversified Investment Company

Management company that meets the requirements of the "75-5-10" rule. [ 75-5-10 Rule ] To be considered a diversified company, at least 75% of the fund's total assets must be invested in the following manner: 1. No more than 5% of its total assets may be invested in the securities of any one corporation 2. Investments will not cause the fund to own more than 10% of the voting stock of any one corporation [ End ] The remaining 25% of the management company's assets can be invested in any way it sees fit.

A Series 6 representative may always sell:

Open-end management companies Variable contracts

An investor places an order to liquidate her shares of the Shining Star ETF on Monday, at 4:23 p.m., Eastern time. What price will she most likely receive?

Shares of ETFs are not typically redeemable; investors liquidate by selling them in the secondary market. When selling shares, investors receive the current bid price. If the order is placed after the market closes (e.g., 4:23 p.m.), the investor should expect to receive the opening bid price on the next trading day.

Diversification

Spreading out investments to reduce risk. Diversification is one of the main advantages of an investment company offering.

undivided interest

This means that investors share in the profits and losses generated within the portfolio in proportion to their own investment, but do not have a beneficial ownership interest in any of the individual securities.

Investment Company Act of 1940

Two types of management investment companies: 1. open-end funds. (mutual funds) 2. closed-end funds. Defines an investment company as being in the business of holding and managing a portfolio of securities for its investors OR that has 40% of its total assets held in investment securities. In addition, the company must have at least $100,000 in net assets, a minimum of 100 shareholders, and a clearly defined investment objective under which it will operate.

Which two of the following statements are true regarding open and closed-end funds?

When selling an open-end fund, a prospectus must be delivered at or prior to time of purchase When selling a closed-end fund in the primary market, a prospectus must be delivered to investors

investment company

is a corporation, trust, or partnership that issues packaged securities to investors. The investment company collects the investors' money and then selects the appropriate securities for the portfolio to meet the objectives for the specific portfolio.

program disclosure document

is used with the sale of municipal fund securities since they are not subject to prospectus requirements. These include Section 529 Plans, ABLE Programs, and Local Government Investment Pools.

Leveraged ETFs

use derivatives and bonds to magnify the returns of an underlying index. Leveraged funds can be used as an alternative to margin, which also takes advantage of borrowed money to increase returns; these funds have higher costs and risk. Leveraged funds are used for short-term investing. it is vital that the proper customer disclosures are made. The customer must be made aware of all costs, risks, and tax consequences associated with these types of investments.*****