SIE Section 1 Chapter 4 "Investment Company Securities"

Share purchase and redemption violations

1) late trading 2) switching 3) selling dividends

growth and income funds

(combination funds) include some stocks for growth and others that pay higher dividends

investment adviser responsibilities

1) invest the cash and securities held in the fund's portfolio 2) implement the objectives outlined by the board 3) manage day-to-day trading of the portfolio

Redeemable

A type of investment company security, such as a mutual fund and a unit investment trust, for which there is no secondary market or investor-to-investor trading. Instead the security is directly bought from and sold back to the issuer

closed-end fund

A type of investment company that issues redeemable security is representing an undivided interest in a fixed trust, in which there is no active management of the portfolio

Unit Investment Trust (UIT)

A type of investment company where investments are selected, not traded/managed. No management fee charged. Shares are redeemable.

mutual fund

A type of management investment company that makes a continuous offering of brand new, redeemable shares to investors, also referred to as an open-end fund

Management investment company

An investment companies such as a mutual fund or closed-end fund that hires an investment adviser to actively select and manage a Securities portfolio to achieve a stated investment goal

12b-1 fees

Annual fees that cover a mutual funds marketing and distribution expenses

Exchange Traded Funds

Another type of investment company, can legally be established as either UITs or open ended funds, their characteristics make them a unique hybrid of all the types of investment companies

Investment company securities

Collections of diverse pools of securities That are selected and managed by professionals. They combine multiple assets into a single investment opportunity that can be purchased by retail investors, giving them the chance for significant diversification with a smaller investment. Professional management of these investments as appealing to individuals who lack either the attitude or desire to select an actively manage a portfolio of securities. By earning more than one security, investors assume less risk then by owning individual securities within the pool

Expense Ratio Formula

Expense ratio = (management fees+operating expenses)/average annual net assets

Class B Shares

Have a back-end or a contingent deferred sales charge that is paid when investors redeem their shares within a specified number of years. Typically impose a 12b-1 fee that is higher than class a shares, does not offer break points, typically good for investors with a little investment cash and a long investment horizon

Breakpoint Sale

In mutual funds the dollar investment required to make the investor eligible for a lower sales charge. This is a Prohibited practice

Asset allocation funds

Invest in a combination of asset classes including stocks for growth, bonds for income, and cash or cash equivalents for safety and liquidity, providing portfolio diversification. Portfolio manager is typically given some discretion to adjust the mix as market conditions change. Mixture of securities and allocations will also differ by how aggressive the fund is in generating growth and returns

Municipal bond funds

Invest in the bond issued by municipalities. The income generated is free from federal income taxes and may also be exempt from state and local taxes depending on the bond origination and the investor state of residence. These funds are most appropriate for high net worth investors in a high tax bracket

Classic C shares

Level-load sales charge. Typically have relatively high 12b-1 fees, other annual expenses, and either a front or back and a sales load. Generally have the highest annual expense charges. Designed for people who want to make short-term mutual fund investments. If these shares are held for longer the fee gets higher. No breakpoints

actively managed funds

Mutual funds that have portfolio managers who constantly buy and sell assets in an attempt to generate high returns.

late trading

Occurs when purchase or redemption orders are received by the mutual fund after the close of business and are filled at that days price rather than at the next days price. This is prohibited as it could provide an information advantage for the investor receiving the shares because after close the news could be considered.

Rights of accumulation

Offer investors an additional opportunity to receive a reduced sales charge based on the amount of money invested in one mutual fund. It's important to note that under rights of accumulation the sales charge discount is only available on subsequent purchases. Does not apply to initial transactions

Breakpoints

Offer mutual fund investors discounts off the sales charge based on the dollar amount invested

Index funds

Only type of mutual fund that is not actively managed. Instead the funds of purchases most/all of the security is contained in a specific index with the intention of delivering the same performance as that index. Once the portfolio is assembled it is not actively managed. These funds will not be at the market in performance, but the risk of under performance relative to the benchmark index tends to be low

Public Offering Price (POP)

POP=NAV+Sales charge

Selling dividends

Prohibited sales practice where a registered representative sells a mutual fund to an investor right before the fund pays out a dividend. Violation because the dividend distribution will decrease the NAV of the recently purchased shares and result in a tax event for the customer

Investment Company Act of 1940 (1940 act)

Regulates the following entities, three broad categories of investment companies: 1) Face amount certificate companies 2) unit investment trusts (UITs) 3) management companies, includes both closed-end funds and open-end funds

Summary Prospectus

SEC allows an investment company to deliver this condensed version of the longer more detailed prospectus to customers

Senior Securities

Securities that have a preferential claim over common stock on a company's earnings and in the case of liquidation. Generally, preferred stock and bonds are considered senior securities

Class A Shares

Shares of a mutual fund that charges a front-end load and a small or no 12b-1 fee. Offer breakpoints. Beneficial for investors who intend to hold their shares for more than several years/those making large purchases who want to benefit from breakpoints

Shared classes

Some mutual funds offer investors different types of shares; this multi class structure Offers investors the ability to select a fee and expense structure that is most appropriate for their investment goals and investment time horizons

Sales Charge

The amount of the purchase price of mutual fund shares that the underwriter will receive and will therefore not be invested in shares

Trust Indenture

The formal agreement between bondholders and the issuer as to the terms of the debt.

Forward pricing

The method by which mutual funds calculate the purchase and redemption prices, which are based on the next NAV calculation after the order is received

Net Asset Value (NAV)

The value of a mutual fund and the basis of what investors pay, calculated as the total assets of the fund minus it's total liabilities

Letter of Intent (LOI)

Type of contract offered by a mutual fund in which an investor agrees in writing to purchase a specified amount of mutual fund shares over the next 13 months period. The sales charge applied on each purchase is based on the promised total investment

Face-amount certificates

Type of investment company that issues debt securities, backed by interest on real property and securities. Very few still exist today (not important for the exam)

custodian

an institution or person that acts as the caretaker of the fund's securities. it holds in safekeeping all of the securities purchased by the investment company for its portfolio

Switching

When a registered representative moves a customer from one mutual fund to another fund that has a similar investment objective for no legitimate investment purpose. Sometimes called churning this practice is a violation, as it creates additional transaction costs as well as potential tax liability is for the investor.

Redeemable shares

When shareholders wish to sell their shares, they are redeemed by the fund. In other words Mutual funds register a continuous offering of redeemable shares meaning there is no secondary market for mutual funds. If an investor wants to purchase shares the funds will create brand new shares for him to buy. If an investor wants to sell shares they are sold to or redeemed by the issuing fund.

Stock Fund

a mutual fund that invests primarily in common stock that aligns with its objectives. goal of most equity funds is long term growth through stock fund investments

breaking the buck

a stable NAV value is the goal but is not guaranteed. breaking the buck refers to the unusual circumstance in which the NAV falls below $1 and therefore the fund's investment are perform poorly

unit investment trust (UIT)

a type of investment company that issues redeemable securities representing an undivided interest in a fixed trust, in which there is no active management of the portfolio

prospectus

all investors that purchase mutual fund shares must receive this record that contains certain disclosures

Exchange Traded Fund (ETF)

an exchange traded investment company that is designed to closely track the performance of a specific benchmark, sector, or index

diversification

because they invest in a range of companies and industries, mutual funds keep investors from putting all of their eggs in one basket. helps spread risk and protect the shareholders from the failure of a single company

corporate bond funds

buy bonds issued by corporations ranging from large, well-established firms to small companies. the riskier choices may deliver higher yield but will also have greater volatility

mutual funds (can/cannot) sell stock short or buy securities on margin

cannot

Sector Funds (Specialty Funds)

concentrate their assets in a particular industry such as tech or healthcare. present more risk because one year's top sector could crash without notice in the following year

management fee

earned by management investors; typically a percentage of the fund's net asset value. contract for adviser is approved annually by the board of directors

Bond funds (fixed-income funds)

fixed-income funds that aim to earn current income higher than a money market fund without incurring undue risk by investing in a portfolio of bonds and other low-risk investments that pay high dividends and offer capital appreciation

sponsor (distributor/underwriter)

fund contracts this person to sell its shares. sponsor has an annually renewable written contract with the mutual fund company that permits it to buy shares from the fund at net asset value

Professional Management

fund managers do the research, select securities, and monitor their performance

transfer agent responsibilities

handles transactions with customers, responsibilities include: 1) issuing redeeming and cancelling fund shares 2) handling the distribution of dividend and capital gains to shareholders 3) sending out trade confirmations when shares are purchased and sold

growth stock funds

invest in companies that are expected to grow at a rate faster than the market average. stocks of these companies rarely pay off dividends, instead reinvesting corporate earnings in further research and development. these businesses tend to have greater upside potential, but also greater risk and volatility.

income stock funds

invest in dividend-paying companies, stressing steady income over appreciation. these funds might include preferred stocks, blue chip stocks, and utility stocks

international funds and global stock funds

invest in stocks issued by companies located across the world. global funds can also include stocks in US companies. some of these funds invest in companies located in emerging-market countries, which can increase both risk and potential reward

small-cap stock funds

invest in stocks of smaller corporations (generally between $750 million and $2 billion). small cap stocks present the possibility of greater capital but with greater risk

large-cap stock fund

invest in stocks of the largest corporations with market capitalizations often exceeding $10 billion (walmart apple Pfizer etc) large-cap stocks considered relatively stable and secure. often referred to as blue chip stocks

high yield bond funds (junk bond funds)

invest in untested companies as well as in bonds of well-known companies that have weakened financially. they hold below investment-grade debt that has a higher potential of default on interest payments, resulting in higher yields.

Us government bond funds

invest primarily in bonds issued by the US treasury or federal government agencies, and thus offer low credit risk to investors. because of their higher level of safety, their yields and total returns are lower than those of other bond funds

no-load

investor does not pay a sales charge to purchase or redeem shares; typical for money market funds

Management Investment Companies

most common type of investment company. manage a portfolio of securities to achieve a stated investment objective. the management company will hire a professional manager, such as an "investment adviser" whose role is to select the securities and manage the portfolio. these individuals and firms are regulated under the "investment advisors act of 1940" and generally are registered with/regulated by SEC

four categories of actively managed mutual funds

most fall into one of the four following categories: money market funds, stock funds, bond funds, and asset allocation funds

affordability

most mutual funds can be purchased for a relatively low dollar amount for both initial investment and subsequent purchases

no-load fund

mutual fund in which investors pay no commissions when they buy in or sell out. Sold at NAV without sales charge added. NAV = POP. Usually purchased directly from the fund management company rather than from an outside broker or distributor. Index funds are a good example of signs that are no load

dividend payments

mutual fund may earn income from dividends on the stock or interest on the bonds that it holds in its portfolio. the fund distributes this income less fund expenses to shareholders.

liquidity

mutual fund shares can be easily redeemed at any time for the current net asset value (NAV) plus any redemption fees. shareholders will receive the price that is next calculated when they make a redemption request.

index funds

passively managed and operate with limited trading activity.

money market funds

safest and most stable of all the mutual fund types because the 1940s act restricts their investment choices to high-quality, highly liquid, short-term debt investments. because of their liquidity, they are considered cash equivalent funds

Public Offering Price (POP)

sponsors resell fund shares to the public at net asset value plus a sales charge. POP is the total

capital gains distributions

the value of the securities in a fund may rise over time. when a fund sells a security that appreciated, the fund has a capital gain. at the end of the year, the fund distributes these capital gains, minus any capital losses to investors.

net asset value

value of the fund's assets minus all of the fund's liabilities, divided by the number of shares.

net asset value (NAV) increases

when the market value of a fund's portfolio increases above the fund's expenses, the value of the fund and each share of the fund increases. the higher NAV reflects growth in the value of an investor's shares. investors who then choose to liquidate their shares will do so at a profit