Unit 2: Series 6

Ex-Date for open-end investment company is set by

BOD

Which of the following types of investment company securities is the most likely to have a NAV that is 90% of its offer price?

Closed-end company share. The market determines the offer price of closed-end company shares; the offer price may be either more or less than the NAV. Because the NAV in this situation is 90% of the offer price, this must be a closed-end share. An open-end share's NAV must be at least 91.5% of its offered price because the maximum sales charge on open-end shares is 8.5% of the POP.

The Presto Capital Appreciation Fund annual report indicates that the NAV of the fund has increased from $15.65 to $17.03, and its asking price as of the date of the report has actually declined. Presto must be a(n):

Closed-end fund The asking price of a closed-end fund is not determined by its NAV because the fund trades based on supply and demand. An open-end company's NAV cannot go up while its asking price goes down.

___ generally make a one-time public offering of shares.

Closed-end investment companies

A mutual fund can hold which of the following securities in its investment portfolio?

Common stock Preferred stock Corporate bonds Municipal bonds Although a mutual fund can only issue one type of security, common stock, it may purchase many different classes of securities for its investment portfolio, including preferred stock, corporate bonds, and municipal bonds.

The prospectus for a fund states that the minimum initial investment is $500,000. This is most likely what type of fund?

Hedge funds-- due to their much higher risk, usually limit their investors to those who can afford to take that higher risk by having very high minimums.

The bid price is also known as

NAV

Which of the following statements describe an open-end investment company?

The company must redeem shares in any quantity at any time except that it may suspend the redemption of shares with SEC approval. The company may sell new shares in any quantity at any time.

Margin

The use of money borrowed from a bank through a brokerage firm to sell securities

Issue trust units that provide the holder with a share of ownership in a non-managed portfolio of securities

Unit Investment Trust

The type of investment company that can have fixed or nonfixed portfolio

Unit Investment Trust (UIT)

An investment company with a fixed portfolio, redeemable shares and no management fee is

Unit investment trust (UIT)

The SEC does not ___

approve any new issues

Most leveraged and inverse ETFs "reset" ___

daily (designed to achieve their stated objectives daily)

Both open-end and closed-end companies can be

diversified or non-diversified

Diversified fund

does not invest more than 5% of the fund's assets in any one issuer.

Issues debt certificates

face-amount certificate companies

Open-end investment companies selling price determined by

formula in the prospectus (includes sales charge)

A majority vote of the outstanding shares of an open-end investment company is needed in order to approve a change

from a diversified company to a nondiversified company. from an open-end company to a closed-end company.

If an open-end investment company wishes to change its investment objective, it may only do so with a:

majority vote of the outstanding shares.

Growth and Income Fund

may invest in many industries, seeking both dividends and capital gains.

Open-end investment company=

mutual fund

Closed-end investment companies do not

redeem shares

Closed-end investment company

will raise capital for its portfolio by conducting a common stock offering they can also issue bonds and preferred stock often called publicly traded finds

An investment company offering securities registered under the Act of 1933 may make which of the following statements?

"The SEC has declared this prospectus effective." "The SEC has released our securities for sale to the public." When a security registers with the SEC, the date sales are allowed is known as the effective date. The SEC neither approves nor disapproves an issue, nor does it pass on the accuracy or adequacy (completeness) of the information presented in a prospectus

Ex-Date

(Ex-dividend date) the first day one can trade for a security and not be entitled to receive a dividend distribution previously declared by the issuer

Series 6 limited registered representative is not eligible to sell:

1. hedge funds 2. ETFs 3. REITs 4. DPPs

Financial information in a prospectus may be no more than

16 months old

The Investment Company Act of 1940 prohibits a mutual fund from borrowing more than what amounts to ___ its net asset value

33.3% (must keep a 3 to 1 ratio)

The Investment Company Act of 1940 contains a large number of definitions. One of those is of a diversified management investment company. To comply with the definition for a diversified management investment company, an investment company must diversify how much of its assets in a prescribed way?

75%

A diversified company meets the ___ test

75-5-10

Activities by a mutual fund that require approval by a majority vote of outstanding shares

A change in investment policy. A change in the debt-to-equity ratio of a balanced fund.

Specialized fund

A fund that, as part of its investment policy, makes a commitment to invest 25% or more of its assets into a particular economic or geographical sector

___ trade in the secondary market

Closed-end investment company

When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following?

Commissions both when purchasing and liquidating shares. The spread between the NAV and POP can be greater than 8.5%

Funds of Hedge Funds

Funds of hedge funds are mutual funds and, therefore, are registered with the SEC. They have a lower initial investment than hedge funds and are available to smaller investors.

Special Investment Securities include

Hedge Funds Exchange traded funds (ETF) Real Estate Investment Trusts (REITs)

According to the Investment Company Act of 1940, what's required of investment companies?

Investment company registration statement filed with the SEC. Statement of investment policies and diversification status.

The most familiar type of investment company

Management Investment Companies

An investment company that is not classified as either a unit investment trust or a face-amount certificate company would be classified as a(n):

Management Investment Company

Part 1 of a consensus is called

N1-A prospectus (must be furnished to everyone that the company offers a security to)

Can fractional shares be purchased in closed-end?

No, only full shares can be purchased

A unit investment trust has 90% of its portfolio invested in high grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken?

Nothing The portfolio of a unit investment trust is fixed once it has been constructed. Therefore, it does not change in reaction to market conditions.

When must a prospectus be used in closed-end?

Only in the IPO (no prospectus is given when the shares are purchased in a secondary market transaction)

____ are sold with a prospectus during IPO only

Open-end

The ask price is also known as the

Public Offering Price (POP)

Ex-Date for closed-end investment company is set by

SRO (finra)

Mutual funds are subject to which of the following federal securities regulations?

Securities Act of 1933 Investment Company Act of 1940

Part 2 of prospectus is called

Statement of Additional Information (SAI)

If an investment company has a fixed portfolio of municipal bonds with high duration, how will substantial changes in general interest rates affect the company's portfolio?

The market value will fluctuate significantly, but the investment income will remain stable because the same bonds remain in the portfolio and there has been no change to their coupon rates.

An issuer who sells mutual funds that have been registered under the Securities Act of 1933 is allowed to make which of the following statements?

The securities offered are registered with the SEC. The SEC only clears or releases a security for sale. It neither approves nor disapproves the offering, nor does it pass on the accuracy or adequacy of the information contained in the prospectus. A disclaimer regarding this fact must be on the front page of the prospectus.

Real Estate Investment Trust (REIT)

a company that manages a portfolio of real estate, mortgages or both to earn profits for shareholders NOT an investment company trade on exchanges & OTC not considered to be direct participation programs (DPPs) An owner of REITs holds an undivided interest in a pool of real-estate investments

In registering with the SEC, an investment company must provide...

any plans the company has for investing in real estate or commodities. any plans the company has for concentrating investments in a single industry. the business experience of each officer and director during the preceding five years. semiannual reports to shareholders, one of which must be audited type of management company it intends to be

Hedge funds:

are not required to register with the SEC and are not covered under the Investment Company Act of 1940. Only available to accredited investors, therefore, not available to small investors. There is no exemption for making a suitable recommendation to any investor.

Hedge Fund

are not required to register with the SEC and are not covered under the Investment Company Act of 1940. Hedge funds are only available to accredited investors, therefore, not available to small investors. There is no exemption for making a suitable recommendation to any investor.

An open-end investment company may:

borrow against fund assets Open-end investment companies may borrow against assets, provided their asset-to-debt ratio is never less than three to one (300%). The only security they may issue is redeemable common stock. Since they are redeemable securities, they do not trade in the secondary markets.

All firms are allowed to:

borrow funds from and lend funds to third parties.

Which investment company has no provision for redemption of outstanding shares?

closed-end company (doesn't redeem the shares it issues)

In reviewing investment companies, you notice one that has a net asset value (NAV) greater than its asking price. The investment company must be:

closed-end management company

Management investment company is either

closed-end or open-end

Under the Investment Company Act of 1940, what must register with the SEC as investment companies?

face-amount certificate companies unit investment trusts open- and closed-end management companies separate accounts of insurance companies used to fund variable annuity and variable life contracts

A majority vote of the outstanding shares of an open-end investment company is needed to approve a change:

from an open-end company to a closed-end company. in the objectives of the fund.

Hedge funds are indirectly available to ordinary investors through mutual funds called

funds of hedge funds

Series 6 rep can sell

funds of hedge funds

A holder of mutual fund shares:

has a right to vote on vacancy on BOD receives regular reports on the fund's expenses no less frequently than semi-annually. will be able to redeem as many of those shares as desired at the next computed NAV (not POP)

Balanced Fund

invests in a balance of bonds and common and preferred stocks.

The capital structure of an open-end investment company might include:

issuing one class of security with limited bank borrowing

An investment company must register with the SEC and, in doing so, must provide all of the following information EXCEPT:

its past performance

Generally speaking, a mutual fund may

lend money lend securities borrow money purchase call option contracts

As written in the Investment Company Act of 1940, investment companies must do all of the following

limit the membership of their board of directors to a maximum of 60% interested persons. state and adhere to their investment objectives. have a minimum of $100,000 in net capital before embarking on a public offering.

If your client wishes to invest $50,000 in a portfolio of mutual funds, payment may be made via each of the following

liquidation of shares of stock held in the customer's account a personal check wire transfer from the client's savings account (Credit may not be extended on the purchase of mutual fund shares.)

In the sale of open-end investment company shares, the prospectus:

must be delivered to the client either before or during the sales solicitation

Specialized funds (sector funds)

must have at least 20% of assets invested in a particular sector of the economy or geographic area can still be diversified if it meets the 75-5-10 test

Hedge Funds and mutual funds are similar in that they both:

offer professional investment management

It is prohibited for an investment adviser to purchase securities for a mutual fund portfolio:

on margin Mutual funds may not purchase securities on margin because, in the event of a margin call, they have no recourse to investors' funds. However, a fund is not prohibited from buying securities that meet the investment objective of the fund, which could include low-rated corporate bonds and municipal bonds.

Open-end investment company

only issues one class of security and that's common stock conduct a continuous primary offering of common stock Mutual fund shares do not trade in the secondary market

Under the Investment Company Act of 1940, the term redeemable security could be used when referring to the securities issued by

open-end investment companies. unit investment trusts.

The investment policy of a mutual fund can be changed by a majority vote of:

outstanding shares (NOT a majority vote of shareholders.)

SEC prohibits mutual funds from

participating in joint investment or trading accounts selling uncovered call options (naked) selling securities short purchasing securities on margin

A series 6 limited registered representative may only sell closed-end investment company securities in the ____

primary market, not the secondary market!!

Securities sold in the secondary market do not have a

prospectus delivery requirement

The shares an open-end investment company sells are

redeemable securities

The Investment Company Act of 1940 requires ...

registration of the company with the SEC a minimum initial net worth of $100,000, a specifically defined investment objective whether the company intends to qualify as a diversified or non-diversified investment company. The asset-to-debt ratio must be at least 3:1.

Short selling

securities industry practice that involves selling shares that are not owned in a short sale, investors borrow and sell high, then buy back low

Leverage ETF

seek to deliver multiples of the performance or benchmark they track

Inverse ETF

seek to deliver the opposite of the performance of the index or benchmark they track

All of the following purchases are permitted in a mutual fund's portfolio:

shares of other mutual funds. junk bonds. index options.

All of the following purchases are permitted in a mutual fund's portfolio EXCEPT:

stock on margin

Closed-end pricing determined by

supply and demand

To register new securities, an investment company must:

supply detailed information about itself to the SEC. supply detailed information about the new securities to the SEC.

Under the Investment Company Act of 1940, the SEC may prohibit mutual funds from:

the SEC may prohibit mutual funds from purchasing securities on margin or selling portfolio securities short

Breakpoint schedules are set by

the board

A company must register with the SEC if

the company is in the business of investing in, reinvesting in, owning, holding or trading securities; OR 40% or more of the company's assets are invested in securities

changes to the portfolio, within the scope of the funds' investment policy, are decisions of

the portfolio manager

Since a mutual fund is considered a continuous primary offering, SEC rules prohibit

the purchase of mutual funds on margin

Management Companies

trade the securities in the investment portfolio to achieve the investment objectives of the company, and which are subclassified into open-end and closed-end companies.

UIT portfolios are usually not ___, they are fixed trusts

traded

Provided that it has shareholder approval, an open-end investment company may:

underwrite the securities of another issuer. Borrowing and lending money and securities and underwriting the securities of another issuer may be done with a majority vote of the outstanding shares. Mutual funds may not sell securities short.

Direct Participation Programs

unique form of business that raises money to invest in real estate, oil and gas, equipment leasing, etc most common= limited partnership A series 6 cannot facilitate any transaction involving DPPs

The forwards pricing rule requires

use of the next calculated NAV, which may be available on the day the redemption request was received.