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Flashcards in Chapter 12.2 Deck (14):

Registration of investment companies

Any investment company which engages in interstate commerce must register with the SEC, under the investment company act of 1940. The investment company must have a minimum net worth of $100,000.


What percentage of the board of directors of the funds must be independent directors?



Investment companies are prohibited from the following activities:

-Purchasing any security in a margin account
-Participating in a joint trading account
-Selling a security short


What can an investment company do?

-Buy put and call options
-Trade securities on a short term basis
-Borrow and lend money


Capital gains distributions on investment companies

-Are derived from realized long-term gains on the portfolio
-Are always long-term to the investor regardless of how long shares have been held
-May be taken in the form of cash or shares
-Are taxable each year to the investor, regardless of how they are taken
-Must be paid out 100% to investors, at least annually
-Are always reinvested at NAV with No sales load


Investment income or Dividends of investment companies

-Are derived from dividends, interest and short term gains on the portfolio
-Are paid to shareholders after the fund has deducted it's operating expenses
-Are always ordinary income to the investor
-Funds which pay out at least 90% of the net investment income qualify as "Regulated investment companies", which means they are exempt from paying tax on dividends distributed - but are taxed on dividends not distributed. This is known as the "Conduit" or "Pipeline" theory.


Form 1099

Annually, investors will receive a 1099 showing every distribution by a registered investment company and will also show the source of the distribution(capital gain or dividend).


The investment policy

Drafted by the board of directors of the fund and executed by the portfolio manager of the fund. It outlines the fund's investment goals and objectives.
-Changes to the investment policy must be approved by the board of directors and a majority of outstanding voting securities.
-Renewal of the portfolio manager's investment advisory contract with the fund requires either shareholder or director approval


Section 35 of the 1940 Act

Addresses unlawful representations by mutual fund companies. Mutual funds may not make misrepresentations such as:
-Stating that the U.S. government approves, sponsors or recommends a fund
-Stating that they are insured by the FDIC, a bank or any insured depository institution
-Stating that a fund is not what it truly represents, for example, claiming that a fund is a corporate bond fund when it's portfolio is predominantly comprised of treasury securities, municipal bonds, or money market funds.


Shareholder rights include:

-To vote for the board of directors
-To vote to change the investment objective
-To vote annually on the investment objective
-To receive semi-annual and annual reports
-To terminate a 12b-1 Plan


Who can sell open-end investment companies?

Series 6, Series 62, Series 7


Who can sell closed-end investment companies?

Series 7, Series 62.

**A series 6 licensed person would only be allowed to sell the shares if it was a new issue of the closed-end company.


Any offer of mutual fund shares must be preceded by or accompanied by what?

A current prospectus


Investment company act of 1940. The following rules apply to investment companies that are registered with the SEC under the 1940 ACT:

-Investment companies must:
-File complete financial statements with the SEC when requested to do so by the SEC and
-Send financial information to shareholders semi-annually
-Mutual funds must continuously offer a prospectus which must be updated at least annually. No prospectus may be used if the information is more than 16 months old. Prediction and projections are prohibited on investment companies.
-Investment companies must have a minimum net worth of $100,000 before they can be issued to the public.
-40% of the board of directors must be non-affiliated
-Cash and securities must be held by a custodian, which is usually a bank
-When purchasing fund shares, a customer must pay within 2 business days after purchase. After redemption of shares, customers must be paid within 7 calendar days.
-The investment company act also regulates the portfolio of variable annuities.