Chapter 12.2 Flashcards Preview

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Flashcards in Chapter 12.2 Deck (14):
1

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.

2

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

40%

3

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

4

What can an investment company do?

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

5

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

6

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.

7

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).

8

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

9

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.

10

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

11

Who can sell open-end investment companies?

Series 6, Series 62, Series 7

12

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.

13

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

A current prospectus

14

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.