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.
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