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Flashcards in Chapter 12.4 Deck (23):

Selling Dividends

Selling dividends is prohibited. Selling dividends is using an upcoming dividend as an inducement to purchase shares.


When must an investment company make payment for shares tendered to it or its agent

Within 7 calendar days of tender


Breakpoint sales

It is contrary to just and equitable principles of trade to sell an amount of a fund just below the breakpoint. A breakpoint is a reduced sales charge applied according to a quantity disclose schedule disclosed in the fund's prospectus


Letter of intent

Allows an investor a 13 month period to reach a breakpoint discount amount. Sales charges are deducted from each payment as set in the letter of intent.


Who is not eligible to sign a letter of intent?

Partnerships, investment clubs, or any group of persons pooling funds.


Rights of accumulation

An existing shareholder is entitled to a reduced sales charge when the accounts of spouses, children, IRAs, 401ks, 529s, and living trusts can be combined in order to obtain discounts on new purchases. When the total value of already held shares plus the additional amount to be invested equals or exceeds the sales charge breakpoint, the reduced sales charge is applicable.
-Fixed annuities or a corporate pension fund would not qualify for ROA.
-Accumulation plans are plans where the investors usually make monthly or quarterly payments


Dual purpose fund

Only closed-end and issues 2 classes of shares. It issues:
-Capital shares: which receive all of the appreciation on the securities in the portfolio.
-Income shares: which receive all of the dividends and interest on the securities in the portfolio.


When must a fund underwriter notify FINRA if payment is not received from another FINRA member in connection with wire orders on shares of the fund?

Within 10 business days


Affiliated person

Means a person who directly or indirectly owns, controls, or holds 5% or more of the outstanding voting securities of the fund or any director, partner, co-partner, or member of an advisory board


What is the maximum single term to which a director of an investment company be elected?

5 Years


12b-1 Plans

Allow funds to pay distribution costs out of the fund's assets for marketing the fund's shares, including advertising, commissions, printing and mailing of prospectuses, and/or sales literature.
**12b-1 plans can be terminated at any time through a majority vote of either shareholders or the uninterested board of directors


Conversion or switching privilege

Some investment companies allow investors to exchange shares of one fund for those of another fund under the same management at NAV. This switch may involve a nominal charge for conversion but does not require additional sales charges. This switch may also results in a tax gain or loss to the investor, because the IRS classifies it as a sale and a purchase.


Deferred sales charges or contingent funds

Known as "back-end loaded funds." A back-end load occurs when a sales load is imposed if fund shares are redeemed prior to a certain number of years passing. After a certain number of years, little or no sales load is imposed upon redemption. Contingent deferred sales charges must be disclosed on the front of the customer's purchase confirmation.


Registration as in investment adviser

Required to be a fund manager under the investment advisors act of 1940. It is required so that the manager may be compensated for giving advice, such as portfolio management or hourly fee.


Performance based fees

Investment advisory contracts may provide for fees based on performance for clients with $2,000,000 net worth or $1,000,000 under management with the advisor.
-Defined periods used to measure performance for compensation must be set forth in the contract and the performance must be compared to an established appropriate securities index.
-The formulas for determining when increases and decreases in fees shall occur must be disclosed


How much can RRs and member firms allowed to receive in gifts from mutual fund wholesalers?

$100 per year, per person. Occasional dinners would be allowed.


Mutual fund switching

It is usually a violation for RRs to recommend that customers "switch" from one family of funds to another without an investment justification. The switch needlessly imposes commissions and a tax liability on the customers. Remember mutual fund investing should be a long-term commitment - not short-term


When can a member compensate it's salespeople and managers based on "Total Sales" of investment company shares?

If the compensation does not favor or disfavor sales of shares of any particular investment company


What happens if an investor tenders a mutual fund or variable annuity for redemption within 7 business days after purchase:

The B/D must refund to the underwriter, it's full commission and the underwriter must refund the sales load to the fund or variable annuity


What are sales charges on variable annuities based on?

The total amount paid into the separate account. Most variable annuities charges a sales charge but it is not a front-end sales load.


When must applications for variable annuities be forwarded to the issuer?



Mutual fund sales literature permits what?

-Hypothetical illustrations, statements of fund managers, average rate of return, and expense ratios


Mutual fund sales literature does not permit what?

Projections of performance