Chapter 17: Analysis of managed and structured products Flashcards

Question

How to calculate NAVPS?

Answer 1

= (Total Assets - Total Liabilities) / total number of Shares or Unites outstanding.

Answer 2

- Order from investor -> mutual fund representative -> transmit to the principal office of the mutual fund on the same day. - Payment for purchases is usually made in advance, payment for redeemed must be made within 2 business days after the NAVPS is determined.

Answer 3

- varies but at least once a week. (most large fund calculate every day after market close). - If a fund compute NAVPS less frequently than daily, sales and redemptions are made at the next valuation date. - If computed monthly, redemption must be submitted up to 10 days before the computation. - One exception to these rules is real estate funds. They must compute at least once a year, although most funds make the calculation on a quarterly basis

Answer 4

- Type of fund - Its sponsor and method of distribution - The amount of money being invested - The method of purchase (lump sum vs contractual purchases spread out over a period of time).

Answer 5

- Vary from firm to firm because they are set by the distributors -> negotiable. - Usually % of purchase price, % reduces as the amount of purchase increases. - Front-end load takes fee directly from the actual amount invested -> the offering price > NAVPS. Regulations require that front-end loads be disclosed in the prospectus, both as a percentage of the purchase amount and as a percentage of the net amount invested.

Answer 6

- set by dealer and are not negotiable. - the fee might base on the original contribution to the fund or on the asset value at the time of redemption. - In most cases, the charges decrease the longer the investor holds the fund.

Answer 7

no sale charges however, some self-directed brokers levy (thu phí) modest administration fees. The funds also charge some management fees and other administrative fees.

Answer 8

The Ontario Securities Commission and the Department of Innovation, Science and Economic Development Canada (ISED)

Answer 9

offering price = NAVPS / (100% - sale charge %)

Answer 10

- The annual trailer fee the fund pay to sales representative as long as the client holds the funds. (provides ongoing services to investors, including investment advice, tax guidance, and financial statements) - Usually paid out of the fund manager's management fee.

Answer 11

- Some funds charge set-up fee - Some no-load funds charge early redemption fee if redeem within 90 days of the initial purchase. Could be flat fee of $100 or 2%.

Answer 12

- Fee apply when exchange units of one fund for another in the same family or fund company. - Some fund companies allow unlimited free switches between funds, others allow a certain number of switches before fee are applied. - Negotiable fee to maximum 2% of the amount being transferred, some just waive this fee. - Not apply in case the fund mergers or terminate. In such cases, it is allowed to transfer to existing fund or withdraw the cash value.

Answer 13

depends on type of fund, particularly on the level of service required to manage the fund.

Answer 14

- Money market funds: low (0.5%-1%) - Equity funds: higher (except index funds), ranging from 2-3% or higher - Index funds: usually lower than equity funds

Answer 15

in the prospectus. Fee can be based on the average daily net asset. (not great because reward not on the performance of the fund)

Answer 16

- Interest charge - Taxes, audit, and legal fees - Safekeeping and custodial fees - Provision of information to share or unitholders.

Answer 17

- represents the total of all management fees and other expenses charged to a fund by a percentage of the fund's average net asset value for the year. - Trading or brokerage costs are excluded from the MER because they are included in the cost of purchasing or selling portfolio assets.

Answer 18

MER = Aggregate fees and expenses payable during the year / average net asset value for the year *100%

Answer 19

No, it calculated after deducting MER. The NAVPS also calculated after the management fee has been deducted.

Answer 20

- type of fee-based fund NOT commission-based with a lower MER. - Client is charged a % of the assets under management, rather than a commission or fee for each transaction. - Reduce the double charge (in the past, client were charged an MER that included compensation to the sale representative)

Answer 21

personal trust, disclosure, and regulation.

Answer 22

1. Duty of care 2. Integrity 3. Professionalism 4. Compliance 5. Confidentiality

Answer 23

1. You must conduct due diligence before providing advice or recommending products. 2. Must understand your clients' needs, goals, and risk tolerance 3. You must learn about the products you sell and make sure your recommendations suit each client's situation

Answer 24

1. You must act in an honest, fair, and trustworthy manner in all dealings with clients, employers, colleagues, and the public. 2. You must avoid situations where your interests conflict with those of your clients

Answer 25

1. You must conduct business in a professional manner that reflects well on yourself, your employer, and your profession. 2. You should encourage others to do the same 3. You should also strive to maintain and improve your professional knowledge

Answer 26

You must conduct yourself in accordance with applicable securities legislation and industry rules

Answer 27

You must hold client information in the strictest confidence.

Answer 28

How the funds are sold (not regulate the funds themselves)

Answer 29

1. The Autorite des marches financiers (overseeing the operation of fund companies within the province) 2. The Chambre de la securite financiere (setting and monitoring continuing education requirements and for enforcing a code of ethics). A co-operative agreement currently between MFDA and the QC regulatory organizations will help to avoid regulatory duplication.

Answer 30

1. National instrument 81-101 (deals with mutual fund prospectus and Fund facts disclosure) -> 2. National instrument 81-102 (requirements and guidelines for distribution and advertising of mutual fund)

Answer 31

Most mutual funds are qualified for sale in all provinces and are therefore registered for sale in each jurisdiction. With certain exceptions, the funds must annually file a full or simplified prospectus, which must be acceptable to the provincial securities administrator. Most funds, particularly the smaller ones, file a prospectus or a simplified prospectus only in provinces where sales prospects appear favourable. Selling a fund’s securities to residents of provinces in which the fund has not been qualified is prohibited. Therefore, mutual fund representatives must deal only in those funds registered in their own jurisdiction

Answer 32

1. A fund Facts document 2. A simplified prospectus 3. The AIF 4. The annual audited statements or interim (tam thoi) unaudited financial statements 5. Other information required by the province or territory where the fund is distributed, such as material change reports and information cirulars. - > NI 81-101 requires only that the Fund Facts document be delivered to investors before they purchase a mutual fund. However, an investor may also request delivery of the simplified prospectus, the AIF, or the financial statements. In such case, the distributor must provide all those documents as well.

Answer 33

- To give key information about a mutual fund. - Written in plain language and must consist of no more than 2 double-sided pages. - Must be presented in an easily understood format (universal standard) -> investors can compare data consistently. - Purpose: provide timely information that may affect the investors' decision.

Answer 34

Yes. For each class or series of mutual fund. Maybe delivered in person, by email, or through other means.

Answer 35

- Right to withdraw from the purchase within 48 hours after confirmation of the purchase is received. - Depending on the province, they maintain their right of damages or to rescind (huy bo) the purchase if the Fund Fact document, simplified prospectus, AIF, or financial statement contain a misrepresentation. - Each province specifies a time limit within which investors must act to claim the right to damages or recission. - Investors can request a compy of the simplified prospectus at no charge

Answer 36

1. Section 1: Fund information (Introduction, quick facts, investment of the fund, Risks, past performance, suitability, impact of the income taxes on investor returns) 2. Section 2: Costs, Rights, and other information (Cost of buying, owning, and selling the fund, statement of rights, more information about the fund)

Answer 37

1. Introduction (document date, fund name, manager name, and name of class or series if any) 2. quick facts (key background points like created date, total value, MER, identity of manager, expected frequency and date of distributions, minimum investment) 3. investment of the fund (provide what the fund invest in, list of top 10 investments and % of net asset value for each invesment, investment mix and a breakdown of fund's invesment exposure) 4. Risks (rates the fund's risk on a scale from low, low-to-medium, medium, medium-to-high, and high. remind investors the funds does not guarantee a return and they may not get back the money invested) 5. past performance (Chart showing returns after expenses deducted over 10 years, table showing the best and worst returns for the fund in a 3-month period the last 10 years, an average return calculation based on 1000$ investment 10 years ago and its worth today, together with the percentage annual compound return during this period) 6. Suitability (who is this fund for?) 7. Impact of the income taxes on investor returns

Answer 38

1. Cost of Buying, Owning, and Selling the Fund (sales charges, fund expenses which may include MER and TER, other fees) 2. Statement of Rights (what can investors do if they change their mind, right, and options within a defined period including right to cancel a purchase within 48 hours) 3. More information about the fund (contact information so investor can contact to get more information)

Answer 39

- A mutual fund prospectus is normally shorter and simpler than a typical prospectus for a new issue of common shares. Under the simplified prospectus system, the issuer must abide by the same laws and deadlines that apply under the full prospectus system. As well, the buyer is entitled to the same rights and privileges. - Must be filed with the securities commission annually, but need not be updated annually unless there is a change in the affairs of the mutual fund. - Must be written in plain language and presented in an easy-to-understand format. - > For further purchases of the same fund, it is not necessary to provide the Fund Facts document or simplified prospectus again unless it has been amended or renewed.

Answer 40

1. Part A: introductory information about the mutual fund, information applicable to funds managed by the mutual fund. 2. Part B: detailed information about the specific mutua fund.

Answer 41

yes. But Part A of each prospectus must be substantially similar, and the funds must belong to the same mutual fund family, administered by the same entities, and operated in the same manner.

Answer 42

* Purpose of the prospectus and identifying the other information documents that the fund must make available to investors * Name and basic information about the issuer, including a description of the issuer’s business * Risk factors and description of the securities being offered * Method used to set the price of the securities being sold or redeemed, and disclosure of any sales charges Method of distribution * Statement of who has the responsibility for management, distribution, and portfolio management * Fees paid to dealers * Statement of management fees and other expenses, including the annual MER for the past five years * The fund’s investment objectives and practices * Information on the amount of dividends or other distributions paid by the issuer * In general terms, the income tax consequences to individuals holding an investment in the fund * Notice of any legal proceedings material to the issuer * Identity of the auditors, transfer agent, and registrar * Statement of the purchaser’s statutory rights * Summary of the fees, charges, and expenses payable by the security holder

Answer 43

Must be amended concurrently with the Fund Facts document and investors must receive a copy of the amendment.

Answer 44

Funds that invest in real property

Answer 45

- Annual audited financial statements must be made available to the securities commission (or commissions) where the fund is registered on or before the deadline set by the commission. These statements must be made available to new investors. Financial statements that are unaudited at the end of six months after the fund year-end must also be submitted to the securities commissions, usually within 60 days after the reporting date. These statements must also be made available to new investors.

Answer 46

• Significant holdings in other issuers • The tax status of the issuer • Directors, officers, and trustees of the fund and their indebtedness and remuneration • Associated persons, the principal holders of securities, and the interests of management and others in material transactions • The particulars of any material contracts entered into by the issuer

Answer 47

With the securities administrators in all provinces in which they operate. They also have to inform within 5 business days of any important change in personal circumstances (address change, bankruptcy)

Answer 48

A mutual funds course such as the Canadian Securities Institute's Canadian Securities Course, the Investment Funds in Canada course, or another qualifying education program.

Answer 49

They can file an application (initial and continuing registration) electronically with the National Registration Database (NRD) with the appropriate fee. In QC, the representative must register with the Autorite des marches financiers

Answer 50

• Must be employed by the distribution company. • Not permitted to carry on other forms of employment without the prior approval of the appropriate securities administrators and any industry associations of which your firm is a member. However, many provinces have issued policy statements permitting persons to be dually registered as mutual fund representatives and life agents. • Must complete a detailed report about your past businesses, employment, and conduct and submit it to a police review. The report must include the following information: - Any companies with which you have been associated in certain capacities. - Any action against you regarding any government license to deal in securities - Any action against you regarding any government license to deal with the public in any other capacity requiring registration - Any disciplinary action regarding approval by any securities commission or similar professional body - Any past criminal convictions or current charges or indictments - Any bankruptcies or proposals to creditors - Any civil judgment or garnishment

Answer 51

within 5 business days (or 10 days in QC)

Answer 52

Registration is automatically suspended. The employer must notify the provincial securities administrator of the termination of employment and in most provinces, the reason for termination.

Answer 53

notice in writing must be received by the securiteis administrator form another registered dealer of the employment of the representative by that other dealer. Must be approved by the securities administrator.

Answer 54

The registration lapses (mất hiệu lực) and the representative must reapply for registration. The permitted period is 30 days in most provinces and six months in Quebec

Answer 55

• Purchases of no more than 10% of the total securities of a single issuer or more than 10% of a company’s voting stock • No purchases of shares in the manager’s own company (e.g., a fund owned by a bank cannot buy shares in that bank) • Purchases of no more than 10% of the net assets in the securities of a single issuer or 20% of net assets in companies engaged in the same industry (except specialty funds) • No purchases of the shares of other mutual funds, except in certain cases where no duplication of management fees occurs • No borrowing for leverage purposes • No margin buying or short selling • No commodity or commodity futures purchases • Limitations on the percentage of holdings in illiquid securities, such as those sold through private placement and unlisted stocks

Answer 56

Managers are subject to strict regulatory controls about that. But they are allowed to incorporate specific permitted derivatives as part of their portfolios to hedge against risk and to facilitate market entry and exit. But not for speculate with investor's money.

Answer 57

* The total amount that can be invested in derivatives (10% maximum as a percentage of the net assets of a fund) * How derivative positions must be hedged by the assets of the fund (based on daily portfolio valuations) * Expiry dates on different option products * Permitted terms * The qualifications required by portfolio advisors to trade these instruments

Answer 58

in a mutual fund’s simplified prospectus. The disclosure must explain how they will be used to achieve the mutual fund’s investment and risk objectives. It must also describe the limits of and risks involved with the planned use of derivatives

Answer 59

1. Quoting a future price 2. Offer to repurchase ( in an attempt to insulate (cách ly) your clients from downturns in price) 3. Selling without a licence (You must be licensed in each province where you intend to sell mutual funds) 4. Advertising the registration (your register with securities autority) 5. Promising a future price 6. Sales made from on e province into another province or country (unless you are registered in the investor's province) 7. Sale of unqualified securities (. It is forbidden to sell mutual funds that have not been approved by the provincial regulator)

Answer 60

- When an investor places an order to buy or sell a mutual fund, the price per unit or share the investor will pay or receive is not known. The purchase or sale price is based on the NAVPS on the next regular valuation date. - The NAVPS (current day or the next day) depends on the order-time of day on which the order is entered, often before 4:00 p.m. ET at the end of the current business day. Orders received after 4:00 p.m. ET are priced at the end of the next business day. -> It is unlawful for a representative to backdate an order in an attempt to buy or sell shares or units at a previous day’s price.

Answer 61

- Fund managers may not provide money or goods to a distributor firm or its representatives in support of client appreciation. - The commission rate on a fund cannot be changed unless the simplified prospectus for that fund is renewed. - Fund managers may not provide co-operative funds for practices that are considered general marketing expenses, such as general client mailings. - Fund managers may not financially subsidize skill enhancement courses such as courses in effective communication or improving presentation skills development. - Fund managers may not provide non-monetary benefits of any significant value to a distributor firm or its representatives. Occasional rewards of minimal value may be permitted if they are unlikely to influence the behavior of the recipient (e.g., pens, t-shirts, or golf balls)

Answer 62

Sales communications can include any of the following information: • A description of the fund’s characteristics • A comparison between funds under common management or funds with similar investment objectives • A comparison of the fund to an index • Performance information (which must follow very specific rules with respect to how performance is calculated and presented) • Advertising that the fund is a no-load fund

Answer 63

you should always consult with your branch manager or | compliance officer. Their approval is needed before you send out any sales communications

Answer 64

- “full, true, and plain disclosure” -> include a clear explanation of the method by which the rate of return was calculated. (The method must be in accordance with standard industry practices) - For client accounts < 12 months, the rate of return shown must be the total rate of return since the account was opened at the mutual fund dealer. - Any client communication that contains, or makes reference to, a rate of return has been reviewed and approved by appropriate supervisory staff at the mutual fund dealer

Answer 65

• The market value of the assets held in the client account at the beginning and end of the 12-month period covered by the report • The total assets deposited and withdrawn during the 12-month period and since opening the account • The annual change in the market value of the client’s account for the 12-month period • The cumulative change in the market value of the account since the account was opened • Annualized total percentage return using a money-weighted methodology for periods of one, three, five and 10 years, as well as since inception.

Answer 66

Not less than yearly, and the report must cover, at a minimum, a 12-month period. Some mutual fund dealers elect to report on performance more frequently than the required minimum.

Answer 67

the Know Your Client (KYC) rule.

Answer 68

• Learn the essential facts about the client before opening an account, including age, net worth, earnings, and investment objectives. • Learn the essential facts relevant to every order accepted and make sure that it is within the bounds of good business practice. • Learn the circumstances behind each transaction. • Make sure that your recommendations are appropriate for the client, based on factors such as the client’s financial situation, investment knowledge, investment objectives, and risk tolerance. • Maintain your client’s account information and update it regularly as circumstances change

Answer 69

- To make sure all orders are suitable for the client, order forms may contain a KYC section. In some cases, the KYC form is a separate document that must be completed by the purchaser. - For clients with multiple accounts, you should obtain separate KYC information for each account. The investment objectives, risk tolerance, and investment horizon of each account may differ.

Answer 70

then you cannot process the transaction.

Answer 71

* The client transfers their account to the dealer. * The dealer or mutual fund representative becomes aware of a material change in the KYC information. * A different mutual fund representative has taken over the client’s account.

Answer 72

- Mutual fund dealers and their sales representatives maintain an adequate record of each order and of all instructions, given or received, for the purchase or sale of mutual funds (No matter if the transaction is executed). - Must be reviewed within a reasonable period. - Must maintain documented evidence of all suitability reviews and any follow-up action taken as a result of a review. - Under MFDA Policy No.2, Minimum Standards for Account Supervision, that a supervisor, branch manager, or branch compliance officer also perform a suitability review of the investments in a client’s account. They must maintain evidence of that review and any follow-up action taken as a result of their review. - The suitability requirement applies to recommendations you make to a client, as well as to unsolicited orders. (Unsolicited orders are orders for mutual funds that have not been recommended by the representative; the request comes from the clients). - > Before accepting an unsolicited order, you must verify that the purchase is reasonable given the client’s investment objectives, risk tolerance, investment horizon, and investment knowledge.

Answer 73

You must advise the client of its unsuitability. If the client wishes to go against your advice, you must maintain the following details in the record of the order: • Evidence that the transaction was unsolicited • Proof that you performed a suitability review • Clear indication that you advised the client that the proposed transaction was unsuitable

Answer 74

You should consult with your branch manager or compliance officer. Mutual fund dealers must have written procedures for dealing with unsuitable, unsolicited orders, and there should be no obligation to accept an unsuitable purchase order from a client.

Answer 75

- the features of the products being recommended to clients. You must fully understand the characteristics of a fund, such as level of risk and investment objectives, before you can make suitable recommendations to your clients.

Answer 76

- Anyone has a right to trade over the client’s account ( Investment experience and knowledge) - Anyone with a financial interest in the account. (joint account holders and beneficiaries of trusts or trust accounts for children) - A trustee has trading authority over the trust. (the trustee’s investment experience and knowledge)

Answer 77

When they aware of a material change in the client’s circumstances. At least once a year, the dealer must request, in writing, that each client notify the dealer of any material change in his or her circumstances.

Answer 78

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Answer 79

Before any client’s account is opened.

Answer 80

- Must have processes and procedures for this purpose, and it must provide appropriate training to all its employees and representatives. - The firm must also appoint an AML compliance officer.

Answer 81

- Verify the identity of every person authorized to provide instructions regarding a client’s account or who has a beneficial interest in that account. - Other procedures involve the freezing of accounts of individuals and organizations that appear on a FINTRAC-published list, the reporting of suspicious transactions and attempted transactions, and client identification requirements that apply in special circumstances. - Cash transactions (or a series of transactions) in a single account of $10,000 or more on any given day must be reported to the dealer’s compliance officer.

Answer 82

The accurate completion of documentation when new accounts are opened.

Answer 83

may be provided in a stand-alone document or it may be included in the account opening documentation. The documentation should include any information that a reasonable client would consider important about the relationship between the client and the mutual fund dealer and its sales representative

Answer 84

1. The nature or type of client account. 2. The products and services offered 3. The products and services offered 4. The procedures regarding the handling of cash and cheques 5. The dealer's obligation to the client 6. The circumstances in which a suitability review is needed. 7. The terms with with respect to KYC information 8. The terms of account reporting 9. The nature of compensation paid to the dealer

Answer 85

- should be approved by the head or branch office (or both). - Mutual fund dealers must also maintain evidence that relationship disclosure has been provided to the client. - The disclosure information can be signed by the client and incorporated into account documentation, in which case a copy of the signed account documentation is sufficient evidence. - If the dealer chooses to provide relationship disclosure as a stand-alone document, it may ask the client for signed acknowledgment of receipt as evidence that it was delivered. Copies of the disclosure documents may be maintained in the client’s file - Whenever a significant change occurs in the relationship disclosure information, the dealer must take reasonable steps to notify the client of the change as soon as possible

Answer 86

- Is to establish the client’s account in accordance with both securities regulation and the mutual fund dealer’s policies and procedures. Upon accepting a new client account, it must be reviewed and approved as soon as possible by the person responsible for approving new client accounts at the firm.

Answer 87

the client’s full legal name and address is confirmed.

Answer 88

A New Account Application Form (NAAF) which includes the necessary KYC information (If this information is not included in the NAAF, it must be captured on a separate form). Include: the client’s personal information, financial information, risk tolerance, and investment objectives. The NAAF must also disclose whether the client is an insider or significant shareholder of a public corporation.

Answer 89

* A change in risk tolerance level * A new investment time horizon * A new investment objective or objectives * A material change in assets or income

Answer 90

- A client signature, or other methods.

Answer 91

the date on which the client informs the representative of any changes to the KYC information must be recorded and maintained.

Answer 92

1. Control of registrant (they can only sell through a corporation that it controls directly or indirectly, or with which it is affiliated and must be registered) 2. Registration of employees (Only registered mutual fund sales representatives can sell mutual funds) 3. Dual employment (in financial services and mutual fund representatives of the dealers) 4. Conflicts of interest (can arise because of dual employment) 5. In-house funds ( the securities sold through the FI must be issued by a mutual fund sponsored by the FI. Otherwise, need to consult the relevant securities regulator) 6. Proficiency (employees must satisfy normal proficiency requirements) 7. Premises (Cơ sở) and disclosure

Answer 93

1. some FI employees may be compensated only on the basis of their sales of mutual fund securities. -> motivated to sell mutual funds to a client even when other products are more suitable. 2. Even on a salary-only basis. (a representative with the authority to approve a client loan may do so to fund the client’s mutual fund purchase).

Answer 94

- Must have supervisory rules regarding potential conflicts arising from dual employment. The rules must be approved by the relevant provincial securities administrator unless such rules make the following provisions: • Dually employed representatives are paid salary only, and one of the following two requirements also applies: - A dually employed representative cannot make loans to finance purchases of mutual fund securities sold by that representative. - Any loan made by a dually employed representative to finance the purchase of mutual fund securities sold by that representative must be approved by a senior lending officer of the FI.

Answer 95

- The dealer must carry on its business in such a way that it is made clear to clients that the business of the dealer and the FI are separate and distinct. (Separate premises within a branch are not required) -> clear to clients of the FI that the mutual funds they purchased from a separate entity. Clients are further informed that those mutual funds are not guaranteed by the financial institution, are not covered by deposit insurance (e.g., the Canada Deposit Insurance Corporation), and may fluctuate in terms of value and returns. This disclosure must be printed in boldface type and must appear on the following documents: • Fund prospectuses: The disclosure must be contained in the body of prospectuses; on renewals, the disclosure must appear on the face page. • Subscription or order forms: If these forms are used, disclosure must appear on them. (Order forms may not be required for processing telephone transactions.) • Confirmation slips • Promotional material: The disclosure must appear on all promotional material appearing or handed out in any branch of the FI. - The FI may lend money to a client to facilitate the purchase of mutual fund securities sold by the dealer. The dealer must disclose to the client that the full amount of the loan must be repaid, even if the value of the mutual fund securities (purchased with the loan) declines.