CHAPTER 4 Flashcards
(37 cards)
Investment Company Act of 1940 Definition of Investment Companies
Face Amount Certificates
Unit Investment Trust
Management Companies (ETFs, mutual funds, separate accounts)
Face Amount Certificates
Contract between an investor and issuer where issuer guarantees payments of a stated amount at a future date. Investor agrees to pay the issuer a set amount in lump sum or periodic installments.
NOT managed
Does NOT trade in secondary market
UITs
No board
Create portfolio to meet objective
Sell redeemable units
Undivided interest
Fixed portfolio
Fixed date
Debt based will end when last bond matures
Equity will end at certain date it will be liquidated
No management fees
Shares redeemable at specific intervals
NOT managed
Does NOT trade in secondary market
Management Investment Company
Closed end
Open end
ETFs
Separate Accounts
Closed End
Raise capital by issuing common stock, can issue bonds or preferred stock
IPO releases fixed numbers of shares with SEC
Fund is closed to investors after selling
May choose to be closed if investment has limited shares
Publicly traded on secondary market
Supply and demand
May trade above or below NAV
Open End
Mutual Funds
Common stock ONLY
NO bonds or preferred
May borrow
No specific number of shares
Register open offering with SEC
Continuous offering and can raise unlimited amount of capital
Funds redeemed at NAV through issuer
Purchase and sale of securities does not change NAV
Priced at end of day
Issue full or partial shares
Can buy bonds or preferred
Structure of Investment Companies and management companies that issue common stock
Not traded in secondary
Purchase and redeemed through fund
Once redeemed, shares are cancelled
Fund guarantees you can redeem so very marketable and liquid
Undivided interest in fund
Generates dividends and cap gains
Reinvestments at NAV
Reinvesting compounds growth
Distribution taxable
Sold in full or fractions
Managed professionally
Max sales charge is 8.5% of POP
Shareholders vote on BOD, investment adviser, objectives, sales changes, fund closing
Class A Shares
Front end - pay from the front
BEST when you have large investment over long periods of time
Class B Shares
Back end - Contingent Deferred Sales Charges - CDSC
Fee on the end if you sell, every year you hold the fee decreases until 5-7 years when it fully drops off and becomes Class A shares (no sales charge at that point)
BEST when smaller investment for long period of time
Class C Shares
Level Load - Usually have a .25% annual services fee indefinitely. Also may have a 1% CSDC for leaving early and often have 12b-1 fees.
BEST for short time frames between 1 year to 5 years
No Load
No sales charges or loads.
Purchased at NAV
Still charge fees that are not sales charges like purchase fees, account fees, exchange fees, redemption fees
Breakpoints
Quantity discounts on mutual funds so that the larger the investment the larger the discount
Only apply to Class A shares
Can combine investment accounts to decrease this like between spouses
Letter of Intent LOI
If you plan on buying more soon, you can send a letter in letting them know you will buy more
Rules:
Within 13 months
Extra shares are bought with reduced sales charge but are held in escrow until you actually buy
Appreciation and reinvested dividends don’t count towards LOI
If you don’t pay within 13 months then:
Pay difference in sales charge
Surrender escrow shares
LOI may be backdated up to 90 days
Breakpoint Sales
If you are just below a breakpoint then the customer NEEDS to be told they are right there.
Rights of Accumulation
Investor can qualify for reduced sales charges
Available for later investments
Allows for reduced sales charges that will not apply to first transaction
Allows investor to use growth in share price to qualify
No time limits
When total value of shares meets breakpoint you may qualify
Used current value or value of investments, whichever is higher
Combination Privilege
Fund family may offer more than one fund that you can get a reduced sales charge for investing between multiple funds in the same family
Exchange Privilege
May not have sales charges (redemption or purchasing) for going between funds in the same family
Still a taxable event
NAV
(Total assets - total liabilities) / Number of outstanding shares
Expense Ratio is made up of these expenses
Managers fees
Administrative costs
BoD costs
12b-1 fees (advertising)
Annual cost is: Expenses / NAV
Sales charges from BD and sales loads ARE NOT included in expense ratio - those are one time
Forward Pricing
All transactions of MFs are processed at the next NAV calculation which is end of the day - forward price
When are you the owner of a mutual fund?
The day that you buy it
Public Offering Price (POP)
POP = NAV + Sales Charge
On a load fund POP is always greater than NAV
Sales charge is % of POP
No load then the NAV = POP
Sales charge cannot be greater than 8.5% of POP
Closed end then NAV may be greater or less than POP
Open has to be lower if sales charge
Dividends for Mutual Funds
Become owner on record on the day you buy
Sellers are not that day of redemption
Investor may buy the fund and receive dividend if they buy that day since they have it on the record date
Ex - div date is day after record
Order is declaration - record - pay - ex-div
All dates set by BoD
Fully Statutory Prospectus
Material info
If used to solicit a trade, must be given before or during solicitation
Key info, clear, electronic, objective, policies, sales charges, management expense, expense ratio, services
1-5-10 years of performance or whichever is shorter if life
Any sales literature is solicitation so need this with it
CANNOT be altered
