Investment Companies - Management Companies

Question 1

A management company is established by the fund _____

Answer 1

sponsor - or underwriter

Question 2

The sponsor must register the fund with the _____ and provide a ______

Answer 2

with the SEC and must provide a prospectus

Question 3

In an open-end fund, each investor must receive the ______

Answer 3

prospectus

Question 4

The POP for each mutual fund share is the ______

Answer 4

net asset value per share + a sales charge

Question 5

Closed-end shares are issued with a _____ and then traded ______

Answer 5

issued with a prospectus, then are traded publicly (are negotiable)

Question 6

The “investment adviser” to the fund receives a ______ and is typically under a _____ contract which then requires a ______ every year thereafter

Answer 6

receives a management fee, 2 year contract, then requires a shareholder vote

Question 7

A diversified fund is defined as one with:

Answer 7

• 75% or more of its assets invested in securites
• a max of 5% invested in any one issue
• a max holding of 10% of voting securities in any one holding

Question 8

To calculate Net Asset Value, all securities in the portfolio are _______

Answer 8

marked to market

Question 9

If fund is “no-load”, then a customer does not have to pay a _______ to buy shares

Answer 9

sales commission

Question 10

The maximum sales charge on mutual fund shares is ______ of the POP

Answer 10

8.5% of the POP (note however that it is in fact more than 8.5% of the NAV, since the POP includes the sales charge)

Question 11

Sales charge percentage formula is:

Answer 11

= Ask-Bid/Ask

Question 12

Under the Investment Company Act of 1940, a customer must be paid within _______ after redeeming mutual fund shares

Answer 12

7 days

Question 13

Mutual funds can charge both _____ and _____ fees, but they cannot exceed _____ of the POP (as regulated by FINRA)

Answer 13

sales charge and redemption fees, but cannot exceed 8.5% of the POP

Question 14

A “contingent deferred sales charge” incentivizes people to keep their money ______

Answer 14

in the fund for a specific amount of time

Question 15

In order for a fund to charge the max 8.5%, they must offer:

Answer 15

• breakpoints
• letter of intent
• rights of accumulation

Question 16

A breakpoint is:

Answer 16

a discount for a large dollar purchase; according to FINRA must be “fair and reasonable”
- breakpoints are applied to the ENTIRE purchase

Question 17

An investment club (a bunch of investors grouped together) cannot take advantage of the _______

Answer 17

breakpoints

Question 18

If an investor intends to buy more of a particular mutual fund’s shares, they can sign a ______ and get the breakpoint applied to their future purchases as well as prior purchases

Answer 18

• letter of intent; if they don’t fulfill their promise, then they pay the higher sales charge

Question 19

A letter of intent can last for ____ plus the _____

Answer 19

13 months, plus the 90 day backdate period

Question 20

Under a LOI, the shares purchased under the breakpoint are held in _____

Answer 20

escrow

Question 21

Rights of accumulation mean that if you buy additional shares that put your total assets above a breakpoint, you pay the _____

Answer 21

lower breakpoint

Question 22

FINRA requires that mutual funds offer ______ and that there is no _____ applied to reinvestment

Answer 22

must offer dividend reinvestment and cannot impose a sales charge for that

Question 23

Fund distributions are taxable ______

Answer 23

in that year (whether reinvested or not)

Question 24

You can switch funds in the same “family” for no sales charge, but it is still considered a ____ and gains are ____

Answer 24

sale and gains are taxed

Question 25

Rule 12b-1 allows mutual funds to charge the cost of soliciting new investment to the _______

Answer 25

existing shareholders

Question 26

Funds that elect 12b-1 can impose a max sales charge of _____ if they do not impose account maintenance charges, and ____ if they do impose account maintenance charges

Answer 26

7.25% if they do not, 6.25% if they do

Question 27

The 12b-1 fee cannot exceed ____ of average annual net assets

Answer 27

.75%

Question 28

Class A shares:

Answer 28

- impose higher up front sales charges - typically have no annual 12b-1 fees - best for long term investors

Question 29

Class B shares:

Answer 29

- impose a contingent deferred sales charge - impose higher 12b-1 fees - best for intermediate term investors

Question 30

Class C shares:

Answer 30

- no-load shares - highest annual 12b-1 fee - best for short term investors

Question 31

Selling groups are _______ to discount mutual funds shares on their own, or sell them for ____ than the POP

Answer 31

not allowed to discount them on their own or sell them for more than the POP

Question 32

Withdrawal plans are a way for investors to _____ of a mutual fund

Answer 32

cash out

Question 33

Fixed dollar withdrawal plan:

Answer 33

- fixed dollar amount to be received periodically

Question 34

Fixed shares withdrawal plan:

Answer 34

- specifies the number of shares to be redeemed periodically

Question 35

Fixed percentage withdrawal plan:

Answer 35

- specifies fixed percentage of the total net assets invested to be redeemed periodically

Question 36

Fixed period withdrawal plan:

Answer 36

- account is to be liquidated over a fixed time period

Question 37

FINRA prohibits the following mutual fund practices:

Answer 37

- breakpoint sales - trading mutual fund shares - inappropriate recommendations for class B shares - late trading - market timing

Question 38

"Closed-end" funds are used for portfolios in ______ securities

Answer 38

illiquid, such as munis or "third world" investments

Question 39

Closed-end funds trade at a discount to the NAV when they are offering a ______ compared to the market

Answer 39

lower rate of return; or when there is uncertainty about their investments

Question 40

Closed-end fund shares can be redeemed. T/F

Answer 40

FALSE - they cannot be redeemed, they may be sold

Question 41

ETFs employ an _______ to keep the price at NAV

Answer 41

arbitrage feature

Question 42

With an arbitrage feature, large institutional investors are allowed to _______

Answer 42

buy the fund shares at a discount, short the equivalent shares of stock in the underlying portfolio, then exchange the ETF shares for the underlying stock ---> ie they stabilize the price and profit from the arbitrage opportunity

Question 43

Because ETFs technically allow for more shares to be created (because of the arbitrage mechanism) they are technically _______

Answer 43

open-end funds, but are traded like closed-end funds

Question 44

Advantages of ETFs are:

Answer 44

- continually priced during the day as the underlying holdings change in price (mutual funds only priced at close) - purchased without a sales charge (although a commission typically applies - ETFs can be purchased on margin - ETFs can be sold short - low expense ratios - tax efficient, as they are not required to distribute gains annually

Question 45

Purchasers of ETFs must be provided with either a _____ or a _______

Answer 45

prospectus or a product document

Question 46

Under the 1940 act, management companies are required to send financial statements to shareholders __________

Answer 46

semi-annually; includes IS, BS, and a list of all holdings

Question 47

If a fund distributes at least 90% of their net investment income to shareholders, they are regulated under subchapter __ and do not have to pay _____

Answer 47

subchapter M and do not have to pay taxes (the shareholders receive it as a pass-through and pay their income tax)

Question 48

The tax code also imposes surcharges on funds that do not distribute at least _____ of Net Investment Income and ____ of capital gains to shareholders

Answer 48

97% of NII and 98% of capital gains

Question 49

If an investor wishes to liquidate fund share, their cost basis is calculated as ____ plus ______

Answer 49

the original purchase price PLUS all reinvested distributions

Question 50

Net capital gains can only be distributed ______

Answer 50

once a year; dividends can be distributed whenever the BOD decides

Question 51

The current yield formula for a mutual fund =

Answer 51

= annual income / offering price

Question 52

The current yield formula for a mutual fund AFTER the ex-date =

Answer 52

= annual income / (offering price + prior year distributions)

Question 53

Shareholders in a management company have the right to:

Answer 53

- vote for the BOD - vote for changes in investment style - vote annually on the investment adviser - receive annual and semi-annual reports

Question 54

Under the 1940 act, the managers of the fund cannot exceed ____ of the board

Answer 54

60%

Question 55

Minimum fund capital of _____ must be held by the sponsor to start the management company

Answer 55

$100,000