Management Companies Flashcards

Question

A customer has purchased $5,000 of a mutual fund. Over the past 5 years, the fund has appreciated to $22,000. At this point, the customer wants to buy another $5,000 of the fund. In the prospectus, the breakpoint schedule is: ``` Purchase Amount Sales Charge $0-$10,000 8 ½% >$10,000-$20,000 7 ½% >$20,000-$45,000 6 ½% >$45,000-$65,000 5 ½% >$65,000 5 % ``` On the $5,000 purchase, the customer will pay a sales charge of: A. 8 ½% B. 7 ½% C. 6 ½% D. 5 ½%

Answer 1

The best answer is C. Since this fund starts with the maximum sales charge of 8 ½%, it must offer rights of accumulation. Funds charging the maximum sales charge are required to do so under FINRA's Conduct Rules. To determine the breakpoint for the customer, the new purchase amount is added to the current value of the customer's holdings in the fund. $22,000 current value plus $5,000 purchase = $27,000 total holding after the new purchase. This places the customer between the 3rd tier ($20K - $45K), so the sales charge imposed on the $5,000 purchase is 6 ½%.

Answer 2

The best answer is B. Since this fund starts with the maximum sales charge of 8 ½%, it must offer rights of accumulation. Funds charging the maximum sales charge are required to do so under FINRA's Conduct Rules. To determine the breakpoint for the customer, the new purchase amount is added to the current value of the customer's holdings in the fund. $14,000 current value plus $5,000 purchase = $19,000 total holding after the new purchase. This places the customer between the 2nd tier ($10K - $20K), so the sales charge imposed on the $5,000 additional purchase is 7 ½%.

Answer 3

The best answer is B. The letter of intent to receive a breakpoint can be backdated 90 days. The letter can extend for a maximum time period of 13 months, inclusive of the 90-day backdating. Since the client has already "used up" 2 months, he or she has 11 more months to buy the additional shares

Answer 4

The best answer is B. Since the customer needs to invest $30,000 to achieve the next breakpoint, and has $28,000 now, an additional $2,000 is required. The customer may not have this money at this time. If the customer signs a Letter of Intent to complete the $30,000 breakpoint, he or she has 13 months to make payment of the additional $2,000, and will still receive the lower sales charge

Answer 5

The best answer is C. Mutual fund breakpoints are applied to the entire "family" of funds offered by a sponsor. This customer has a total $360,000 investment in the ACME fund family. Another $60,000 purchase brings the customer's position up to $420,000; and the applicable breakpoint on the $60,000 purchase is 2% from the breakpoint schedule shown.

Answer 6

The best answer is C. The Letter Of Intent (LOI) provision operates separately from Rights of Accumulation and takes precedence over Rights of Accumulation. Because of this, the customer must deposit new money in the dollar amount required by the LOI to get the lowered sales charge. Since the customer has deposited $15,000 of the $25,000 required by the LOI already, the remaining $10,000 must be deposited to retain the reduced sales charge. After the LOI is completed, the additional NAV from the asset appreciation is added to the account balance, and establishes a new higher base level ($25,000 deposited plus $5,000 asset appreciation = $30,000) from which the sales charge will be calculated on any future purchases.

Answer 7

The best answer is C. If a customer is "close" to a breakpoint, it is a violation to not make the customer aware that putting in the additional funds to reach that level will result in a lower sales charge. If the disclosure is not made, the registered representative has committed a violation known as a "breakpoint sale."

Answer 8

The best answer is C. If a customer is "close" to a breakpoint, it is a violation to not make the customer aware that putting in the additional funds to reach that level will result in a lower sales charge. If the disclosure is not made, the registered representative has committed a violation known as a "breakpoint sale." A "backing away" violation is where a firm quote is given to a customer and then not honored - the representative has "backed away" from that quote.

Answer 9

The best answer is B. 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% instead of 8.50%.

Answer 10

The best answer is D. 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% instead of 8.50%.

Answer 11

The best answer is B. FINRA allows a mutual fund to call itself "no load" (as in no sales charge) as long as the maximum annual 12b-1 fee does not exceed .25%. Note, in contrast, that if a fund wishes to advertise itself as a "pure no-load fund" then it cannot charge any 12b-1 fees.

Answer 12

The best answer is C. If this customer invested $40,000 in Class A shares, he pays a 2% sales charge and no annual 12b-1 fees for the 1 year investment time horizon. If the customer invested $40,000 in Class B shares, there is no up-front sales charge; but because the customer will redeem after year 1, he will be hit with a 4% redemption fee on these shares. In addition, the customer must pay .40% in annual 12b-1 fees for 1 year. If the customer invested the $40,000 in Class C shares, then the customer must pay .75% annually in 12b-1 fees for just 1 year. The lowest fee purchase is, therefore, Class C shares.

Answer 13

The best answer is D. Redemption is at Net Asset Value or 1,000 shares x $13 NAV = $13,000. Since there is a redemption charge of 1/2% x $13,000 = $65 redemption fee that is subtracted from the $13,000, the customer will receive $12,935 at redemption.

Answer 14

The best answer is A. Mutual funds are redeemed at NAV less a redemption fee (if any). No commissions are charged on purchases or redemptions. The redemption fee of 1/2% must be deducted to get the net proceeds. $14.30 NAV x .995 x 200 shares = $2,846

Answer 15

The best answer is B. Mutual funds are redeemed at NAV less a redemption fee (if any). The redemption fee of 1/2% must be deducted to get the net proceeds. $15.00 NAV x .995 x 200 shares = $2,985

Answer 16

The best answer is B. Deferred sales charges are imposed only if a customer redeems, with the amount of the sales charge typically being reduced the longer the investor remains in the fund. This investor is redeeming his $10,000 investment after holding it for 1 full year; therefore the fund is being redeemed during the 2nd year. This means the Contingent Deferred Sales Charge is 4% (it is 5% if redeemed in year 1; 4% in year 2; 3% in year 3; 2% in year 4; 1% in year 5; 0 thereafter). If the investor redeems during year 2, he or she must pay the 4% deferred sales charge, and the investor will receive $10,000 x .96 = $9,600 upon redemption.

Answer 17

The best answer is C. Mutual fund shares do not trade. Orders to buy are filled by the fund at the next computed POP; and orders to sell are filled at the next computed NAV. Because this customer placed the order to redeem (sell) after the Friday 4:00 PM close, the customer redemption request will be filled at the next closing NAV, which will happen the following Monday.

Answer 18

The best answer is C. An order placed to buy or redeem mutual fund shares is "filled" at that day's closing Net Asset Value adjusted by any sales charges or redemption fees. If the fund is no load, there's no sales charge.

Answer 19

The best answer is D. If a fund offers an automatic reinvestment provision, both dividend distributions and capital gains distributions are reinvested at Net Asset Value.

Answer 20

The best answer is A. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

Answer 21

The best answer is A. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint. People cannot "join together" to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint; nor can investment advisers group their customers' purchases; nor can a partnership be formed to buy mutual funds at a breakpoint. An investment adviser (IA) omnibus account is a single account held at a broker-dealer for all of the investment adviser's clients. The investment adviser cannot get a breakpoint based on aggregated purchases for these clients - each IA client is considered to be a separate purchaser.

Answer 22

The best answer is A. People cannot "join together" to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. Individuals whether acting alone, or in a family unit, or as part of a corporation's retirement plan are considered to be "one" purchaser and qualify for the breakpoint. An investment adviser (IA) omnibus account is a single account held at a broker-dealer for all of the investment adviser's clients. The investment adviser cannot get a breakpoint based on aggregated purchases for these clients - each IA client is considered to be a separate purchaser.

Answer 23

The best answer is A. Investment clubs cannot group purchases for a breakpoint, nor can investment advisers group their customers' purchases. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint. Related family members such as spouses or parents and minor children are also counted as one purchaser and would qualify for a breakpoint.

Answer 24

The best answer is C. Mutual fund breakpoints are calculated based on amounts invested with a given fund sponsor - it makes no difference which broker-dealers were used to make the fund share purchases. The breakpoints are not calculated based on how much of a fund is purchased through a given broker-dealer but how much the client invests in a given "fund family."

Answer 25

The best answer is A. Unrelated investors cannot "join together" to aggregate their purchases and get the benefit of a breakpoint. However, mutual fund companies will aggregate purchases of immediate family members in the same household and give them the benefit of the breakpoint. The two brothers are not in the same household, so this does not count!

Answer 26

The best answer is B. Aggregation occurs at the mutual fund level, not at the broker-dealer level. Thus, all mutual purchases within the same family are aggregated to count towards a breakpoint - it makes no difference from which broker-dealer the shares were purchased.

Answer 27

The best answer is D. Mutual fund shares are offered under a prospectus. The price to be charged in a prospectus offering is the POP as stated in the prospectus - which is stated as the "Next Computed Net Asset Value + the Sales Charge." The prospectus will also detail breakpoints where sales charges are reduced. Breakpoint tables are created by the fund, not the selling broker dealer. Discounts to customers that are not stated in the prospectus are prohibited. Selling the fund for more than the Public Offering Price as stated in the prospectus is similarly prohibited.

Answer 28

The best answer is C. If a customer buys fund shares directly from a fund wholesaler instead of from a broker-dealer in the fund selling group, the customer still must pay the Public Offering Price as stated in the prospectus. The customer does not get any extra discount by going directly to the wholesaler. Fund wholesalers must be FINRA members. All fund shares must be priced in accordance with the rules written under the Investment Company Act of 1940 - for example, mutual fund shares must be "forward priced" under these rules.

Answer 29

The best answer is D. A "breakpoint sale" might sound like a good thing, but it is not! It is selling a mutual fund to a customer in an amount that does not give the customer the benefit of the breakpoint (Just BELOW the minimum threshold). This unsavory practice is a violation of FINRA rules.

Answer 30

The best answer is C. A "breakpoint sale" might sound like a good thing, but it is not! It is selling a mutual fund to a customer in an amount that does not give the customer the benefit of the breakpoint. If a customer wishes to invest $24,001 in this fund, he or she should be told that another $1,000 invested will result in a lowering of the sales charge. If the customer does not have the extra $1,000 right now, then a letter of intent should be signed for the additional $1,000 purchase, which gives the customer another 13 months to get the benefit of the breakpoint.

Answer 31

The best answer is C. Asset appreciation does not count towards completing a breakpoint, so Choice A is a false and misleading statement. The client contractually agreed to buy $60,000 of fund shares (within 13 months) under a Letter of Intent to get a lower sales charge. If the customer does not deposit the full $60,000, then the sales charge is recomputed to a higher percentage, based on how much the customer actually purchased. So the customer must deposit another $10,000 to complete the breakpoint. If the customer were to take the capital gains distribution as cash and use that money to buy additional shares to complete the breakpoint, then the customer would have to pay a sales charge (which would be lower because the breakpoint is being completed). But the customer must understand that if the capital gains distribution were simply reinvested, that would occur at NAV and there would be no sales charge. Not completing the breakpoint and the resulting fractional bump-up in sales charge would be less costly to the customer than the sales charge that would be imposed on the additional purchase (usually – there can be exceptions here). Thus, Choice B is an inappropriate recommendation. Choice C is the right thing to do. The customer must deposit the remaining $10,000 to complete the breakpoint. Choice D is basically garbage.

Answer 32

The best answer is B. The basic rule on prospectus delivery is that the prospectus must be delivered “at, or prior to, confirmation.” When a customer buys a security that requires a prospectus delivery (a new issue), in the “good old days,” a confirmation was generated detailing the purchased security and amount due, a prospectus was included in the envelope, and this was mailed by “snail mail” to the customer. When the customer opened the envelope, the prospectus was included with the confirmation, meeting the rule’s requirements. The SEC has modernized the prospectus delivery rule for stock and bond offerings, allowing an electronic prospectus to be sent to the customer’s e-mail address. However, the mutual fund rule still requires a paper “profile prospectus” sent to the customer with the confirmation, with the full paper prospectus being available electronically if requested. Open-end fund shares are purchased at the next computed NAV, not the prior's days closing NAV. They do not trade in the market, so a purchase at the market price at the moment the order is placed is not possible. Finally, any sales charge is disclosed in the prospectus.

Answer 33

The best answer is A. The initial offering of closed-end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. Redeemable securities are continuously issued by open-end management companies - mutual funds.

Answer 34

The best answer is D. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Adap Fund is $7.50, so 100 shares will cost $750 plus a commission.

Answer 35

The best answer is C. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Acco Fund is $8.25, so 100 shares will cost $825 plus a commission.

Answer 36

The best answer is D. If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Adap Fund is $7.50. An investor selling 100 shares receives $750 less a commission.

Answer 37

The best answer is D. If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Acme Fund is $10.25. An investor selling 100 shares receives $1,025 less a commission.

Answer 38

The best answer is C. The minimum purchase price for an open-end (mutual) fund is net asset value. The fund cannot be sold for less than this amount. It may be sold for more with a sales charge not exceeding 8 1/2% of the offering price. Closed-end funds trade in the market. The market may value the fund at NAV, at a discount to NAV or at a premium to NAV. Therefore, the only fund that can sell at a discount to NAV is a closed-end fund.

Answer 39

The best answer is B. SPDRs ("Spiders"), QQQs ("Qubes"), and DIAs ("DIAmonds") are exchange traded funds (ETFs), listed on the exchanges. The "Spider" is the Standard and Poor's 500 Index ETF; the "Qube" is the NASDAQ 100 Index ETF; and the DIA is the Dow Jones Industrial Index ETF.

Answer 40

The best answer is A. The "SPDR" is the Standard and Poor's Depositary Receipt, one of the first index-ETFs. It is based on the composition of the Standard and Poor's 500 Index. An ADR is an American Depositary Receipt. This is the vehicle for trading foreign stocks in the U.S. An ARS is an Auction Rate Security and a VRDO is a Variable Rate Demand Obligation.

Answer 41

The best answer is C. DIA is the acronym for the "DIAMOND" - the Dow Jones Industrial Average (30 stocks) Depository Receipt. This is an Exchange Traded Fund traded on the exchanges.

Answer 42

The best answer is D. Since this ETF is "2x," it is an ETF that moves in the same direction as the market, but it moves twice as fast The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index rises by 10%, this position will rise by 20% to $12,000 value ($10,000 x 1.2). At the end of the second day, because the index goes down by 5%, the ETF value will decline by 10%. $12,000 x .90 = $10,800.

Answer 43

The best answer is D. A leveraged ETF uses borrowing (margin) and options to magnify price movement as compared to the reference index. A 200% leveraged ETF can be expected to move 2 times as fast as the reference index, either up or down. A 300% leveraged ETF can be expected to move 3 times as fast as the reference index, either up or down

Answer 44

The best answer is D. If market interest rates rise, both stock and bond prices are negatively impacted. However, fixed income security prices fall more than stock prices. Furthermore, the longer maturity and lower coupon issues fall the fastest as market interest rates rise. An inverse ETF, also called a short ETF, profits when prices drop. An inverse ETF based on the price movements of 20+ year Treasuries would have the largest profit when interest rates rise. This type of ETF has shorted 20+ year Treasuries in the hopes that prices will drop and the positions can be covered (bought back) for a profit. If market interest rates rise, this is exactly what should happen.

Answer 45

The best answer is C. Since this ETF is "-1x," it is an inverse ETF that moves at the same rate (1x), but in the opposite direction (-), to the market. The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index falls by 10%, this position will rise by 10% to $11,000 value ($10,000 x 1.1). At the end of the second day, because the index goes up by 5%, the ETF value will decline by 5%. $11,000 x .95 = $10,450.

Answer 46

The best answer is B. ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940.

Answer 47

The best answer is C. Exchange Traded Funds, as the name says, trade on stock exchanges. Most are AMEX (now renamed the NYSE American) listed, but there are ETFs on the NYSE and NASDAQ as well.

Answer 48

The best answer is D. ETFs (Exchange Traded Funds) such as SPDRs are negotiable - they trade as would any regular stock. They are marginable and they can be sold short since ETFs are available for many different indexes and sectors. ETFs are not redeemable - it is mutual fund shares that are redeemable.

Answer 49

The best answer is A. ETF stands for Exchange Traded Funds. These are fund shares that trade like any other stock. They are not mutual fund shares because they cannot be redeemed at any time with the sponsor. Rather, they are negotiable securities.

Answer 50

The best answer is A. Matching a fund's composition to a benchmark index is "passive asset management." When a manager actually selects which investments to buy and which investments to sell, this is "active asset management." Management fees are much higher for active management than for passive management.

Answer 51

The best answer is A. Almost all ETFs are based on a benchmark index. They mirror the composition of the index, so they are "passively" managed and have low management fees. An actively managed fund is one where the investment adviser chooses which securities to buy and sell. Active management comes with higher management fees. There are only a very few actively managed ETFs - almost all are passively managed. They trade like any other stock and are not redeemable.

Answer 52

The best answer is A. Exchange Traded Funds (ETFs) can be traded anytime during the day, whereas mutual funds are purchased or redeemed at that day's closing net asset value. The expense ratios for ETFs are similar to, or lower than, those for comparable index mutual funds. The purchase or sale of an ETF incurs a commission cost; and ETFs can be purchased or sold short on margin.

Answer 53

The best answer is B. ETFs (Exchange Traded Funds) are actively traded on stock markets like any other stock. UITs (Unit Investment Trusts) are created by a sponsor and sold with a prospectus. The secondary market for these is usually thin, though the sponsor does make a market in trust units. Both ETFs and UITs have low expense ratios; both are typically passively managed (that is, the portfolio is basically fixed); and cash dividends received from both qualify for the lower 15% tax rate if the portfolio holds equity securities.

Answer 54

The best answer is C. An ETN is an Exchange Traded Note. It is a structured product created by an investment bank. These are “bond-like” investments that have a typical 7-year life. They give an annual return that is tied to the performance of a benchmark stock index, subject to a cap and a floor. They are not ETFs – there are no physical securities backing the product and they are not an investment company type. They are simply backed by the credit of the issuing bank – if the bank fails, so does the ETN. ETNs are listed and trade, though trading is generally thin. This minimizes marketability risk, but note that ETNs still have market risk - their price can fall in the market.

Answer 55

The best answer is D. ETFs have been increasing in popularity as compared to traditional mutual funds because of their low cost (low expense ratios); ease of buying and selling like any other stock; and tax efficiency (no mandatory annual long term capital gain distributions). ETFs are available based on sector indexes; narrow-based stock indexes; broad based stock indexes; bond indexes and international stock indexes. Note that there is no such thing as an ETF based on an individualized stock portfolio. The whole point of an ETF is to create a negotiable security that benchmarks a recognized index.

Answer 56

The best answer is B. Regarding Exchange Traded Funds (ETFs), the shares trade in the secondary market like any other stock. However, any purchaser is required to be delivered either a prospectus (similar to that for a mutual fund) or a Product Document summarizing key information about the ETF and the details of where a prospectus can be obtained. The basic idea here is that the customer is buying the equivalent of an exchange traded index-mutual fund; and even though technically each purchase is not a "new issue" like the purchase of a mutual fund, the customer must still receive a disclosure document. An Offering Memorandum is the disclosure document used for a Regulation D private placement. An Official Statement is the disclosure document used for a new municipal bond issue.

Answer 57

The best answer is C. The expense ratio of a mutual fund measures the proportion of investment return on assets that is consumed by expenses. The lower the ratio, the more "efficient" the fund is. The expense ratio is: Fund Operating Expenses Expense Ratio = ---------------------------------------- Total Net Assets

Answer 58

The best answer is C. A no-load fund is one that does not have a sales charge. All mutual funds charge management fees, whether they are load or no-load funds. The maximum sales charge on a load fund is set at 8 1/2% by FINRA. FINRA does not set maximum management fees. The Investment Company Act of 1940 does not set maximum management fees either - it requires that shareholders vote on the management contract, which will tend to limit compensation; and that compensation cannot be based on fund gains and losses. The permitted management fee structure is either a flat fee; or a fee based on percentage of assets under management.

Answer 59

The best answer is A. The largest expense of running a mutual fund is the annual management fee. It is typically 1/2 - 1% of assets annually.

Answer 60

The best answer is C. The formula for the expense ratio is: Fund Operating Expenses Expense Ratio = ----------------------------------------- Total Net Assets If expenses rise (such as a higher management fee or administrative costs), or assets fall (caused by increased redemptions), the ratio will rise. Large investment inflows would increase total net assets, causing a decline in the ratio.

Answer 61

The best answer is A. The formula for the expense ratio is: Fund Operating Expenses Expense Ratio = ----------------------------------------- Total Net Assets If expenses rise (such as a higher fees), or assets fall (caused by increased redemptions), the ratio will rise. Distributions made by the fund have no bearing on the ratio. The sales charge is not part of the expense ratio.

Answer 62

The best answer is C. A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.

Answer 63

The best answer is C. A fund that distributes at least 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount.

Answer 64

The best answer is C. If a mutual fund invests solely in municipal securities, there is no federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from federal income tax). However, capital gains on all securities are taxable.

Answer 65

The best answer is D. Since this mutual fund invests solely in municipal securities, there is no federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from Federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from Federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax-free municipal interest income. Capital gains on municipal bonds are taxable - it is only the interest income which is free of federal income tax. Therefore, any capital gains distributions made a fund investing solely in municipal securities are taxable.

Answer 66

The best answer is D. Since this mutual fund invests solely in municipal securities, there is no federal tax liability on the interest income received (remember, the interest income from municipal securities is exempt from federal income tax). Under the "conduit" theory, any payment distributed by the fund to shareholders retains the same character and is free from federal income tax. Similarly, undistributed income retained by the fund would not be taxed, since it consists solely of tax free municipal interest income.

Answer 67

The best answer is D. When a switch is made between two funds, the IRS considers this to be the sale of one fund and the purchase of another fund. If the fund shares that are sold have appreciated, there is capital gains tax liability.

Answer 68

The best answer is D. When the shares of one fund are sold, unless the monies are reinvested in the same fund, (resulting in a non-taxable "like-kind" exchange), capital gains tax is due on the sale proceeds versus the cost basis in the shares. The purchase of the new (different) shares results in a new cost basis.

Answer 69

The best answer is B. Since mutual funds do not trade, the Board of Directors sets the ex (reduction) date for fund distributions.

Answer 70

The best answer is D. Since mutual funds do not trade, the Board of Directors sets the ex-date (reduction date) for fund distributions. The ex-date is set at the morning of the business day following the record date. This is the date that the distribution is made to shareholders, or reinvested in additional share purchases.

Answer 71

The best answer is A. Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.

Answer 72

The best answer is C. Surprisingly, whenever a fund sells a position at a significant loss, there is no reduction in NAV. Why? The position has already been marked to market and the loss is reflected in the fund's NAV each day. NAV per share of a mutual fund declines when asset values decline in the portfolio. When a fund pays either a dividend distribution or capital gains distribution, the NAV per share is reduced on the ex date to reflect the lower per share value. Of course, any person who elects to reinvest the distributions in more shares will have now hold more shares, each one worth less than before. But in aggregate, the investment value would not have changed.

Answer 73

The best answer is D. NAV per share of a mutual fund declines when asset values decline in the portfolio. When a fund pays either a dividend distribution or capital gains distribution, the NAV per share is reduced on the ex date to reflect the lower per share value. Of course, any person who elects to reinvest the distributions in more shares will have now hold more shares, each one worth less than before. But in aggregate, the investment value would not have changed. Surprisingly, whenever a fund sells a position at a significant loss, there is no reduction in NAV. Why? The position has already been marked to market and the loss is reflected in the fund's NAV each day.

Answer 74

The best answer is A. If a fund distributes a dividend or capital gains to shareholders, the fund shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the fund. The receipt of these monies into the fund increases NAV per share. However, because the shares were reduced by the exchange for the dividend where they were traded on the ex date, the net effect of the dividend receipt to the fund is "0" (tricky, huh!). Depreciating securities in the fund portfolio will also decrease NAV per share.

Answer 75

The best answer is C. This is a tricky question. If a fund distributes a dividend to shareholders, an ex-date is set by the Board of Directors of the fund. On this date, the Fund's shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the fund. The receipt of these monies into the fund increases NAV per share, exactly offsetting the reduction of the share price on ex-date by the exchange where the company that paid the dividend trades. Thus, when securities in the portfolio pay a dividend, there is no effect on NAV. Appreciating securities in the fund portfolio will also increase NAV per share. Redemption of shares should have no effect on NAV per share.

Answer 76

The best answer is B. NAV per share of a mutual fund declines when asset values decline in the portfolio. When a fund pays either a dividend distribution or capital gains distribution, the NAV per share is reduced on the ex date to reflect the lower per share value. Of course, any person who elects to reinvest the distributions in more shares will have now hold more shares, each one worth less than before. But in aggregate, the investment value would not have changed.

Answer 77

The best answer is B. If a fund distributes a dividend or capital gain to shareholders, the fund shares are reduced by the value of the distribution on the ex date. Redemption of shares has no effect on Net Asset Value per share, because the redemption of each share occurs at the current Net Asset Value that day. The reduction in total net assets is exactly matched by a proportionate reduction in shares outstanding, so Net Asset Value per share is unchanged by the redemption. NAV is calculated each business day, not every calendar day.

Answer 78

The best answer is A. The Investment Company Act of 1940 requires that at least 40% of the Board of Directors be "non-interested parties" - that is, they are not affiliated with the sponsor, custodian, transfer agent, or firms in the selling group.

Answer 79

The best answer is A. The best answer is a. The Investment Company Act of 1940 requires that a minimum of 40% of the Board of Directors of a fund be independent. This means that these individuals cannot be employed by the fund, nor can they be providing services to the fund for compensation. Thus, their decisions overseeing fund management are truly “independent” and ensure that these decisions are being made to benefit the fund shareholders (as opposed to benefitting individuals on the Board. Note that a “regulated” fund is not a definition under the Investment Company Act of 1940. It is an IRS definition, where if a fund distributes at least 90% of Net Investment Income to shareholders, then the fund pays no tax on the distributed income. The income” flows through” to the shareholders and is only taxed at the fund level

Answer 80

The best answer is D. If a fund wishes to change its investment objective, this action requires majority vote the shareholders of the fund.

Answer 81

The best answer is B. Mutual funds must send their financial statements to shareholders semi-annually (twice a year).

Answer 82

The best answer is A. When talking about mutual funds, the Fund Sponsor is the Fund Underwriter and the Investment Adviser is the fund portfolio manager. Broker-dealers may join in a selling group to sell these funds, acting as agent only. Public Offering Price of a fund is the same as the fund's ask price. Net asset Value is the fund's redemption price. The "load" is the fund's sales charge.

Answer 83

The best answer is C. Money market funds usually do not impose sales charges but all funds impose management fees. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares. The reason why these funds are called "money" funds is that the securities held in the portfolios have very short maturities (less than 30 days) and turn over into cash quickly.

Answer 84

The best answer is B. Money market funds invest in very short term (usually 30 day maximum maturity) money market instruments with an investment objective of high current income. All distributions are fully taxable as investment income. The beta coefficient (volatility of a security relative to the market) of these funds is very low - the securities are not volatile because the maturities are so short. Money market funds typically do not have sales charges.

Answer 85

The best answer is A. Mutual funds offer various share classes to investors. The investor can choose to buy the same fund either as a Class A, B, C, or D share. Class A shares typically charge an up-front sales charge, but have no, or very low, annual 12b-1 fees. Class B shares have no up-front sales charge; instead, they have a contingent deferred sales charge, and impose higher annual 12b-1 fees than A shares. Class C shares have a lower contingent deferred sales charge than B shares, but impose the highest 12b-1 fees. Class D shares are typically sold by investment advisers. There is no sales charge, but they impose annual 12b-1 fees and service fees. Unlike Class B or C shares, Class A shares offer breakpoints. Class C shares are sometimes referred to as "level loads."

Management Companies Flashcards

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