Unit 4:1 Investment Companies

Question 1

Investment Company Act of 1940

Answer 1

defines an investment company as being in the business of holding and managing a portfolio of securities for its investors

This federal Act regulates the organization of companies that are in the business of holding and managing a portfolio of securities for its investors.

A federal securities law that sets the SEC registration requirements for investment advisers and sets general guidelines to protect the interests of the public when dealing with investment advisers.

Question 2

what is an investment company

Answer 2

A corporation, trust, or partnership that issues packaged securities to investors.

a corporation, trust, or partnership that issues packaged securities to investors; collects the investors’ money and then selects the appropriate securities

Question 3

What is one advantage an investment company offers?

Answer 3

Instant diversification

Question 4

To be defined as an investment company, a company is required to have all the following

Answer 4

1. A clearly defined investment objective 2. A portfolio of securities 3. $100,000 in net assets

Question 5

The most common investment companies

Answer 5

unit investment trusts and management companies.

Question 6

Trusts are created to

Answer 6

hold investor funds and securities.

Question 7

trust is operated by

Answer 7

board of trustees

Question 8

unit investment trust (UIT)

Answer 8

1. established or organized under a trust indenture
2. fixed portfolio, which may consist of equity securities (stocks) or debt securities (bonds)
3. UITs use a “buy and hold” strategy resulting in lower operating costs and fewer taxable transactions on a year-to-year basis

-Typically invest in a fixed portfolio of securities
-Units are referred to as shares of beneficial interest
-Are redeemable with the issuer
-Have a predetermined end date
-Are not actively managed

This investment company is established under a trust indenture, and issues shares of beneficial interest that are redeemable with the issuer and not actively managed.

Question 9

shares of beneficial interest (SBIs)

Answer 9

Issued by unit investment trusts as redeemable securities to show ownership interest.
redeemable securities
1. sold to investors in fixed dollar increments (typically $1,000 per unit)
2. Each SBI represents the investor’s ownership in the UIT portfolio
3. typically redeemable back to the issuer, which means the trust will buy back an investor’s units at the net asset value (NAV)

Question 10

participating UITs

Answer 10

A UIT that purchases mutual fund shares that will be held in a trust.

Question 11

management company (or management investment company)

Answer 11

organized as a corporation, operates under the direction of a board of directors, and issues shares of undivided interest to investors

2 subcategories: open-end and closed-end management companies.

Question 12

Board of Trustees

Answer 12

The group that establishes the investment objective and supervises the operations of a trust.

Question 13

Undivided Interest

Answer 13

Investors share in the profits and losses generated within the portfolio in proportion to their investment, but do not have a beneficial ownership interest in the individual securities.

Question 14

board of directors (BOD

Answer 14

protect shareholder interest.
Elected by the fund’s shareholders, this group establishes the fund’s investment objectives, oversees the professionals hired by the fund, and protects shareholders’ interests.

Question 15

responsibility of the fund’s investment adviser (fund manager)

Answer 15

making security selections for the fund’s portfolio
providing investment advice to the fund
maintaining appropriate diversification in the portfolio, and conforming to the investment objective established by the board
managing the day-to-day trading within the portfolio

Advisers register with the SEC using Form ADV.

Question 16

Management Fees

Answer 16

Investment advisers are paid a fee for their services
based on a percentage of total assets under management
typically the largest ongoing expense for the fund

Question 17

Custodian

Answer 17

organization, such as a trust company, commercial bank, or similar financial institution, that physically safeguards the cash and securities (stocks, bonds, and certificates) owned by the fund

Question 18

transfer agent

Answer 18

all recordkeeping and customer service functions for the fund, processes name and address changes, and keeps track of the number of shares owned by each investor

issues new shares to buyers and cancels old shares that have been redeemed.

act as the paying agent for the fund, distributing dividends and capital gains to investors

Question 19

expense ratio

Answer 19

method for measuring the annual expenses against the average net assets; it shows how efficiently the fund is operating.

Question 20

Expenses of the Fund

Answer 20

-Board of directors’ stipends
-investment adviser management fees - largest component
-Custodial services
-Transfer agent fee
-12b-1 fee, if charged
-Administrative fee, including legal, accounting, and day-to-day ———-expenses

Question 21

underwriter

Answer 21

(distributor or sponsor) must be a FINRA member firm
responsible for the preparation of retail communication

Question 22

activities are prohibited for mutual funds

Answer 22

Buying on margin (buying securities with borrowed funds)
Selling on margin, or short selling
Selling an uncovered (naked) option contract

Question 23

Covered call writing

Answer 23

acceptable option strategy a mutual fund can use as an investment alternative.
occurs when the fund holds common stock and then the fund sells a call against the common stock.
Option income funds traditionally participate in covered call writing to generate extra income.

Question 24

Form ADV

Answer 24

The form used to register an investment adviser with the SEC.

Question 25

Fund Underwriter

Answer 25

They earn compensation for distributing fund shares to BDs and the public and prepare retail communications.

Question 26

Closed-End Management Company (Closed-End Fund)

Answer 26

An investment company that issues a fixed number of shares through an IPO which will then trade in the secondary market.

Question 27

Open-End Management Company (Mutual Fund)

Answer 27

An investment company registered with the SEC that does not specify how many shares it will issue and continuously offers new shares to investors in the primary market allowing the fund to raise an unlimited amount of capital.

Question 28

net asset value (NAV)

Answer 28

price a customer receives upon selling, or redeeming, a mutual fund share
fundamental value of the fund

Question 29

sales charge/sales load

Answer 29

primary compensation paid to the underwriter and broker-dealers for marketing, advertising, and selling fund shares to the public

expressed as a percentage of the POP, not a dollar amount

sales charges cannot exceed 8.5%.

Question 30

public offering price (POP)

Answer 30

price the customer pays when purchasing shares of a mutual fund

Question 31

12b-1 fees

Answer 31

The expenses to cover distribution and sometimes shareholder services

Question 32

Relationship Between NAV and POP

Question 33

12b-1 distribution fee includes

Answer 33

Marketing, advertising, and other costs of distributing fund shares

Advertising includes the printing and mailing of prospectuses and sales literature to new investors, but not existing investors

Question 34

Class A share

Answer 34

sales charge is assessed at the time of purchase

Question 35

contingent deferred sales charge (CDSC)

Answer 35

only paid if the customer fails to stay invested in the fund for a prescribed minimum period of time