Chapter 3 Pooled Investment Rules

Frequency of shareholder financial reports for investment companies

Semiannually, with one being the audited annual report.

Frequency of required SEC reports for investment companies

At least annually, or more frequently if required.

Minimum net capital requirement under the Investment Company Act of 1940 before a public offering

$$100,000$$

Maximum percentage of another registered investment company's voting shares a fund may generally own

$$3\%$$

Maximum timeframe for a mutual fund to pay redemption proceeds to shareholders

Within $7$ days of request.

Minimum percentage of an investment company's board of directors that must be noninterested

At least $40\%$ (allowing up to $60\%$ to be interested or affiliated).

Ownership threshold of voting shares defining an affiliated person under the Investment Company Act of 1940

$5\%$ or more.

The two sub-classifications of management investment companies

Open-end companies (mutual funds) and closed-end companies.

Type of capital issues permitted for open-end investment companies

Common stock only.

Primary function of an investment company's custodian

Safeguarding the fund's cash and securities.

Requirement for altering a mutual fund's fundamental investment objective or diversification status

Majority shareholder approval.

Initial duration and subsequent renewal frequency for a mutual fund investment adviser contract

Initial contract term is $2$ years; thereafter renewed annually.

Parties required to approve the renewal of an investment adviser contract

The board of directors or shareholders, plus a majority of noninterested directors.

Maximum notice period required to terminate an investment adviser contract without penalty

No more than $60$ days' written notice.

Effect of assigning an investment adviser contract to a new adviser

Automatic termination of the contract.

Purpose of a 12b-1 fee and maximum allowable annual rate for a fund to be marketed as no-load

Covers distribution and marketing costs; maximum allowed for no-load status is $0.25\%$ of net assets per year.

Characteristics of Class A mutual fund shares

Front-end sales load with lower ongoing asset-based $12b-1$ charges.

Characteristics of Class B mutual fund shares

Contingent Deferred Sales Charge (CDSC) upon early redemption with higher ongoing expense ratios.

Characteristics of Class C mutual fund shares

Level load structure with no front-end load, higher ongoing $12b-1$ fees, and a short-term CDSC.

Eligibility for mutual fund sales charge breakpoints

Available to individuals, joint accounts, corporations, and families, but explicitly NOT available to investment clubs or random investor groupings.

Formula to calculate mutual fund sales charge percentage

$$\text{Sales Charge } \% = \frac{\text{POP} - \text{NAV}}{\text{POP}}$$

Pricing rule applied to mutual fund share purchases and redemptions

Forward pricing, calculated using the next computed NAV (typically once daily at 4:00 p.m. ET).

Primary pricing mechanism for closed-end fund shares

Supply and demand in secondary market trading, which may cause shares to trade at a premium or discount relative to NAV.

Formula for calculating the percentage premium or discount of a closed-end fund relative to NAV

$$\text{Premium/Discount } \% = \frac{\text{Market Price} - \text{NAV}}{\text{NAV}}$$

Key difference between ETF and open-end mutual fund trading

ETFs trade continuously on secondary exchanges throughout the day at market prices, whereas mutual funds execute orders once daily at forward NAV.

Investment fund types whose shares investors can buy on margin or sell short

Exchange-Traded Funds (ETFs) and Closed-End Funds (CEFs).

Portfolio management style and structure of a Unit Investment Trust (UIT)

Fixed, unmanaged portfolio with no active portfolio manager or investment adviser.

Common legal structure used for hedge funds, venture capital, and private equity funds

Limited partnerships (with a General Partner managing and Limited Partners contributing capital).

Standard hedge fund fee arrangement and threshold required before incentive fees apply

$2\%$ management fee and $20\%$ performance fee calculated above a specified hurdle rate.

The 90 / 75 / 75 tax requirements for REIT conduit treatment

Distribute at least $90\%$ of taxable income; invest at least $75\%$ of assets in qualifying real estate, cash, and Treasuries; derive at least $75\%$ of gross income from real estate.

Tax pass-through limitation distinguishing REITs from Direct Participation Programs (DPPs)

REITs pass through net income to shareholders, but operating losses do NOT pass through.

Taxation of REIT dividend distributions versus capital gain distributions

Dividend distributions are taxed as ordinary income; capital gain distributions are treated as long-term capital gains.

Regulatory classification of Real Estate Investment Trusts under federal law

REITs are NOT classified or regulated as investment companies under the Investment Company Act of 1940.