SIE for Dummies: Delivering Diversification

2025-2026

Investment Company Registration

Investment Company must register with the SEC. Must disclose open- or close-ended, names and addresses of affiliated people, if plan to raise money by borrowing, if plan on investing in commodities or real estate, how they plan on investing, conditions under which the investment plan can change (ex. a vote of shareholders), and business experience of each director and officer.

Investment Company

Pools money from many investors and invests it in a portfolio of securities. Each investor shares in the gains or losses according to their ownership interest. Investment Company Act of 1940 divides this into 3 main types

Management Investment Company

An investment company whose portfolio is managed for investors. It may be open-end or closed-end and may be actively or passively managed.

Diversified Management Company

Must invest at least 75% of its assets so that no more than 5% of total assets are invested in any one issuer and it owns no more than 10% of any issuer’s outstanding voting shares.

Nondiversified Management Company

An investment company that does not meet the 75-5-10 diversification test and may concentrate more assets in a smaller number of issuers.

Open-End Fund (Mutual Fund)

Continuously issues new shares and redeems outstanding shares with the issuer. It has no fixed number of shares and investors transact at the next computed price.

Net Asset Value (NAV)

The value of a fund’s assets minus liabilities, divided by shares outstanding. NAV is calculated the same way for open-end and closed-end funds.

Mutual Fund Bid Price

The NAV. When investors redeem mutual fund shares, they receive the next computed NAV under forward pricing.

Mutual Fund Public Offering Price (POP)

The ask price paid by investors. For a load fund, it equals the NAV plus the sales charge; POP = NAV ÷ (100% − sales-charge percentage).

Forward Pricing

Mutual fund purchases and redemptions are executed at the next NAV or POP calculated after the order is received. A mutual fund does not trade below its NAV.

No-Load Fund

A mutual fund that does not impose a sales charge. It may charge transaction expenses, but its 12b-1 fee may not exceed 0.25% of average net assets.

Statutory Prospectus

The full mutual fund prospectus describing holdings, strategy, fees, expenses, risks, and performance. Because mutual funds continuously issue new shares, a current prospectus must always be available.

Summary Prospectus

A shorter disclosure document that may be delivered to an investor if the statutory prospectus is available.

12b-1 Fee

A fee paid from mutual fund assets for distribution and promotional expenses, such as advertising and printing or mailing prospectuses. It must be disclosed in the prospectus.

Closed-End Fund

Makes a one-time public offering of a fixed number of shares. After the IPO, investors buy and sell shares in the secondary market rather than redeeming them with the issuer.

Closed-End Fund NAV

The parity value of a closed-end share, calculated as assets minus liabilities divided by shares outstanding. Market price may be at a premium or discount to NAV.

Closed-End Fund Public Offering Price

After the IPO, the current market or ask price determined by supply and demand. A purchaser also pays a broker’s commission.

Exchange-Traded Fund (ETF)

A pooled investment that trades on an exchange throughout the day. It provides diversification but can be bought on margin or sold short and normally involves brokerage commissions.

Open-End vs. Closed-End Capitalization

Open-end funds continuously offer new shares; closed-end funds capitalize through a one-time offering and then trade in the secondary market.

Growth Fund

Invests mainly in common stocks for long-term capital appreciation. Current income is secondary.

Aggressive Growth Fund

Seeks rapid capital appreciation by investing in smaller, newer, or speculative companies and carries high risk.

Growth and Income Fund

Seeks both capital appreciation and current income, commonly through dividend-paying stocks.

Income Fund

Invests primarily to generate current income, typically through bonds, preferred stock, and dividend-paying common stock.

Balanced Fund

Holds a mix of stocks and bonds to provide both growth and income while reducing risk through diversification.

Money Market Fund

A relatively safe mutual fund that invests in short-term debt instruments and seeks liquidity and preservation of capital.

Specialized (Sector) Fund

Concentrates in one industry or market sector, such as technology, healthcare, or financial services. It has less diversification and more risk than a broad fund.

International Fund

Invests mainly in securities of companies outside the investor’s home country.

Global Fund

Invests in securities throughout the world, including the investor’s home country.

Index Fund

A passively managed fund designed to track a particular stock or bond index. It generally has lower management fees than an actively managed fund.

Hedge Fund

A privately offered, professionally managed pool for sophisticated or accredited investors. It commonly requires a large minimum investment and is exempt from SEC registration.

Foreign Stock Fund

A fund whose portfolio is composed primarily of foreign securities.

Municipal Bond Fund

A fund that invests in municipal securities, generally for federally tax-exempt income.

U.S. Government Fund

Invests in U.S. government or government-agency securities and emphasizes safety and income.

Fund of Funds

A fund that invests in other funds instead of individual securities.

Life-Cycle (Target-Date) Fund

A fund of funds that automatically becomes more conservative as its target date approaches, usually reducing equity exposure as the investor gets older.

Breakpoint

A dollar level at which a mutual fund purchaser qualifies for a reduced Class A sales charge. Breakpoint schedules must be disclosed in the prospectus.

Breakpoint Sale

An improper recommendation to purchase just below a breakpoint, causing the customer to pay a higher sales charge.

Letter of Intent (LOI)

A signed statement allowing an investor to receive a breakpoint based on an intended total investment, normally completed within 13 months. Shares may be held in escrow to cover a higher charge if the commitment is not met.

Rights of Accumulation

Allow an investor to combine the value of existing fund holdings with a new purchase to qualify for a breakpoint.

Mutual Fund Sales Charge

Included in the POP rather than added afterward. The maximum permitted sales charge is 8.5% of the POP.

Sales-Charge Percentage

(POP − NAV) ÷ POP. POP always represents 100% in a mutual fund sales-charge calculation.

Class A Mutual Fund Shares

Charge a front-end load when shares are purchased. They usually have lower expense ratios and offer breakpoints, making them more suitable for long-term investors.

Class B Mutual Fund Shares

Traditionally impose a contingent deferred sales charge when shares are redeemed and have higher expenses than Class A. They may convert to Class A after being held for many years.

Class C Mutual Fund Shares

Impose a level annual load and usually a short-term exit fee. They have higher expenses and are generally designed for shorter holding periods.

Face-Amount Certificate Company

Issues certificates purchased for a lump sum or through installments and promises a fixed amount at maturity. It resembles a zero-coupon investment and has limited liquidity.

Unit Investment Trust (UIT)

A fixed portfolio of securities sold in redeemable units. UITs do not actively trade the portfolio and do not employ an investment adviser.

Fixed UIT

Invests in a fixed portfolio, commonly bonds, and terminates when the securities mature.

Participating UIT

Invests in shares of mutual funds. The funds held remain fixed, although the underlying mutual-fund portfolios may change.

Exchange-Traded Product (ETP)

A category that includes exchange-traded funds and exchange-traded notes. ETPs trade intraday, can be sold short or purchased on margin, and normally charge commissions.

Passive ETF

Tracks a market index such as the S&P 500 or DJIA and changes holdings mainly when the index changes.

Active ETF

An ETF whose manager may change the securities held in an effort to meet an investment objective.

Inverse ETF

Uses derivatives to seek a daily return opposite that of a benchmark, allowing investors to attempt to profit from a market or sector decline.

Leveraged ETF

Uses derivatives to seek a multiple of a benchmark’s daily return, such as two or three times the daily movement. Its objective normally resets daily.

Mutual Fund vs. ETF Pricing

Mutual funds use forward pricing at the next computed NAV or POP; ETFs trade throughout the day at current bid and ask prices.

Investment Company Affiliated Transactions

Affiliated persons generally may not trade portfolio securities between funds in the same family, but they may purchase and redeem fund shares like regular investors.

Annuity

An insurance-company contract designed to accumulate funds and later provide periodic income, often for retirement.

Fixed Annuity

Guarantees a fixed rate and fixed payments, with deposits held in the insurer’s general account. It is not a security, is exempt from SEC registration, and requires an insurance license to sell.

Fixed Annuity Inflation Risk

Because payments remain fixed, purchasing power may decline as prices rise.

Variable Annuity

A security whose value and payments depend on investments held in a separate account. It must be sold with a prospectus by someone holding both securities and insurance licenses.

Variable Annuity Separate Account

Holds variable-annuity deposits apart from the insurer’s general assets and invests them in securities selected from available subaccounts.

Variable Annuity Taxation

Earnings grow tax-deferred. Withdrawals are taxed only on earnings because contributions were made with after-tax dollars.

Variable Annuity Death Benefit

During the accumulation phase, the beneficiary generally receives the greater of the account value or a guaranteed minimum specified in the contract.

Accumulation Unit

The unit purchased during a variable annuity’s pay-in phase, similar to a mutual-fund share. Its value changes with the separate account.

Single-Payment Immediate Annuity

Purchased with one lump sum and begins making payments shortly after purchase.

Single-Payment Deferred Annuity

Purchased with one lump sum, with payouts delayed until a future date.

Periodic-Payment Deferred Annuity

Funded through periodic contributions, usually monthly, with payouts beginning later. It is the most common annuity purchase arrangement.

Annuity Unit

During the payout phase, accumulation units convert into a fixed number of annuity units. The number is fixed, but the unit value and payment may vary.

Straight-Life Annuity

Pays for the annuitant’s life and stops at death. It provides the highest periodic payment but offers no survivor guarantee.

Life Annuity with Period Certain

Pays for life and guarantees payments for a stated minimum period. If the annuitant dies early, the beneficiary receives payments for the rest of that period.

Joint-Life with Last-Survivor Annuity

Provides payments over two lives and continues until the last annuitant dies. Because it covers two lives, payments are lower than straight life.

Annuity Early-Withdrawal Penalty

A taxable withdrawal before age 59½ is generally subject to a 10% penalty in addition to ordinary income tax on earnings.

Variable Life Insurance

Has a fixed premium and a separate account selected by the policyowner. The death benefit has a guaranteed minimum but may increase with investment performance.

Variable Universal Life Insurance

Has flexible premiums and a separate account selected by the policyowner. Because premiums and investment performance vary, cash value and the minimum death benefit may not be guaranteed.

Variable Products

Variable annuities, variable life, and variable universal life are securities because their values depend on separate-account investments.