SIE (Training Consultants v3.5, 2025): Ch. 4, Investment Companies, SEC. 1 - DEFINITION OF AN INVESTMENT COMPANY

Investment Company

A financial institution principally engaged in investing in securities, pooling investors’ money to invest in securities to achieve stated goals, regulated by the SEC, and registered under the Investment Company Act of 1940.

Diversification

Spreading investments across different securities to reduce risk, a key benefit offered by investment companies.

Liquidity

The ability to easily buy or sell an investment without significantly affecting its price, offered by investment companies.

Professional Management

Investment companies provide professional oversight of investment portfolios, a key appeal to investors.

Face Amount Certificates Company

An investment company that issues debt certificates at a discount, which pay the purchaser a stated “face value” at maturity.

Unit Investment Trust (UIT)

An investment company that issues redeemable units, generally has a fixed portfolio, is supervised but not actively managed, pays interest instead of dividends, and terminates once all bonds mature.

Management Company

An investment company that actively manages a portfolio of securities, either as open-end (mutual funds) or closed-end funds.

Open-end Management Company

Issues and redeems shares every business day; commonly known as mutual funds.

Closed-end Management Company

Issues shares once, which are then publicly traded like a stock.

Diversified Fund

A management company with at least 75% of assets regulated so no more than 5% is invested in one corporation and does not own more than 10% of a company’s voting stock.

Non-diversified Fund

A management company with assets not subject to diversification regulations.

What is an investment company?

A financial institution that pools investor money to invest in securities to achieve stated goals, regulated by the SEC and registered under the Investment Company Act of 1940.

What are the main benefits of investment companies?

Diversification, liquidity, and professional management.

Do investment companies include brokerage companies, insurance companies, or banks?

No, they do not.

What are the three classifications of investment companies?

Face Amount Certificates Companies, Unit Investment Trusts (UITs), and Management Companies.

What is a Face Amount Certificates Company?

An investment company that issues debt certificates at a discount and pays a stated “face value” at maturity.

What is a Unit Investment Trust (UIT)?

An investment company issuing redeemable units, generally with a fixed portfolio, supervised but not actively managed, paying interest instead of dividends.

Do UITs reinvest funds from sold securities?

No, they are supervised but not managed, so funds are not reinvested.

What is a Management Company?

An investment company that actively manages a portfolio of securities, either as open-end or closed-end.

What is the difference between open-end and closed-end management companies?

Open-end issues and redeems shares daily (mutual funds), while closed-end issues shares once which are then publicly traded.

What defines a diversified fund?

At least 75% of assets are regulated, with no more than 5% invested in one company and ownership of no more than 10% of any company’s voting stock.

What defines a non-diversified fund?

A management company whose assets are not regulated for diversification. #