Securities Industry Essentials - Unit 4

provides the regulatory framework for mutual funds

Investment Company Act of 1940

True or False: Face-Amount Certificates are NOT an example of an investment company

False

Face-Amount Certificates and Unit Investment Trusts are or are not managed and are or are not sold in the secondary market.

FACs and UITs are NOT managed and they are NOT sold in the secondary market. Once their portfolios are created, they are not changed. They are only redeemable through the issuer.

What types of securities may a closed-end investment company issue?

common stock, preferred stock, and debt securities

What types of securities may an open-end investment company issue?

common stock only are issued to shareholders; however, the funds themselves can purchase common stock, preferred stock, and debt securities

What is the primary difference between the open- and closed-end investment company?

Closed End: set number of shares is limited; while the number of shares is limited, they do sell in the secondary markets; price is controlled by supply and demand

Open End: perpetually offering new shares to the public; registers an open offering with the SEC

publicly traded funds are another name for

closed-end investment companies

Net Asset Value is what?

it is the fund’s assets minus its liabilities

True or False: when an investor sells mutual fund shares, the fund pays the investor their proportionate share of the company’s net assets

True; therefore, the company’s net capital falls, but so does its number of outstanding shares keeping the NAV per share the same

True or False: open end mutual funds trade in the secondary market

False

True or False: closed end mutual funds trade in the secondary market

True

In open end funds, reinvestments and distributions are done at NAV/market price and are/are not taxable.

NAV, are

True or False: an investor in mutual funds have rights to vote for board members, choice of advisor, investment objective and other changes

True

Under the Investment Company Act of 1940, the maximum sales charge allowed is 8.5% of the POP (public offering price)

True

Class A Open End Shares

Front-End Load Shares; sales charges are paid at time of purchase and taken out of total amount invested; the most common class of fund

Class B Open End Shares

Back-End Load Shares; also called a contingent deferred sales charge; paid at the time they redeem their shares and is a declining percentage reduced annually; the charge will eventually reach 0% at which time they are converted to Class A shares and there will be no charge at redemption; oftentimes have higher expenses than Class A shares

Class C Open End Shares

Level-Load Shares; typically have a contingent charge, 12b-1 promotion fee, and a services fee that are paid annually; more appropriate for investors with short time horizon as the fees add up and become more expensive than other Class shares

No-Load Shares

shares marketed directly to public eliminating need for underwriters and the sales charges to compensate them

Breakpoints

quantity discounts available only to Class A shares; the greater amount purchased, the better the discount; advisors are required to inform investors if their purchase is nearing such a breakpoint; makes Class A shares more appropriate to investors making a very large purchase

this class of share is most appropriate for investors making a small investment with a long time frame

Class B; to take advantage of the sales charge that gets smaller with each year held

this class of share is best for short term investors (more than 1 year but less than 5 years)

Class C Shares

this class of share is best for investors making a large purchase with a long time horizon to spread the one-time charge over several years

Class A Shares

True or False: investors may combine purchases of Class A shares among related persons to reach a breakpoint

True

the mechanism used by investors that allow them to purchase shares at a lower charge by promising to buy more shares within 13 months which are then escrowed and held by the fund

Letters of Intent; may be backdated by 90 days; the 13 months begins the date of the letter; if the investor fails to make the promised investment, they will be given the option to either pay up or cash in the escrowed shares

Another mechanism allowing an investor to reduce their sales charges by making additional purchases of Class A mutual fund shares but having no time limits and no up-front discount

Rights of Accumulation; investor pays full sales charge for initial investment; additional purchases will be comibined with initial purchase amount for breakpoint purposes; there are no time limits

True or False: a fund’s expense ratio includes the sales charge/load

False

for Front-End Load funds, Class A Shares, the public offering price (POP) is comprised of:

the NAV + sales charge

the sale of mutual funds just below a breakpoint

breakpoint sale; it is a violation if the advisor does not inform the investor that their purchase would qualify for a breakpoint if they invested just a bit more; advisor may do this to make a higher sales charge/commission

True or False: dividends for mutual funds are settled the same day it is executed; buyers become owners of record the same day they purchase and sellers cease to be owners of record the same day they sell

True

True or False: ex-dividend date for a mutual fund is the day after the record date

True

Order of Steps for a mutual fund dividend distribution: DRPE

Declaration Date

Record and Payable Date (same day)

Ex-Dividend Date (set by the fund’s BOD rather than exchange or FINRA)

True or False: the fund’s balance sheet, statement of operations, and income statement are included in the Statutory Prospectus

False; this information is included in the Statement of Additional Information (SAI) which can be requested from the fund, broker-dealer, or the SEC

a type of prospectus containing little information used to raise awareness and for advertising purposes

Omitting Prospectus or Tombstone Ad

True or False: a Summary Prospectus may be used to make a sale

True; it includes an application for the purchase and includes a summary of key information; the Full Prospectus must be made available to users of the Summary Prospectus before the sale is confirmed

according to Subchapter M, to avoid taxation on the full net investment income (NII), a fund must distribute at least x% of income to shareholders

90%; in this case, they only pay taxes on the % not distributed; if they only distribute 89%, they pay taxes on the full 100%

Because a variable annuity has investment risk, for an individual to sell it, they must be licensed in both __________ and __________

insurance, securities

in a variable annuity, if the insurance company investment manager assumes control of the subaccounts, it must be registered as an __________ Investment company

open-end

in a variable annuity, if the insurance company investment managers allows another party to control the subaccounts, it must be registered as a ____________

Unit Investment Trust

the amount of annuity income is determined by the annuitants SAAPI which stands for:

sex

age

amount

payout type

assumed interest rate

a big difference between a fixed annuity and a variable annuity is that, with a fixed annuity, it is the _____________ that assumes all the risk and is therefore not considered a __________

insurance company, security

Which of these makes a variable annuity suitable for an investor?

• seeking supplemental income

• seeking preservation of capital

• seeking accumulation of capital

seeking supplemental income

growth within a variable annuity’s subaccounts is or is not subject to annual income taxation

is not; growth is taxed at the time of withdrawal; it is growth that is withdrawn first and then principal; if under age 59.5, the taxable portion of withdrawals are subject to additional 10% penalty

an exchange from one annuity to another

1035 Exchange; not subject to taxes but may be subject to surrender fees

True or False: the decision to annuitize a variable or fixed annuity is irreversible

True