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Series 7 Management Companies
Terms in this set (109)
The sponsor of a mutual fund is also known as the underwriter or fund underwriter
What does he do?
The sponsor of a mutual fund is the firm that "creates" the fund and registers it with the SEC.
Hires the fund investment adviser and custodian bank.
The sponsor establishes a separate broker-dealer to distribute the fund to the public; either directly; or through a selling group. This broker-dealer is called the fund distributor.
The custodian bank performs all of the following functions
-Sends dividends and capital gain distributions to shareholders
-Prepares and mails proxies to shareholders
-Holds the portfolio of investments in safekeeping
The investment adviser is hired by
the fund sponsor or underwriter
The investment objective is set by the
sponsor of the fund, which can only by changed by a vote of shareholders
The primary function manages the fund within the investment objective
It's investment objective is to generate current income for its shareholders
The fund invests in FIXED INCOME SECURTIES like treasury bonds, preferred stocks- these are fixed income securites, high yield bonds
Invest in common stocks
Growth funds invest in common stocks for growth. These funds are looking for large capital gains and typically pay little in the way of dividends.
Gives a balance of both growth and income
Invest in common stock for growth and preferred stocks and bonds for income
Sector fund is a mutual fund that
invests in securities found in one industry or geographic area.
For example an energy fund or a country fund.
Also known as a specialty fund
Money Market Fund
Alternative to holding cash
Have management fees
Examples commercial paper, treasury bills, banker's acceptance, and REPOs
Way to park money to figure out what to do with investment
Ginnie Mae mutual fund
Backed by the full faith and credit of the US gov. so no credit risk
However those with the mutual fund assumes prepayment risk, extension risk, reinvestment risk, and fluctuation of Net Asset Value
Special situation fund
A fund which invests in companies in bankruptcy or takeover situations.
Standard and Poor's 500 Index Fund
The portfolio manager must change the composition of the fund if the stocks included in the index are changed
The fund must weigh its investments in the same manner as the Standard and Poor's 500 index is weighed
The management fee for such a fund is typically lower than for an actively managed fund
Index funds attempt to "shadow" the performance of the designated index, such as the Standard and Poor's 500 index or Value Line Index
Highest yield to lowest yield
Use taxes as a guide!!
Corporate Bond Fund- highest yield -subject to all taxes
Government Bond Fund- second- subject to Fed tax
Municipal Bond Fund- lowest yield- possibly exempt from all
When a customer buys a mutual fund, the customer pays
Public Offering Price
Public Offering Price
The next computed Net Asset Value + Sales Charge (Sales Load)
The front-end load on a mutual fund is best described as the
cost of investing in a fund
Money market funds are usually no load funds
Firms count these funds as short term holding vehicles for customer monies before a longer term investment is made, and attempt to attract these funds by not imposing a sales charge.
Money market funds
-typical maturities of securities held in the portfolio are 30 days or less
-money market funds are typically sold without a sales charge
-money market funds impose management fees
No load mutual funds
Sells without a sales charge
Funds that are marketed directly to investors without a broker-dealer like Vanguard or Fidelity.
Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is
8 1/2% of the Public Offering Price NOT NAV. This is the maximum percentage of all dollars invested
For $10 this is an 85 cent charge
This applies to the total of both "up front" sales charges and "back end" redemption fee.
A customer buys at the
POP price which is the Ask price
If a customer want to redeem a fund then they will redeem at the
NAV price which is the Bid price
To impose the maximum sales charge, under FINRA rules, mutual funds must offer investors which of the following benefits?
Breakpoints, Rights of Accumulation, Letter of Intent
Regarding a mutual fund "Letter of Intent"
-Letter can cover period of 13 months
-The letter can be backdated 90 days
-The extra shares purchased under the break point are held in escrow until the letter is completed.
Charges existing shareholders cost of soliciting new investment for a mutual fund. TV and web advertisement for a mutual fund are paid by 12b-1 fees
What is the maximum annual 12b-1 fee
If a fund charges a 12b-1 fee, the maximum up front sales charge is downgraded from 8 1/2% to
A 30-year old customer with a 30-year investment time horizon has received her first substantial year-end bonus of $30,000 from her job working at DEF Corporation and decides to invest the money in ABC Growth Fund. She informs you that things have been going well at work and she is likely to receive at least another $30,000 bonus at the end of next year that she will invest as well. You should inform the customer that:
because of the funds "letter of intent" feature, you will be able to offer her a 1% sales charge on Class A shares since a LOI gives one 13 months to offer up more money
Dollar Cost Averaging
Dollar Cost Averaging
Its a fluctuating share price and a fixed dollar amount invested periodically/ monthly that results in a lower weighted average per share purchase
If market prices are fluctuating, the plan will produce a lower average per share cost
Dollar cost averaging doesn't work if the price of the stock remains fixed, nor does it protect against loss in a falling market.
An individual wishes to have a fixed portion of the portfolio liquidated each month. He or she should elect which type of withdrawal plan?
A fixed percentage of the total investment value is redeemed periodically
A fixed dollar amount is paid periodically
A fixed number of shares is redeemed periodically
A fixed time period is specified during which the account is systematically liquidated
A customer redeems a mutual fund. The customer must be paid the money from the fund company within how many business days?
7 calendar days or 5 business days
Mutual fund shares are
A customer who places an order to buy in an open ended fund
will buy at that day's closing Net Asset Value plus any sales charge
Customer who places an order to redeem open ended fund
will do so at that day's closing Net Asset Value
An order placed to BUY or REDEEM mutual funds shares is "filled" at
that day's closing Net Asset Value adjusted by any sales charges or redemption fees.
That day's closing price is the basis for fund PURCHASE price computations
That day's closing price is the basis for fund REDEMPTION price computations
Mutual funds that have an automatic reinvestment provision must reinvest
dividends at NAV and capital gains at NAV
If the fund offers automatic reinvestment provision both dividend distributions and capital gains distributions are reinvested at Net Asset Value- no sales charge is imposed on reinvested money
Money market funds use a
$1 constant NAV doesn't fluctuate
An agreement between an institutional investor (hedge fund) and mutual fund. Where mutual fund would accept an order until 4:30 pm
If institutional investor could buy or sell till 4: 30 pm for there benefit
This is prohibited by FINRA
MF publish every two hours NAV of their shares during their trading day.
Massive amount of buying or selling exploitation from institutional investors forced MF managers to rebalance their porfolios and impose higher fees to their investors
It dilutes the value of the existing shares
FINRA also prohibits this
Who is not allowed a breakpoint on mutual fund purchases
-An investment club account buying for the club participants
-A partnership account where the partnership is formed to buy mutual funds
-An investment adviser omnibus account
A corporate treasurer buying for an investment
Is allowed a breakpoint
Most fund companies allow for aggregation of accounts of immediate family members, including retirement plan accounts for those persons and trust accounts for those person, what is this called?
Householding- all account of persons in one household are added together and count towards a breakpoint
Can unrelated people join together to get the benefit of a breakpoint?
occurs at the mutual fund level, not broker-dealer level
based on all purchases that occur within a single mutual fund "family"- it makes no difference where the shares were purchased.
Aggregation rules to qualify for a breakpoin under a mutual Letter of Intent?
To qualify for the lower sales charge, all purchases must be made in the same fund family, but can be made through different broker-dealers
What is disclosed in the fund prospectus?
Sales charge to be impose and breakpoints to lower sales charge
What can a sales group member not do?
Sell shares to the public at a discount from the POP
HOWEVER the sponsor CAN sell shares to a selling group member at a discount but this is the SPONSOR not the sales group member selling to the public...
A "breakpoint sale"
advising a customer to buy an amount of a mutual fund that is just below the minimum threshold needed to qualify for a lowered sales charge shown in a breakpoint sale
This is a violation of FINRA rules
Closed-end investment companies
-The portfolio of investments is managed
-The initial offering of shares is made under a prospectus
-Shares trade in the secondary market at prevailing market price
Close End Funds
When you buy them you buy them at the CURRENT MARKET PRICE (which can be lower, higher, or the same as NAV) price PLUS COMMISSION
When you sell them you sell them at the CURRENT MARKET PRICE LESS COMMISSION
SPDRs, QQQ, DIA are acronyms for
Exchange Traded Funds, passively managed and a hybrid as they are structured as open-end management companies but listed on an exchange and trade
Spider, the Standard and Poor's 500 Index ETF
Qubes, NASDAQ 100 Index ETF
Diamonds, Dow Jones INDUSTRIAL AVERAGE Index ETF
use borrowing to accelerate the ETF's price movement
For example a 200% leveraged ETF should move 2 times as fast as the reference index, in the same market direction
Moves opposite of the market but at the same rate
Leverage Inverse ETF
Moves opposite of the market and at a different rate
Can individual investors buy creation units of ETFs?
No, only institutional investors
You buy at the market price of the exchange plus pay a commission to do the trade
THEY ARE NOT REDEEMABLE
The way you get out is by selling them in the market
Exchange traded funds are
Comparing ETFs to Mutual Funds
Expense ratios for exchange traded index funds are comparable to, or lower than, those for index mutual funds
Net asset values for exchange traded index funds are calculated continuously through the day; while net asset values for mutual funds are computed once each day
Comparing expense ratios from lowest to highest
When comparing ETN to ETF
ETNs have credit risk, because it's only back up by word of the bank
ETNs and ETFs have market risk
However, ETF's DON't have credit risk because they have real collateral to back them up
Purchasers of ETFs are required to get either
a Prospectus or a Product Description summarizing key information about the ETF
ETFs are available
On broad-based stock indexes
On narrow-based stock indexes
On international stock indexes
On bond indexes
The expense ratio of a mutual fund is
Fund Operating Expenses/ Total Net Assets
The lower the ratio, the better because that the less of the return on assets that's being eaten by expenses.
The expense ratio of a mutual fund is a measure of operating efficiency
What is the biggest expense of running any mutual fund?
Management fees are deducted from fund gross investment income before any dividend distributions are made
The annual management fee paid to the investment adviser is based on a percentage of net assets
Management fees cannot be based on fund performance
A no-load fund is one that doesn't have a sales charge: all mutual funds charge management fees whether they are load or no load funds.
If a mutual fund distributes 99% of its Net Investment Income to its shareholders, how much of the Net Investment Income will be taxable?
A fund that DISTRIBUTES AT LEAST 90% of Net Investment Income to shareholders is "regulated" under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount. So, only the 1% of the income retained is taxed.
A fund that distributes at least 90% of its Net Investment Income to shareholders.
IT IS CALLED REGULATED FUND!!
In order to be regulated under Subchapter M of the IRS Code, at least how much of the Net Investment Income must be distributed to the mutual fund shareholders?
What does this mean "regulated"?
If an investment company is "regulated" under Subchapter M of the IRS, then the fund pays no tax on the net income that is distributed to shareholders; the tax liability is the responsibility of the shareholders.
Exchange feature offered by mutual fund "families"
Gives the customer the right to exchange one fund for another in the same family at NAV- no sales charge
If an investor "switches" funds within a family what does the IRS consider?
The IRS views this as the sale of one fund; and purchase of another.
On liquidating sale- taxable capital gain, or tax deductible capital loss
How to avoid this- "like-kind exchange"
Ie sell shares of money fund and reinvest in another money fund (not growth or income)
A customer switches from a growth fund to an income fund within the same "family of funds"
The sale results in a "taxable event" on which tax on any gains is dues and the purchase establishes a new cost basis
A customer wants to switch between 2 different mutual funds within the same "family". You should tell the customer that
taxes will be due if the fund shares that are sold have appreciated
What to remember about Mutual funds?
THEY DO NOT TRADE, so their ex date is set by the fund's Board of Directors
If a fund distributes a capital gain to shareholders
The capital gain is taxable if it's taken as a check
Capital gain is taxable if it's automatically reinvested in the fund
What does not affect NAV?
Redemption, because each share is being redeemed at the current NAV
CASH dividend, on the ex date, each share held is now worth less, bu the fund received the cash dividend, which holds or uses the investment, so the effect on NAV per share is 0
What reduces NAV of a mutual fund
Asset depreciation, capital gains distribution and dividend distribution
Investment Company Act of 1940 defines 3 types of investment companies
-Face Amount Certificate Company
-Unit Investment Trust
Regarding mgmt companies (mutual and publicly traded funds)
-Must start with initial Net Assets of $100,000
-Min of 100 shareholders
-Securities registered with SEC and sold with prospectus
-Must be Board of Directors- no more than 60% of interested person.
-At least 40% of "non interested" persons
Individuals who have an economic tie to fund sponsor
Shareholders of mgmt company have the right to vote
-Change of investment objective of fund
-Board of Directors
Shareholders of mgmt company DON'T have the right to vote
-Dividend distribution amount
Mutual Funds must send their financial statements to shareholders
semi-annually: these include balance sheet, income statement, statement of all the fund's portfolio holdings
With customer account statements with brokerage accounts sent quarterly if there is no trading activity, monthly if there is trading activity
Mutual funds that adopt "12b-1" plan
Acceptance of the plan requires a majority vote of the outstanding shares; the Board of Directors; and the disinterested members of the Board
Discontinuance of the plan requires majority vote of the outstanding shares or the disinterested members of the board
Mailings to prospective purchasers of the fund are acceptable "12b-1" charge
Expense ratios for funds that have adopted 12b-1 plans can be expected to be higher than for similar funds without 12b-1 fees
Quotes published in the news media for mutual funds show
Bid price at NAV; Ask price at NAV plus the maximum sales charge
How to reasonably compare one fund from the other
One fund can reasonably be compared to another fund with similar investment objectives. Not reasonable to compare funds with different investment objectives
When comparing funds, any "tax effect" should be taken into account
When comparing funds with similar investment objectives or comparing fund performance to a benchmark index, the same time frame should be used for both funds.
Consistent performance over a long time frame is an indicator that the fund is well managed.
Funds with the same investment objectives don't have the same risks
-Invest in securities, but also in pools of other assets such as commodities and currencies
-Engage in aggressive trading tactics and are highly leveraged
-Adviser compensation is typically based on a percentage of capital appreciation
-The adviser typically makes a significant personal investment in the hedge fund
-Often hold illiquid investments
-Use leverage and other speculative practices
-Place limitations on withdrawal of funds
-Are not regulated and offer much less investor protection
The manager of an unregistered hedge fund is typically compensated by a fee based on a
percentage of assets under management plus a performance fee based on profits
2 and 20- 2% management fee and 20% of profits
A customer that invests in a "fund of hedge funds" should be made aware that:
-there are 2 layers of fees associated with the investment- those of the fund manager; and those charged by the underlying hedge fund managers
-the computation of NAV is difficult because investments may be made in highly illiquid securities that are infrequently traded
-the level of risk associated with the investment is typically higher than that of a regular mutual fund
-fund distribution will generally consist of more highly taxed ordinary income and short term capital gains.
Impose an up-front sales charge;
Impose very low, or have no, annual 12b-1 fees.
Do not impose an up-front sales charge;
Have a contingent deferred sales charge (CDSC);
Impose higher annual 12b-1 fees than A shares.
Do not impose an up-front sales charge;
Have a lower CDSC than B shares or no CDSC;
Impose higher annual 12b-1 fees than B shares.
Are typically sold through investment advisers;
do not impose an up-front sales charge;
Impose annual 12b-1 fees and service fees.
Investor strategy for Class A
Long term investors are usually best off with Class A shares:
The up-front sales charge is a one-time event; while the smaller annual 12b-1 fee does not significantly reduce the funds' return compounded over a long period of time.
Investor strategy for Class B
Intermediate term investors are usually best off with Class B shares:
The contingent deferred sales charge typically falls to "0" over the first 5 years that the fund is held. If the investor leaves after 5 years, no sales charge is imposed. Furthermore, over this time period, the annual 12b-1 fees are moderate.
Investor strategy for Class C
Short term investors are usually best off with Class C shares:
The contingent deferred sales charge typically starts lower than that for B shares and falls to "0" over the first 5 years that the fund is held. If the investor leaves the fund early, a lower sales charge is imposed than for either A or B shares. However, the annual 12b-1 fees are very high. If the investor stays in the fund for a long time, these will greatly depress the funds' return.
What to know for mutual funds and fixed unit investment trusts
Both have breakpoints available for mutual funds and unit investment trusts
Expense rations for mutual funds tend to be higher than expense ratios for fixed unit investment trusts
THIS SET IS OFTEN IN FOLDERS WITH...
SIE Ch. 5
SIE STC Ch. 3
Chapter 2 Exam
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