Investment Company Act of 1940 Overview

Investment Company Act of 1940

• Classifies investment companies into three main types: Face-Amount Certificate (FAC) companies, Unit Investment Trusts (UIT), and Managed Investment Companies (both open-end and closed-end).

Face-Amount Certificate Company

• Investors make periodic payments for a specified period in exchange for the face amount of the security at maturity.

Unit Investment Trusts (UIT)

• Fixed UITs allow clients to purchase shares in a fixed portfolio of stocks/bonds.
• Non-fixed UITs invest in shares of an underlying mutual fund.
• UITs are characterized by a lack of active management.

FACs and UITs Trading

• Neither FACs nor UITs trade in the secondary market and can only be redeemed through the issuer.
• Portfolios are static once created and do not change, leading to no ongoing management.

Managed Investment Companies

• Open-end companies (mutual funds) operate exclusively in the primary market.
• Closed-end companies have a limited number of securities available for trading.

Mutual Fund Pricing

• Prices are determined at the end of each business day.
• Sellers receive the next calculated NAV (Net Asset Value), while buyers pay the next POP (Public Offering Price).

Impact on Net Assets

• Dividend payments and market declines reduce net assets without affecting the number of shares, resulting in a decline in NAV.

Class of Shares and Sales Charges

• Class C shares primarily utilize a Contingent Deferred Sales Charge (CDSC).
• Class A shares have a front-end sales charge; beneficial for large investors.
• Class B shares feature a back-end load that decreases over time; suited for both short and long-term investors.
• Class C shares have level loads, ideal for short-term investors; no-load shares have no sales charge, but may have other fees.

Redemption of Mutual Fund Shares

• Mutual fund shares are redeemable securities and do not trade on secondary markets, including exchanges or OTC.

Dividend Distribution Options

• Investors can receive up to five payments annually and may choose to reinvest these payments, avoiding any sales charges.

Variable Annuity

• Provides a return that varies based on mutual fund performance, placing investment risk on the investor rather than the insurance company.

Annuitization Process

• A one-time, irrevocable action where an investor forfeits asset ownership in exchange for guaranteed lifetime income from the insurance company.

12b-1 Fee

• A fee imposed by an investment company to cover marketing and promotional costs associated with a mutual fund.

Letter of Intent

• Investors can notify the investment company of their intent to invest additional funds to meet breakpoint requirements within 13 months.
• Fund holds shares purchased at the reduced charge in escrow until the investment is completed.

Escrow Definition

• Refers to the third-party holding of money, legal documents, and instructions until contract conditions are satisfied.

Breakpoints

• Quantity discounts on mutual fund shares; purchasing larger amounts results in lower sales charges.

Statement of Additional Information (SAI)

• Investors must receive a SAI copy upon request within three business days at no cost.

Prospectus Requirements

• Full statutory prospectus must be provided before a sale.
• Summary prospectus (Rule 498) must be given before or during the solicitation.

Omitting Prospectus

• An advertisement that displays performance figures without complete disclosure typically found in the full prospectus.

Costs Associated with Mutual Funds

• Includes maintaining shareholder records, providing shareholder services, and investment adviser fees.