Questions and Answers
Which of these options are types of investment companies classified by the Investment Company Act of 1940? (Select all that apply)
What is a Face Amount Certificate Company?
A type of investment company where an investor makes periodic payments and at the end of a specified period, the company pays the investor the face amount of the security.
What is a Unit Investment Trust?
Fixed - client purchases a certain number of shares in a fixed portfolio of stocks/bonds. Nonfixed - The UIT purchases shares of an underlying mutual fund.
FACs and UITs trade in the secondary market.
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What is the difference between open-end and closed-end managed investment companies?
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How are mutual funds priced?
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Paying a dividend and suffering a market decline both increase the net assets of a fund.
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Which class of shares uses a CDSC as the main sales charge?
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Which class of shares best suits large deposit investors?
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Mutual fund shares are redeemable securities that trade privately on exchanges.
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How many payments may a mutual fund investor receive during the year?
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What is a Variable Annuity?
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What does 'annuitization' refer to?
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What is a 12b-1 fee?
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What is a Letter of Intent in the context of mutual funds?
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What is meant by 'escrow'?
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What are breakpoints in mutual funds?
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How long does a mutual fund have to satisfy a request for a Statement of Additional Information?
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A full statutory prospectus must be given before a sale of mutual funds is made.
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When must the summary prospectus (Rule 498) be provided?
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What is an Omitting Prospectus?
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Study Notes
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.
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Description
Explore the Investment Company Act of 1940, which categorizes investment companies into Face-Amount Certificate companies, Unit Investment Trusts, and Managed Investment Companies. Learn the characteristics and trading methods of each type, including their operational frameworks and investor interactions. This quiz provides a comprehensive understanding of these investment structures.
