Mutual Funds: Structure and Regulation
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Questions and Answers

Which type of fund typically has the lowest management fees?

  • Hedge funds
  • Equity funds
  • Money market funds (correct)
  • Index funds

What is one criticism of the management fee structure in mutual funds?

  • It is significantly lower for index funds compared to equity funds.
  • It rewards managers based solely on assets managed rather than performance. (correct)
  • It includes a commission based on investor redemptions.
  • It only compensates managers based on the fund's performance.

What expenses are not covered by the management fee in a mutual fund?

  • Management fees for subordinate managers
  • Taxes, audit, and legal fees (correct)
  • Marketing expenses
  • Trading commissions

If a fund has total annual expenses of $10 million and $500 million in assets, what is the Management Expense Ratio (MER)?

<p>2% (B)</p> Signup and view all the answers

What defines the strategy of index funds compared to equity funds?

<p>They mirror the market with occasional rebalancing. (A)</p> Signup and view all the answers

What are the components that make up the Management Expense Ratio (MER)?

<p>Management Fee and Operating Expenses (D)</p> Signup and view all the answers

What justifies the payment of trailer fees to mutual fund sales representatives?

<p>They provide ongoing services to investors. (A)</p> Signup and view all the answers

As of June 1, 2022, which type of dealer is prohibited from receiving payments from mutual funds?

<p>Discount brokers who do not make suitability determination (D)</p> Signup and view all the answers

Critics of trailer fees argue that these fees may cause which potential issue for sales representatives?

<p>They could create a conflict of interest. (C)</p> Signup and view all the answers

Which of the following statements about the ongoing debate about trailer fees is true?

<p>Supporters believe they provide valuable benefits to investors. (D)</p> Signup and view all the answers

What does NAVPS stand for in the context of mutual funds?

<p>Net Asset Value Per Share (A)</p> Signup and view all the answers

What is the main factor that determines the redemption price of shares if no sales charges are applied?

<p>NAVPS calculated at market close (A)</p> Signup and view all the answers

If a mutual fund calculates NAVPS less frequently than daily, what is the potential consequence for redemptions?

<p>Redemptions are executed at the next valuation date (B)</p> Signup and view all the answers

What is the typical deadline for orders to be processed at the end of the day price for mutual funds?

<p>4:00 p.m. ET (B)</p> Signup and view all the answers

How often are new mutual funds required to compute NAVPS according to regulation?

<p>At least once a week (D)</p> Signup and view all the answers

What is the maximum fee an advisor may charge for transferring funds between mutual funds?

<p>2% of the amount being transferred (A)</p> Signup and view all the answers

Which of the following statements about F-class funds is true?

<p>F-class funds usually charge an asset-based fee instead of transaction fees. (A)</p> Signup and view all the answers

What principle is NOT part of the regulatory framework for mutual funds in Canada?

<p>Transparency (A)</p> Signup and view all the answers

What happens to switching fees if a fund merges with another fund?

<p>Investors can transfer without incurring withdrawal fees. (B)</p> Signup and view all the answers

What is one common characteristic shared by all securities industry participants in Canada?

<p>They are subject to the rules and regulations of the SRO and various provincial securities laws. (A)</p> Signup and view all the answers

Flashcards

Net Asset Value per Share (NAVPS)

The value of one share or unit of a mutual fund, calculated by dividing the total assets minus liabilities by the number of shares outstanding.

Offering Price

The price paid by an investor to purchase one share or unit of a mutual fund.

Redemption Price

The amount received by a shareholder when redeeming their shares of a mutual fund.

Price Calculation Deadline

A deadline set by a mutual fund for receiving orders to purchase or redeem shares, after which the next day's price will be used.

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Redemption Fee

A fee charged by some mutual funds for redeeming shares.

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Management Fees

The fee paid to the fund manager for managing the fund's investments. It is typically expressed as a percentage of the fund's assets under management.

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Operating Expenses

Fees that cover the fund's operating expenses such as interest charges, taxes, legal fees, and administrative costs.

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Management Expense Ratio (MER)

The total annual expenses of a fund, expressed as a percentage of its average net asset value.

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Index Fund

A fund that aims to track the performance of a specific market index, such as the S&P 500.

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Equity Funds

Funds that invest in stocks or other equity securities.

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Trailer Fee

A fee paid to the sales representative who sold you the mutual fund. It's an annual fee paid out of the fund manager's management fee.

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Investment Management Fee

A fee paid to the investment manager for their expertise in selecting and managing the fund's investments.

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Operating Expenses of a Mutual Fund

Expenses incurred by the fund beyond the management fee, such as administrative costs, custodial fees, and legal expenses.

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Conflict of Interest with Trailer Fees

A potential conflict of interest where a sales representative might recommend keeping money invested in a mutual fund even if it's not the best option for the investor, because they receive a trailer fee for doing so.

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What is an F-class fund?

A type of mutual fund with a lower MER that is charged a fee based on assets under management instead of commissions per transaction.

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What are Switching Fees?

These fees apply when switching between different mutual funds within the same company. Some companies offer unlimited free switches, while others have limits before fees apply.

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What are Advisor Fees?

These fees are typically charged by financial advisors for transferring funds between accounts. They are usually negotiable, capped at 2% of the amount being transferred.

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What is the MER?

The Management Expense Ratio (MER) is a percentage of fund assets that covers fund operating expenses, including management fees, administrative costs, and marketing expenses.

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How are Mutual Funds Regulated in Canada?

The Canadian securities industry is regulated in each province and territory, aiming to protect investors. Mutual fund regulations focus on personal trust, disclosure, and regulation, emphasizing ethical conduct among industry participants.

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Study Notes

Mutual Funds: Structure and Regulation

  • Mutual funds are a type of managed product that pools capital from many investors
  • Investors become unitholders or shareholders in the fund
  • Mutual funds are managed by professionals who follow an investment mandate
  • Active management involves making investment decisions based on market outlook
  • Passive management involves replicating a market index
  • Mutual funds offer diversification, economies of scale, and low-cost investment options
  • Mutual fund structures include mutual funds, ETFs, segregated funds, and more
  • Mutual funds have various types of charges such as expense ratios, sales charges, and more
  • Mutual funds are a complex investment requiring specific regulations
  • The "Know Your Client" rule and "Know Your Product" rules dictate suitability requirements
  • Mutual fund regulatory bodies include provincial securities commissions and CIRO
  • Disclosure documents, like Fund Facts and simplified prospectuses, are used to explain the fund
  • Client account performance reports must include the beginning and end account values, totals, and more
  • Prohibited selling practices include unethical sales tactics that harm clients
  • The fund has a custodian to manage investor funds
  • Different fund structures have pros and cons
  • Regulatory requirements are in place to protect investors
  • Costs associated with mutual funds include sales commissions, management fees, and more
  • Funds can be structured as a trust or a corporation
  • Fund managers, distributors, custodians and directors each have specific responsibilities
  • Fund managers pay trailer fees to distributors
  • Mutual funds have a set of rules and prohibitions, aimed at protecting investors
  • The role of directors or trustees is overseeing the funds, and ensuring it complies with rules

Key Terms

  • Active Management
  • Annual Information Form
  • Custodian
  • Early Redemption Fee
  • F-class funds
  • Front-end load
  • Fund Facts
  • Know Your Client
  • Know Your Product
  • Managed Product
  • Management Expense Ratio
  • Money Market
  • Mutual Fund
  • National Instrument 81-101
  • National Instrument 81-102
  • National Registration Database
  • Net Asset Value Per Share
  • No-load Fund
  • Offering Price
  • Open-end Trust
  • Passive Management
  • Pre-authorized Contribution Plan
  • Redemption Price
  • Registrar
  • Relationship Disclosure
  • Simplified Prospectus
  • Switching Fees
  • System for Electronic Document Analysis and Retrieval
  • Trading Expense Ratio
  • Trailer Fee
  • Transfer Agent
  • Trust Deed
  • Unsolicited Orders

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Related Documents

CSC Volume 2 Chapter 5: Mutual Funds PDF

Description

This quiz covers the fundamentals of mutual funds, including their structure, management styles, and regulatory aspects. Learners will explore the different types of mutual funds, charges involved, and the importance of regulatory compliance. Understanding these concepts is essential for anyone looking to invest in mutual funds or work in finance.

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