retirement outline

Variable annuity fees

·        Death benefit-has an impact on cost

·        Length of time annuity must be held-has an impact on cost

·        Sales charges <8.5% of total payments, paid for with accumulation units in separate account

·        Insurance co. pays broker/dealer commission for selling variable annuity

·        Insurance co. gets spent $ back through separate account fees

·        Level load sales charges, annuitant pays sales charges over the time the $ is invested in annuity

·        Contingent deferred sales charge, penalty charge for ending variable annuity contract early

·        Sales charge period, needs to expire for customers to end contract without penalty

·        Front end sales charge, can’t be>8.5%, investment $ - sales charge is placed in separate account

Variable annuity

·        Security

·        Insurance product

·        Must be registered

·        RR must be licensed in state of sale

Variable annuity contract

·        Security

·        Register with SEC

·        Separate account-register as security

·        Investment Company Act of 1940-separate account must register

·        RR must have Series7 or Series6

The people who sell variable annuities must be registered with which of the following:

·        The state-salesman

·        FINRA-salesman

·        Separate account: state & SEC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

investment company outline

Statement of additional information-if investment objectives met:

·        Mutual funds can invest in option contracts

·        Can borrow $

·        Can lend $

Investment Company Act of 1940

·        Recommend specific mutual fund MUST give prospectus

·        Full and fair disclosure

Prospectus requirements

·        Issue every 16mo

·        If customer requests, statement of additional information

·        Report to stockholders 2x per year-list current holdings-shares and bonds at market value

·        SEC must approve prospectus

Quarterly reports

·        Customer statements-show mutual fund stock and bond holdings at market value

·        For tax prep, report about dividend distribution and capital gain distribution

·        Tax prep form 1099 DIV has div distribution and cap gain distribution

·        Tax free dividends reported as tax free

·        Tax reports sent to holders by 01/31 of the next year

The objectives of a mutual fund can be changed if a majority of which of the following votes for the change?

·        Shares vote

·        Shareholders vote, get as many votes as shares

Regulated investment companies

·        IRS regulates all investment companies

·        Open end-regulated

·        Closed end-regulated

·        Special tax breaks-if pass through 90% of net income to shareholders, avoid 3x tax

·        Conduit theory-allow dividends and interest to flow through to investment company to holder without taxation when investment co. holds it.

An investment company that distributes at least 90% of its net investment income is called a:

·        Regulated investment company

·        90% of net income passed through to shareholders OR they are 3x taxed as a regular corporation

investment company outline

transfer agent

·        Work as bookkeeper

·        Clerks

·        Issue shares/certificates to show individuals own part of investment company

·        Maintain shareholder accounts-transactions, IRS, etc.

·        Send out dividend checks, capital gains distributions unless auto re-invest

·        Cancel redeemed shares

·        Send redemption checks to shareholders

Operating expenses

·        Salary/expenses for board of directors

·        Highest: management fees

·        Custodian fees

·        Service fees

·        Brokerage fees-to buy and sell in portfolio

·        Pay auditors for auditing

·        Legal fees

·        Printing and distribution costs to shareholders

Expense ratio

·        Expense ratio=operating expenses this year/total net asset value

Which of the following expenses are considered part of the costs of operation of a mutual fund?

·        Service fees

·        Brokerage fees

·        Management fees

·        Audit fees

·        Legal fees

·        YET printing prospectuses paid by sales charge

Securities Act of 1933

·        Mutual funds subject to 1933 rules

·        Advertising-oral/written/visual means to promote purchase

·        Prospectus before-or-with-ad

·        Ad can not have written application or tell customers to send fund

·        Ad must be given to FINRA within 10 days of use

·        Prospectus-must give to customer when you suggest they buy

No prospectus needed

·        Tombstone ad

·        Generic ad

Investment Company Act of 1940 says mutual funds can NOT have

·        Real estate

·        Commodities

·        Other mutual funds unless objectives met

·        Securities bought with margin

·        Securities if individual within investment company owns .5% (half of one percent) of issuer’s stock

investment companies outline

ways investors can withdraw from mutual funds

• fixed dollar plan-a fixed dollar amount over a period
• fixed time plan-pays whole amoutn over period
• fixed shares plan-pays out same # of shares each payment
• fixed percentage plan-pays a fixed percentage of invested dollars each payment to investor
• specific withdrawal plan, income plan for retirees/individuals who need income

Investment Company Act of 1940

• unit investment trusts register
• exchange traded funds register
• closed end investment companies register
• open end investment companies register
• aim: protect shareholders
• advisors must follow specific laws/procedures in working with customer's money
• investment companies must have $100,000 of capital and 100 shareholders before selling shares to public
• investment co. must decide it goals, stick to its goals within portfolio
• goals can be changed only by majority vote of shares, voted by shareholders
• Board of Directors-no more than <60% can have ties to investment company
• no less>40% can be independent of the company
• no more than 60% of board can be officers, directors, employees, or owner of 5% or more of outstanding shares of voting stock or be control persons like underwriters and investment advisers
• board of directors must ok 12b-1 plans
• board of directors must review expenses
• board of directors must distribute dividends/capital gains to shareholders
• shareholders don't vote on distributions

investment adviser

• board of directors hires I.A.
• manage fund's portfolio
• contract for 2 years, renewable every year
• board of directors and shareholders must renew contract
• decide to buy, sell, hold cash
• follow federal securities and tax laws
• advantage: professional management of investment company portfolio
• fund's largest expense-manager's receive management fee for services
• not paid with sales charge
• must be registed with SEC

objectives

• growth of capital-making/increasing $
• current income-how much $ are we kicking off

custodian bank

• commercial bank
• keeps securities and cash safe
• can be a trust company
• can be an exchange member firm

The investment adviser for an investment company is compensated with which of the following?

• management fee
• fund's biggest expense
• service fee, for maintaining shareholder accounts
• sales charge, underwriters and broker/dealers receive

 

investment companies outline

ask price, offer price, public offering price

• net asset value + sales charges
• decide at NYSE closing, sold at that price+sales charge if sold

forward pricing

• investor pays an estimate price
• unsure of next NAV pricing

where are mutual funds bought/sold

• not on exchanges
• buy shares as new issues at p.o.p.
• new issues sold at specified price

closed end management investment companies

• managers invest $
• buy mostly stocks and bonds
• offer new shares at initial public offering
• do not redeem shares
• capitalization stable/closed
• traded OTC
• sold at market price
• NAV calculation-same as mutual fund NAV calculation

Which of the following are not considered to be registered investment companies under the Investment Company Act of 1940?

• investment clubs and holding companies
• NOT under SEC
• NOT under Investment Company Act of 1940
• mutual fund-not registered investment company
• open end management investment company, registed investment company

Which of the following are not considered to be management companies under the Investment Company Act of 1940?

• Unit Investment Trusts and Exchange traded funds
• UIT and ETF-no active managers
• open end and closed fund hire investment advisor to manage portolios and rei

investment company outline

Hedge funds

·        Investment pool

·        Not advertised to the public

·        Professional money managers

·        Wealthy individuals invest

·        Institutions with much cash invest

Hedge fund advantages

·        Trades on any market worldwide

·        Unlimited short selling

·        Unlimited use of derivatives

·        Unlimited use of leverage

·        NO Investment Company Act of 1940, Do NOT have to be registered with the SEC

Hedge fund requirements

• must not need access to money immediately/ASAP
• sophisticated investor
• earned income of $200,000 in last two years
• expected income of $200,000 in next year
• minimum $1,000,000 net worth
• trust with assets of $5,000,000

Hedge fund fees

• 1-4% asset based fee
• performance based fee of 20%
• redemption fee if early withdraw
• buy and redeem at net asset value

Webstar Griffin Tarpley, Princeton educated writer warns

1. lack transparency
2. few disclosure documents
3. hard to assess diversification strategies
4. lack regulation
5. not regulated by any entity
6. large amounts of borrowed money/high leverage

Business Development company

• 1940 Investment company act says BDC-regulated investment company
• pass through 90% of investment income to investors
• 70% of assets invested in private/thinly traded public corporations
• can NOT invest in foreign companies
• give assistance to managers of companies they invest in
• make loans to corporations-use some of $ to get an equity position in company
• more of a tax advantage when pass through 98%
• make loans of $2-$50 million
• borrow for lending institutions OR get more investors
• pay out large amount of income and capital gains, >=98%
• trade on exchange
• trade on NASDAQ
• can trade on OTC market

requirements BDC:

• do NOT have to be high net worth
• able to handle risk
• risk comes with higher yields>normal
• yields not growth
• good in tax deferred investments-IRA, defined contribution plan, tax deferred situation

investment companies outline

Exchange traded notes

• unsecured senior debt securities
• issued by bank or broker/dealer
• Barclays issuer
• JP Morgan issuer
• no credit rating for notes
• issuer has credit rating
• promise to pay a certain amount by a certain time
• issued at set price and amt paid at maturity=purchase price=capital gain or loss
• capital gain or loss at sale
• hold ETN till maturity get one time payment based on performance
• can be sold before maturity in open market
• investor pays net asset value w/ commission
• track indexes or stock portfolios 
• track commodities, currencies, stocks with volatility
• index perform well, ETF perform poorly
• profit: value of stocks decrease &  ETN has short position
• lose: stocks decrease and ETN is long index
• lose everything: ETN goes bankrupt
• Securities Act of 1933 issues ETNs
• Investment company act of 1940 issues ETFS
• ETFs, redeem any day to issuer
• ETN, redeem any week to issur
• diversification-stocks, bonds, commodities
• investor buys debt from issuer
• similarity: ETF and ETN a)trade on market on daily basis
• similarity: ETF and ETN a)buy them on margin, can be sold short
• benefits ETN: a)invest in more types of markets than small investor usually can afford b)use as hedging

Investment companies outline

investment companies

• purpose: get many small investors to buy securities
• buy stocks, bonds, money market instruments

Investment company act of 1940,

• $100,000 capital minimum
•  100 shareholders minimum

Nonmanaged

•  many investors, 
• not actively managed

 Managed

•  actively managed by an adviser

 Unit Investment Trusts

• a)issue trust certificates with stake in muni bonds, corporate bonds, stock 
• b)sell units in specific investments 
• c)trust indenture-outlines obligations to manager of trust 
• d)have termination date-can be 50 years or more e)no Board of Directors, no managers f)have trustees

Exchange Traded Funds

• a)open end unit investment trusts aka SPDRs 
• b)open end investment companies 
• c)follow index like foreign companies or sectors 
• d)indexes-Dow Jones Industrial Average, Nasdaq 100 index, S&P 500 index
• shares bought on stock exchange floor-new issues and secondary issues
• no sales charge
• commission charge
• prospectus, with new shares
• secondary exchange, no prospectus
• can be bought on margin
• sell shares at net asset value
• sell shares at market price of ETF
• must buy 50,000 shares of stock
• index not changed much
• can be redeemed by institution that sponsored ETF
• can be sold short
• buying-weighted by index or weight by capitalization
• mutual funds have more turnover
• creation unit, inside SPDRs create in trust with 50,000 shares
• institutional investors may buy whole creation unit
• ETF owners can get dividends-small
• performance from ETF>dividend
• close trading at 4pm
• closing prices shown in newspapers

 Leveraged ETF

• leverages buying another fund that mirrors index
• use investor $ + borrowed money
• borrowed to investment 2:1 or 3:1 ratio
• hope investments>interest cost
• 2 or 3x returns as index
• requires borrowing-has its disadvantages 
• $ in short term securities and small amont of derivatives
• cash used to meet derivative obligations
• fees for management-managing securities
• interest costs on borrowed $
• transaction costs-borrowing and selling of securities
• for sophisticated investors
• for short term investments
• have a professional managing investments
• use leverage to try and make more
• not for a person who cannot tolerate large losses in a short time

Inverse ETF

• sell index fund shares short a)equity swaps b)buy/sell derivatives
• perform inverse from index
•  hedge portfolio against falling prices
• S&P 500 down 10%, ETF up 10%
• short sales, risky-sold stock must be bought again at a high price-could be a large loss
• short sale on a few stocks, loss spread amongst investors
• are managed
• buy and sell frequently
• fees can reduce profits
• bought in rising/increasing market
• sold in falling/decreasing market
• frequent buying/selling creates some volatility loss
• compounding error, losses cut into profits in volatile market
• not for a person who cannot handle large losses in s short time
• not long term investments