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

mutual fund sponsor

• is the investment company
• start fund
• gather first $
• register with SEC

mutual fund underwriter

• distributor of mutual fund shares

selling agreement

• when broker/dealers buy shares at net asset value (NAV) and sell them to customers, they must sign a selling agreement

Securities Act of 1933

• can't buy new issues on margin
• after individuals buy shares and hold for 30 days, shares can be used as collateral in margin accpunt to buy more shares

What is the maximum sales charge that can be assessed on a purchase of open-end investment company shares with all options allowed?

• 8.50%

max sales charge allowed

• if a)quantity discounts
• if rights of accumulation

Public offering price

• POP=NAV+sales charge

A mutual fund has a NAV of $18.60 and a sales charge of 6%. What is the offering price of the fund?

• 100%-6%=94%.
• 18.6/.94=19.79. POP=19.79

quantity discounts

• customer can buy mutual fund shares with less sales charges
• allowed when customer buys a large amount of shares
• prospectus describes discounts for buying large # of shares
• NO: investment clubs
• YES: husbands, wives and minor children
• salesperson must tell customers about discounts
• break FINRA rule, salesman doesn't tell customer about sales discounts

Sales breakpoint (SB, good for customer)

• point where customer gets cheaper sales charge

breakpoint sale (BS, bad for customer)

• salesperson doesn't tell customer who buys large amount of shares that they will get a discount if they buy a smaller amount of new shares above what they were planning on buying
• letter of intent, helps avoid breakpoint sale
• customer statement, helps avoid breakpoint sale
• can happen if salesperson suggests two different mutual funds when customer would pay less sales charges if they bought only one mutual fund

All of the following types of customers can take advantage of reduced sales charges, such as a breakpoint in class A shares, except:

• a father and his adult son
• separate adults are not a legal group like husband and weife

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

underwriting outline

Treasury securities

• treasury bills
• treasury notes
• treasury bonds

•  offered by auction
• competitive bidders, broker dealers, large banks, money centers-$1 million or more-bid within interest rate Fed wants
• noncompetitive bidders, buy $1000-$1,000,000, will always get bonds
• all bidders get T-bills at same yield
• T-bills, T-notes, T-bonds-winning bids get securities at one set price
• T-bill auction-Monday and Tuesday
• payment due Thursday in cash, banks- as federal funds, rollover-maturing Treasry security
• individuals roll over maturing T-bills or deposit a check before auction date
• banks, large institutions set up federal funds account with Fed and pay on Thu payment due
• notes-auction 2nd and 4th Wed, payment due on 15th or last day of mo
• no prospectus, no official statement required
• exempt from Securities Act of 1933
• negotiated underwriting
• issued at price close to par

Noncompetitive bidders for U.S. government T-bills receive which of the following yields at auction?

• the highest yield
• competitive bidders determine yield
• noncompetitive bidders get T-bills first at highest yield 

underwriting outline

• no SEC registration: municipal bonds DO NOT 

bond disclosure:

GO bonds disclosure

• per capita debt

revenue bond disclosure 

• expected income from facility built with bond $
• how muni will spend $
• engineering info

 Exempt

• munis from Securities Act of 1933 registration requirements 
• official statement-not required by SEC

Municipal Securities Rulemaking Board Rules (MSRB)

• publish official statement
• official statement-marketing purposes

prospectus

• for corporate offerings

 official statement

• for municipal offerings

 Priority allocation of orders

1. presale orders
2. group net orders
3. designated orders
4. member orders-@takedown

• munis can be sold before underwriter's underwriting process

corporate debt securities outline

Trust Indenture Act of 1939

1. requires all corporate issues of $10 million or more to be issued under an indenture, deed of trust
2. indenture, a promise by the issuer
3. indenture, trustee watches over an agreement between the issuer and the bondholders
4. bondholders may take legal action if the issuer fails to live up to the promises (covenants) made to the bondholders
5. indenture, outlines the rights and duties for both the bondholder and the issuer
6. the trust indenture describes who is trustee, duties of the trustee
7. Securities Act of 1933: corporate bonds and corporate stocks are subject to registration requirements
8. indenture is part of registration
9. prospectus outlines the provisions of the indenture
10. closed end provision: provisions of indenture may restrict other borrowing at similar terms
11. deed of trust, bond contract 
12. book entry bond, many bonds are issued without certificates, issuer hires transfer agent to keep track of the names of the bondholders
13. issuer hires trustee to make sure the corporation follows all of the terms outlined in trust indenture
14. trustee: has the responsibility to protect the bondholders

Prospectus and indenture

1. prospectus, offering circular: document that is used to describe the terms of the bond, disclosures of risk, the use of the proceeds from selling the bonds

indenture, like an agreement, outlines detailed provisions of the bond

1. if the bond is callable or convertible into shares of common stock
2. authorized amount issued
3. form of the bond-registered bond or book entry bond
4. description of collateral backing the bond 
5. protective covenants, promises
6. sinking fund provisions: an account managed by bond trustee for the purpose of repaying bonds and conversion provisions
7. duties and privileges of the trustees, issuers and bondholders

• Which of the following is a security issued under the Trust Indenture Act of 1939? Corporate bonds. The Trust Indenture Act of 1939 only outlines the requirements for corporate bonds. Municipal and U.S. government bonds are exempt from the act since they are not corporations. Municipalities do issue bonds that have a trust indenture which is under a different requirement by the Federal Government. U.S. government bonds are never issued with a trust indenture.