investment company outline

rights of accumulation

• quantity discounts that build up as investor owns more shares in mutual fund
• discounts increase with accumulated ownership increases

share value based on

• a)current value: NAV or max market price
• b)original purchase price
• c) most often used: current value or original purchase price-which is higher?

letter of intent

• form letter
• issued by mutual fund
• signed by investor
• investor plans on getting lower sales charges by buying set required amount of shares over 13mo
• binding on mutual fund
• not binding on investor
• can backdate 90 days so include previous purchases-take advantage of reduced sales charge

mutual fund conversion, mutual fund exchange

• customers can transfer $ from income-oriented fund to growth fund
• exchanges can be done at NAV
• advantage: keep customers's $ at same mutual fund company
• disadvantage: investor may pay tax consequence on capital gains/capital losses

dollar cost averaging

• invest over time
• investors buy shares every month
• by buying new shares every month-can get some shares cheaper
• average cost per share buying over times decreases vs. buying at one time

Which of the following is true of dollar cost averaging?

• the average cost is always lower than the market price average
• average cost per share<average dollare paid per share
• to investor's benefit

A letter of intent can be backdated up to how long:

• three months/90 days
• good for 13 mo
• can backdate up to three months

Redemption price

• if investors want to get rid of mutual fund shares they redeem them
• firm gives customer net asset value-redemption cost in 7 days
• no secondary market for mutual funds
• investors buy mutual fund shares from company and sell back to company

redemption fee

• redeem at NAV-redemption fee

tax on redemptions/distributions

• <1 year, short term gain/loss
• >1year, long term gain at 0%,15% or 20% by customer's tax bracket
• holding period, begins day customer buys securities, ends day customer sells/redeems securities 

distributions

• ordinary dividends, interest, short-term capital gain distributions-portfolio income, taxed at customer's tax bracket
• long term capital gain distributions-taxed at 0%,15%,20%

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