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75 Cards in this Set
- Front
- Back
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What is the Securities Act of 1933? |
Prevents fraud in the issue of new securities and requires full and fair disclosure |
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What is the role of the SEC with The Securities Act of 1933 (paper act)? |
1) Registration by issuer 2) Issuer files, underwriter advises 3) Cooling off period is a minimum of 20 days 4) Final (statutory) prospectus |
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What happens during the cooling-off period? |
1) SEC reviews the statement for full and fair disclosure 2) The preliminary (red herring) prospectus can be sent out 3) Take indication of interest (not binding), but no orders or offers 4) No information other than red herring can be sent out |
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What is the Securities Exchange Act of 1934? |
The people and places act and deals with the secondary market (e.g., Exchanges and OTC-unlisted). Creation of the SEC came out of this act. |
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What is an underwriter? |
Person that purchased securities from an issuer w/ the intent to resell them |
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Who is an accredited investor? |
Institutions (i.e., bank, B/D, ins company, employee benefit plan w/ excess of $5 mil in assets, corp, partnership w/ excess of $5 mil in assets), insider of the issuer, & any person w/ a net worth of over $1 mil (not including primary residence or income of $2 mil in last 2 years, or join income in excess or $3 mil in 2 years) and has a reasonable expectation of earning the same income in current year. |
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What is Regulation D - Private Placement? |
Securities that are not sold to the public. If selling to accredited investors, general advertisement is allowed. General advertisement is not allowed if selling to non-accredited investors (limit of 35). |
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What is the Investment Company Act of 1940? |
Defines and regulates investment companies |
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Who is an affiliated person? |
A person who owns, controls, or holds, with power to vote, 5% or more of the outstanding voting securities of an investment company. Can be a officer, director, partner, copartner, employee, investment adviser, or member of the advisory board of an investment company. |
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Who is an interested person? |
An affiliated person, their family, legal counsel to company for last 2 fiscal years, B/D with business relationship for last 2 years, or anyone that SEC deems as interested. |
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What deems a person as an interested person? |
The person has to meet the criteria of an interested person. They cannot be deemed an interested person just from being a member of its board of directors or advisory board or an owner of its securities. Some will be known as "noninterested" members. |
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What is an investment company? |
An issuer that is, or holds itself out as being, engaged primarily in business of investing, reinvesting, or trading in securities. More than 40% of the value of the issuer's total asset is invested in investment securities. Does not include a holding company or a variable annuity, but is the separate account. |
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Who is a principal underwriter? |
The fund's chief salesperson for an investment company or fund. Responsible for the distribution of the investment company's shares. |
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What is a redeemable security? |
A security under the terms of which the holder, upon presentation to the issuer, is entitled to receive his proportionate share of the issuer's current net assets. All redeemable except closed-end company shares. Always refers to mutual funds, variable annuities, and unit investment trusts. |
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What is a sales load? |
The difference between the price of a security to the public and the net portion of the proceeds from its sale that is received and invested or held for investment by the issuer, minus any portion that is deducted for trustees' or custodians' fees, insurance premiums, administrative expenses, or fees that are not properly chargeable to sales activities. |
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What is a separate account? |
An account established and maintained by an insurance company in which income, gains, and losses - whether realized or not - from assets allocated to the account are in accordance with the applicable variable annuity or variable life insurance contract. In almost all cases, the separate account is registered as an investment company under the act. |
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What are the types of investment companies? |
The three broad types are face-amount certificate companies, management investment companies, and unit investment trusts (UIT). |
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What are Face-amount certificates? |
1) Issued at a discount 2) Mature at certificate face amount 3) Not actively managed 4) Redeemable |
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What are Unit Investment Trusts? |
1) Fixed Trust a) Debt securities - trust liquidates at maturity b) Equity securities - trust liquidates at predetermined time 2) Not actively managed 3) No board of directors (board of trustees) |
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Is a UIT fixed or non-fixed? |
It can be both. A fixed UIT purchases a portfolio of bonds and terminates when the bonds in the portfolio mature. A nonfixed UIT purchases shares of an underlying mutual fund. Under the Act of 1940, the trustees of both fixed and nonfixed UITs must maintain secondary markets in the units, thus providing a measure of liquidity to shareholders. |
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What are the Management Investment Companies? |
The most common type of investment company. 1) Open-end (mutual fund) 2) Closed-end (publicly traded funds) 3) Diversified a) 75% of assets invested so that: 4) no more than 5% of total assets are in any one issuer 5) no more than 10% ownership of the outstanding voting stock of any one issuer b) No restrictions on the remaining 25% 6) Nondiversified |
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What is a bid price? |
Price at which an investor can sell |
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What is an ask price? |
Price at which an investor can buy |
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What are Closed-End Investment Companies? |
Publicly traded funds. Can be brought or sold in the secondary market either on exchange or OTC after stock is distributed. Supply and demand determine the bid price and the ask price. May trade at a premium or discount to the shares' underlying net asset value. |
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What is the investment company registration process? |
Complete registration on form N1-A 1) part 1 is the statutory prospectus 2) part 2 is the statement of additional info (SAI) 3) disclosure of expenses and risks 4) both identify portfolio managers and describe potential conflicts of interest and method of compensation. |
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What are Open-End Investment Companies? |
Also known as a mutual fund. Does not specify the exact number of shares it intends to issue; rather, it registers an open offering with the SEC. With this type of registration, the open-end investment company can raise an unlimited amount of investment capital by continuously issuing new shares. Always be sold by prospectus & may never be purchased on margin. |
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How to calculate an individual mutual fund share? |
First, calculate its net assets. Total Assets - Liabilities = Net Assets
Then, calculate the net asset value per share (NAV) Net Assets/Number of Shares = NAV
Should be calculated at least once per day! |
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How is the underwriter compensated? |
Add a fee or sales charge (SC) to the NAV. The total price, as known as a Class A share, is called the public offering price (POP). NAV + SC = POP |
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What is forward pricing? |
The price of waiting until the next day's calculation (after 4:00pm closing). |
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What is the max for sales charge? |
The SC may never amount to 8.5% of the POP. |
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What is a diversified company? |
Any mgmt company with at least 75% of the value of its total assets invested so that securities of any one issuer are not greater than 5% of the total assets, and not more than 10% of the outstanding voting securities of any issue are held. No specific requirements for the other 25% of the total assets. |
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What is a nondiversified company? |
Any mgmt company other than a diversified company. |
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When is no action required to maintain a diversified status? |
If a security represents 5% or less of the fund's total assets at the time of purchase and thereafter exceeds 5% due to capital appreciation. |
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Why should management company securities be registered with the SEC before sale? |
Because they are nonexempt. |
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How do you explain a company that is registered with the SEC as an investment company? |
They are in the business of investing in, reinvesting in, owning, holding, or trading securities, and have 40% or more of the company's assets invested in securities (this excludes government securities and securities of majority-owned subsidiaries. |
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What are the minimum requirements a company must meet before it can register as an investment company with the SEC? |
1) Private capitalization (seed money) of at least $100K (allowed to meet this req. in 90 days) 2) A clearly defined investment objective; and 3) Agreed to provide semiannual reports to shareholders (one audited).
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What does an investment company need to file for registration? |
1) The type of investment co it intends to be 2) Plans the company might have to raise $ by borrowing 3) Any intention to concentrate investments in a single industry 4) Plans for investing in real estate or commodities 5) Conditions under which investment policies may be changed by a vote of the outstanding shares 6) Name & address of each affiliated person 7) Business exp of each officer & director for the preceding 5 years |
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What does margin refer to? |
The practice of borrowing money through a brokerage firm to purchase securities. |
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When are the purchase of new shares prohibited? |
The Securities Exchange Act of 1934 prohibits the purchase of new shares on margin for the first 30 days of an offering. |
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Can mutual fund shares be purchased on margin? |
No, because they are always considered new securities. However, they may be used as collateral, a practice known as hypothecation, in accordance with Reg T of the Fed Reserve Board in a margin acct once they have been held fully for at least 30 days. |
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What must a company do after filing as an investment company under the Act of 1940? |
They must also register any securities it intends to sell with the SEC. The registration of shares takes place under the Securities Act of 1933. |
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What is the statement of additional information (SAI)? |
It contains additional information about the fund and further disclosure regarding operations. It is not required in the sales process but must be available upon request for public inspection (without charge). |
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Does the SEC approve securities? |
No, they only request that securities be registered with them. The front cover of every prospectus must clearly state a disclaimer that the SEC does not approve securities. |
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What must the statutory prospectus (N1-A) registration contain? |
1) Type of mgmt investment co it intends to be 2) Plans the company has to raise $ by borrowing 3) The company's intention, if any, to concentrate its investments in a single industry 4) Plans for investing in real estate or commodities 5) Conditions under which investment policies may be changed by a vote of the shares 6)Full name & address of each affiliated person 7) Business exp of each officer & director for the preceding 5 years 8) Provision to provide semiannual reports to shareholders, one must be audited. Must include balance sheet, list & value of securities owned and a statement of income.
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What must precede or accompany a solicitation for sale? |
A statutory or full prospectus. However, an exception is made when selling mutual funds using summary prospectus (SP). With a SP, the purchaser must receive a statutory or full prospectus no later than by receipt of the purchase confirmation. |
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What must a registered rep not do with a red herring or preliminary prospectus? |
Highlight it or draw attention to what they believe to be the key issues. It is a violation of federal securities law. |
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What is avoided during the cooling-off period? |
1) promoting securities 2) accepting money as a deposit to hold securities 3) selling securities 4) taking orders |
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What is Common Stock (Equity Securities)? |
A security that represents ownership in a company. Both open and closed end investment companies allow investors to invest in their portfolios by selling shares of the funds. Interest is proportionate to the number of shares owned. |
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What type of common stock can be issued by open-end companies? |
Redeemable; they may not issued preferred stocks and bonds. They can take on debt by borrowing from banks, but only if they maintain an asset-to-debt ration of at least 3:1. |
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What are bonds and preferred stock (senior securities)? |
A stock issued by closed-end investment companies. Both types of management companies must maintain an asset-to-debt ratio of at least 3:1. |
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What are the restrictions on operations? |
1) Margin trading 2) Short sales 3) Short uncovered options 4) Owning more than 3% of the outstanding shares of another investment company 5) Entering into a joint trading account with another person |
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What do shareholders have the right to vote for? |
1) Board of directors 2) Investment adviser's contract 3) Fundamental change in investment objectives/policies 4) Approval/elimination of 12b-1 fees for mutual funds 5) Changes nature of business |
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What are the changes that require a majority vote of outstanding shares? |
1) Changes in borrowing by open-end companies 2) Issuing or underwriting other securities 3) Changing subclassification 4) Changing sales load policy 5) Changing the nature of the business 6) Changing investment policy |
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What should be included in a final (statutory) prospectus? |
1) The SEC disclaimer 2) Must be a complete and honest document 3) Not approved but cleared for release 4) Effective date (day on which the sales begin)
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What does The Securities Exchange Act of 1934 (people and places act) regulate? |
1) regulation of credit (federal reserve board) 2) regulation of trading activities 3) regulation of exchanges 4) Regulation of insider transactions, short sales, & proxies 5) Registration of B/D & associated persons 6) Regulation of client accounts 7) Regulation of the OTC market |
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Why does The Securities Exchange Act of 1934 - People and Places Act establish rules? |
1) Net capital requirements for B/D 2) Customer protection 4) Antifraud provisions 5) Insider trading |
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What are the 5 parties that work together to make an investment company operate? |
1) Board of directors 2) Investment adviser 3) Custodian 4) Transfer agent 5) Underwriter |
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What is the role of the BOD with an investment company? |
1) Operate fund as business entity 2) All BOD members are affiliated persons 3) Minimum term of one year, max of 5 years 4) No felonies or securities-related misdemanors 5) Composition will be at least 40% noninterested and simple majority noninterested if 12b-1 fees are charged |
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What is the role of an investment adviser with an investment company? |
1) First contract - max of 2 years (majority vote of shares & the noninterested BOD 2) Contract renewable annually (majority vote of shares or BOD) 3) Max 60 day notice of termination 4) Manage to achieve investment objectives, not change them 5) The largest expense of the fund |
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What is the role of a custodian with an investment company? |
1) Usually a bank or B/D 2) Safeguards assets 3) Keeps asset records |
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What is the role of a transfer agent with an investment company? |
1) Shareholder recordkeeping responsibility 2) Shareholder/customer service 3) Can be the fund custodian or separate serviced company |
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What is the role of the underwriter with an investment company? |
1) FINRA member (sponsor/distributor) 2) Sells fund shares to public 3) Sales load not an expense of the fund 4) Concessions refunded on less than or greater than 7 day redemptions 5) May not maintain inventory of shares 6) May share sales load w/ network of other FINRA members |
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What is the 12b-1 fee? |
1) Asset-based distribution fee renewed annually, charged quarterly to the shareholder 2) If not load, must be 0.25% or less 3) Simple majority of BOD must be noninterested 4) To adopt - majority vote of BOD, noninterested members and shares 5) To terminate - majority vote of noninterested BOD or outstanding voting securities |
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What is a fund's expense ratio? |
It includes the expenses of the board, fund manager, custodian, transfer agent, and the 12b-1 fees. |
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How do you calculate the expense ratio? |
Total expenses/Average net assets = Expense Ratio |
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What are the sales disclosures for investors? |
1) Rule 482 ommitting prospectus (tombstone) 2) Statutory prospectus - used for sales
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What does the ommitting prospectus (tombstone) contain? |
1) May contain performance data 2) Omits information; not usable for sales |
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What is in part 1 (prospectus proper) of the statutory prospectus? |
1) Must begin w/ mandatory summary of key points 2) Updated annually 3) May not use info more than 16 months old 4) Performance for 1, 5, & 10 years, or life of fund if shorter (max sales load, reasonable expense projections used & comparison to an appropriate index) 5) Material factors affecting performance 6) Person(s) responsible for fund management |
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What is in part 2 (statement of additional information) of the statutory prospectus? |
1) Consolidated financials 2) Balance sheet 3) Statement of operations 4) Income Statement 5) Sent w/in 3 business days, if requested |
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What is the summary prospectus (SEC Rule 498)? |
1) Summarizes key points of the statutory prospectus in an easy to understand, clear, and concise format 2) Includes an application, but purchaser must be able to access a statutory prospectus no later than confirmation of the sale 3) Cannot be bound together with sales material |
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Who serves the interests of its investor at an investment company? |
1) CEO 2) Team of Officers 3) Board of Directors |
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How long is the term for directors of an investment company? |
They serve a term of office from one to five years and are divided into classes. |
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Is a long arrangement allowed between an investment company and an officer, director, partner, or manager of the fund? |
Under no circumstances is this allowed. |
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What does the proxy statement and seminannual and annual report include? |
1) A discussion of nature, extent, and quality of the services to be provided by the investment adviser 2) the investment performance of the fund and the investment adviser 3) the costs of the services to be provided and profits to be realized by the investment adviser & its affiliates from the relationship w/ the fund 4) the extent to which economies of scale would be realized as the fund grows 5) whether fee levels reflect these economies of scale for the benefit of fund investors. |
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What does the SEC Rule 38a-1 for mutual funds and Rule 206(4)-7 of the Investment Advisers Act of 1940 require? |
That mutual funds and their advisers adopt written procedures designed to prevent violation of federal securities laws. |
