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9 Cards in this Set

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SEC regulations for securities issued by investment companies prohibit which of the following?



1. Closed-end funds from issuing preferred stock.


2. Open-end funds from issuing preferred stock.


3. Closed-end funds from issuing bonds.


4. Open-end funds from issuing bonds.

Answer: 2 & 4



Closed-end funds may issue more than one class of security; including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock; they may not issue senior securities.

An open-end investment co. may do all of the following EXCEPT:



A) continuously offer shares


B) borrow money


C) redeem shares


D) issue bonds

Answer: D



A MF may not issue any senior securities, although it may purchase almost any type of security for its portfolio.

To make a public offering, a registered investment co. must have a minimum net worth of:



A) $1M


B) $10M


C) $100M


D) $100K

Answer: D



Investment companies are not required to register an offering with the SEC unless they have a net worth of $100K.

If an open-end investment co. wishes to change its investment objective, it may only do so with a:



A) unanimous vote of the board of directors.


B) majority vote of the outstanding shares.


C) majority vote of the outstanding shareholders.


D) 2/3 vote of the outstanding shareholders.

Answer: B



The Investment Co. Act of 1940 requires the fund to have a clearly defined investment objective. The only action that can be taken to change the investment objective is a majority vote of the outstanding shares (shares vote, not shareholders).

In a mutual fund portfolio, it is permissable to buy all of the following EXCEPT:



A) junk bonds


B) shares of other mutual funds


C) stock on margin


D) index options

Answer: C



MFs may not purchase securities on margin because, in the event of a margin call, they have no recourse to investors' funds. A fund is not prohibited from buying options, low-quality bonds, or any other MFs.

Which of the following may be done only with the approval of the shareholders of an investment co?



1. A change from diversified to nondiversified status.


2. The purchase of particular bonds on the open market.


3. Personnel changes in the transfer agent's organization.


4. A change in the fund's objectives.

Answer: 1 & 4



Any substantive change in an investment co's form, structure, investment objective or business operation must be approved by a majority vote of the outstanding shares. Bond purchases are left to the fund's portfolio manager, and the transfer agent is trusted with its organization's personnel changes.

Financial info CANNOT be used in a MF prospectus if the information is older than:



A) 16 months


B) 60 days


C) 9 months


D) 12 months

Answer: A



A MF prospectus may not contain information that is more than 16 months old.

MFs are like other types of corporations in which of the following ways?



1. They may issue equity and debt.


2. The board of directors makes policy decisions.


3. Shareholders have ownership rights.


4. Their shares trade in the secondary market.

Answer: D



MFs may only issue redeemable common stock, no preferred stock or bonds. Like corporate stockholders, MF shareholders have a number of rights, including the right to elect the BoD, which sets policies for the fund. However, the shares can only be purchased in the primary market and then redeemed with the fund.

Which of the following is true regarding a "summary section" and a "statement of additional information" for management investment companies?



A) A summary section need not be included in the prospectus of a MF.


B) Both must be included in the prospectus of a management co.


C) Neither are required to be in the prospectus of a MF.


D) A statement of additional information (SAI) need not be included in the prospectus of a management co.

Answer: D



A statement of additional information (SAI) need not be in a prospectus, but available for both open and closed-end investment companies. It consists of info not necessarily needed to make an informed purchase decision, but still useful to the investor. The SEC mandates that "enhanced disclosure" in the form of a summary section be included in the prospectus of open-end investment companies (MFs). It must be written in plain language and the SEC mandates the order of, and the items to be addressed in the summary.