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Investment Company and Variable Products
The Series 6 registration authorizes exactly two families of products: packaged investment company securities and variable insurance contracts. This chapter builds those products from the ground up, starting with how a mutual fund is priced and what an investor actually pays, then moving through share classes, variable annuities and variable life, unit investment trusts, closed-end funds, and 529 plans. Almost every calculation and comparison you will see on the exam lives here.
Open-End Funds: Pricing and Redemption
An open-end investment company continuously offers new, redeemable shares and stands ready to buy them back. Because there is no exchange market, the price is not set by supply and demand; it is computed from the portfolio itself. Net asset value per share equals total assets minus total liabilities, divided by shares outstanding, and it is calculated at least once each business day, normally at the close of the market. Investors buy at the public offering price, which is NAV plus any sales charge, and redeem at NAV. Every order, whether a purchase or a redemption, is filled at the next price computed after the fund receives it, which prevents anyone from trading on a stale price.
NAV per share
Total assets minus total liabilities, divided by shares outstanding. Computed at least once every business day.
Investment Company Act of 1940Public offering price
POP = NAV divided by (100% minus the sales charge percentage). The sales charge is always a percentage of POP, never of NAV.
Sales charge percentage
(POP minus NAV) divided by POP. A fund with a $10.00 POP and $9.30 NAV carries a 7% sales charge.
Forward pricing
Orders are executed at the next NAV calculated after receipt, not at the last published price.
Investment Company Act of 1940Seven-day redemption
A fund must transmit redemption proceeds within seven calendar days of a proper request.
Investment Company Act of 1940Single class of stock
An open-end fund may issue only one class of voting common stock and no senior securities, though it may offer that stock through several sales charge arrangements.
Sales Charges, Breakpoints, and Share Classes
FINRA caps the sales charge on open-end fund shares at 8.5% of the offering price, and a fund may only charge that maximum if it gives investors three things: breakpoint discounts for larger purchases, rights of accumulation, and the ability to reinvest distributions at NAV. Beyond the front-end load, funds may deduct an annual 12b-1 fee from assets to pay for distribution and shareholder servicing. Share classes package these charges differently. Class A shares carry a front-end load but the lowest ongoing expenses, making them the usual answer for large, long-horizon investments. Class B shares avoid the front-end charge but impose a contingent deferred sales charge that declines annually and pay higher 12b-1 fees until they convert to Class A. Class C shares charge a level annual fee with at most a short CDSC, which suits smaller amounts and shorter holding periods but costs the most over many years.
8.5% maximum
The sales charge ceiling applies only if the fund offers breakpoints, rights of accumulation, and reinvestment of distributions at NAV.
FINRA Rule 2341 (Investment Company Securities)Letter of intent
A non-binding letter covering 13 months that lets an investor reach a breakpoint; it may be backdated up to 90 days. Shares are held in escrow until the goal is met.
Rights of accumulation
Existing holdings count toward the next breakpoint with no time limit, unlike the forward-looking letter of intent.
Who may aggregate
An individual, a married couple, and their minor children's custodial accounts count as one person for breakpoints. Investment clubs and similar groups do not.
FINRA Rule 2341 (Investment Company Securities)12b-1 fee limits
Asset-based distribution charges are capped at 0.75% plus a 0.25% service fee. A fund may call itself no-load only if total 12b-1 charges stay at or below 0.25%.
Investment Company Act of 1940Expense ratio
Annual operating costs, including advisory and 12b-1 fees, divided by average net assets. It is separate from any sales charge.
Variable Annuities
A variable annuity is an insurance contract whose investment results flow through a separate account rather than the insurer's general account, which means the contract owner bears the investment risk and the interest is a security. During the accumulation phase, each payment buys a varying number of accumulation units. At annuitization the account value converts into a fixed number of annuity units whose value moves with separate account performance measured against the assumed interest rate: beat the AIR and the payment rises, fall short and it falls. Payout options trade income size against guarantees, with straight life paying the most and joint and last survivor paying the least. Contracts typically have no front-end load but impose surrender charges that decline over the early years, and non-qualified contracts are taxed last in, first out.
Separate account
Registered under the Investment Company Act of 1940, usually as a unit investment trust, and insulated from the insurer's general creditors.
Investment Company Act of 1940Accumulation vs. annuity units
The number of accumulation units grows during pay-in; at annuitization the number of annuity units is fixed and only their value fluctuates.
Assumed interest rate
A pricing benchmark, not a guarantee. Separate account performance above the AIR increases the next payment; performance below it decreases the payment.
Payout options
Straight life produces the largest payment; life with period certain, unit refund, and joint and last survivor each add guarantees that reduce the monthly amount.
1035 exchange
Annuity-to-annuity, life-to-life, and life-to-annuity exchanges avoid current taxation; annuity-to-life does not qualify. Surrender charges may still apply.
Internal Revenue Code Section 1035LIFO taxation
Withdrawals from a non-qualified annuity take out earnings first as ordinary income, plus a 10% penalty before age 59 1/2.
Internal Revenue CodeVariable Life Insurance
Variable life insurance combines a death benefit with a separate account investment. The insurer guarantees a minimum face amount as long as scheduled premiums are paid, but the cash value depends entirely on investment results and carries no floor. Strong performance can lift the death benefit above the guaranteed minimum. Because the contract holder assumes investment risk, the policy is a security, so it is sold with a prospectus and requires both a state insurance license and securities registration. Scheduled premium policies fix the premium amount and timing; variable universal life allows flexible premiums but does not guarantee a minimum death benefit in the same way.
Dual regulation
Selling variable life requires both a state insurance license and the appropriate FINRA registration through a broker-dealer.
Securities Act of 1933Guaranteed minimum death benefit
Scheduled premium variable life guarantees a minimum face amount; the cash value is never guaranteed and can fall to zero.
Prospectus delivery
Because the separate account interest is a registered security, a prospectus must be delivered in connection with the sale.
Securities Act of 1933Loans and surrenders
Policy loans are generally limited to a percentage of cash value, and surrender charges may reduce proceeds during the early policy years.
UITs, Closed-End Funds, and 529 Plans
The Investment Company Act of 1940 recognizes three classes of investment company: face-amount certificate companies, unit investment trusts, and management companies, with management companies split into open-end and closed-end. A UIT holds a fixed, unmanaged portfolio under a trust indenture, has no board of directors and no investment adviser, and terminates on a stated date; its units are redeemable. A closed-end fund issues a fixed number of shares in a one-time offering and those shares then trade in the secondary market at a price that may sit above or below NAV. A 529 college savings plan is neither: because a state establishes it, the interest is a municipal fund security governed by MSRB rules and sold with an official statement rather than a statutory prospectus.
Three classifications
Face-amount certificate companies, unit investment trusts, and management companies (open-end and closed-end).
Investment Company Act of 1940UIT structure
Fixed portfolio, no board, no adviser, stated termination date, redeemable units.
Investment Company Act of 1940Closed-end pricing
Shares trade in the secondary market at a premium or discount to NAV, with commissions rather than the 8.5% sales charge ceiling.
Diversified fund test
The 75-5-10 rule: within 75% of assets, no more than 5% in one issuer and no more than 10% of any issuer's voting securities.
Investment Company Act of 1940529 plans
Municipal fund securities subject to MSRB rules; earnings are federally tax free when used for qualified education expenses, and the account owner keeps control.
Internal Revenue Code Section 529Conduit taxation
A fund distributing at least 90% of net investment income is taxed only on what it retains.
Internal Revenue CodeKiểm tra kiến thức của bạn
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