Achievable logoAchievable logo
Series 10
Sign in
Sign up
Purchase
Textbook
Practice exams
Support
How it works
Exam catalog
Mountain with a flag at the peak
Textbook
Introduction
1. Supervision
2. Registrations
3. Client issues
4. Investment products
4.1 Basic securities
4.2 Investment companies
4.2.1 Basics of Investment Companies
4.2.2 Management companies in more detail
4.3 Open-end funds and exchange traded funds
5. Margin accounts
6. Federal rules and regulations
Wrapping up
Achievable logoAchievable logo
4.2.2 Management companies in more detail
Achievable Series 10
4. Investment products
4.2. Investment companies
Our FINRA Series 10 course is currently in development and is a work-in-progress.

Management companies in more detail

7 min read
Font
Discuss
Share
Feedback

By far the most common investment companies any of you likely have been selling, likely will be selling, and likely will be supervising in principal or supervisory capacity, will be either open-end or closed-end management companies, with the majority likely being open-end. Sure, there are some UITs you all might have sold, or will supervise the sales of in the future, but the vast majority are management companies, and of those likely at least the simple majority were open-end management companies.

Changing investment policies

Any changes to investment policy must be approved by the voting shares. If you are investing in a growth mutual fund, for them to change to an income fund, a vote would be required. You might lose that vote, but, only after a majority of the voting shares approve could a mutual fund change its investment strategy.

Reasoning for purchase

Many reasons people purchase mutual funds is because of the consistent distributions. Mutual funds generally will distribute quarterly income/dividend distributions, and annual capital gains distribution. Every distribution from a mutual fund will contain a written statement that accompanies dividends payments by management companies to explain how it is taxed. Remember, if it is a divided distribution, that is coming from income, and would be taxed at ordinary income rates. If it is a capital gains distribution, that means it is coming from money raised from profits of selling something for more than they purchased it for, then it would be capital gains taxed. Whether long-term or short-term capital gains depend on how long the mutual fund held it, not how long the investor held the shares of the mutual fund before distribution. Very rarely would a mutual fund ever distribute short-term capital gains.

All investors purchase from mutual funds at the Public Offering Price (POP). No one except FINRA member firms may get a discount from the POP. Other member firms may not hold mutual fund shares in inventory, purchased at a discount from POP, that would be with a concession. Concession is merely the complicated term for the discount, the rebate, off of the POP, still above NAV, that the firm could take orders from clients at, thereby having a profit motive to help sell the shares.

NAV and POP in more details.

Net Asset Value (NAV) is the net assets divided by the number of outstanding shares. Net assets is simply total assets minus total liabilities. Outstanding SharesNet Assets​ or it could be written as Outstanding SharesTotal Assets−Total Liabilities​

Public Offering Price, (POP), is often though of as NAV+SC=POP, NAV plus the sales charge, equals POP. It actually is the sales charge coming from POP. NAV+SC is close, but you’d have to round up for the correct answer, or use the formula 1−Sales ChargeNAV​

Sidenote
Example of BDs buying from investment companies

Maybe ABC Mutual Fund has shares with a NAV of 47 and a POP of 50. MNO BD has a client that they want to sell the shares to, client pays $50, but MNO might be getting a $1.50 concession, so they are in effect paying $48.50, selling it to the client at the POP of $50, and that $1.50 they keep. The additional $1.50 over the NAV would be the profit of the mutual fund, and they didn’t have to do the work of selling it.

If the client returns the shares within 7 days, though, that concession and therefore our commission would be returned.

All redeemable securities that are redeemed must be cashed out within 7 days of tender of the security. When an investor sells their mutual funds, or UIT back to the issuer, they will get their money within 7 days. Usually it’s faster, 7 is the most.

Rule 12b-1

Open-end management investment companies cannot act as a distributor of their own securities except through an underwriter, unless the payments made by such company in connection with the distribution are made pursuant to a written plan, the 12b-1 plan. In most cases for the real world, we simply think of 12b-1 as the quarterly fees investors pay, in addition to the up-front load most would be paying with open-end, mutual fund shares. The maximum can be 1.00%, which has a maximum of 0.75% for distribution and 0.25% for service fees. They can, and often are lower, they cannot be higher.

The plan must be initially approved and implemented by approval of the majority of the outstanding voting shares, a majority of the entire board of directors, and a majority of the members of the board that are not interested, the “uninterested board of directors”.

The plan will be reviewed quarterly by the board of directors, but it must be reapproved annually to continue. The vote to continue 12b-1 will require the majority of the entire board of directors along with a majority of those uninterested board of directors. 60% of the board of directors, at most, can be interested; that means at least 40% must be uninterested. One way to think about this, could be that if at most 60% of the group could be male, that means at least 40% must be female. These are saying the same thing and the test could phrase it either way.

The 12b-1 plan can be terminated with either a majority of those same uninterested board of directors, or a majority of the outstanding voting shares. Make sure to pay attention to the or, the others are all ands. Either the uninterested board, OR the shares can end it.

Exchange-traded funds (ETFs)

ETFs seem very much like closed-end funds, in how they trade and work. There are a finite number of shares in an ETF, just like a closed-end fund, and unlike an open-end fund that creates and destroys shares daily. ETFs and closed-end funds trade on exchanges, while open-end are redeemed by the open-end company. The trickiness comes in that many ETFs are actually registered at open-end funds. They function as closed-end, even if technically registered as open-end. ETFs could be registered as closed-end or UITs as well, they just usually in this time, are registered as open-end, likely because of the computerized open-end fund models.

Some common examples of ETFs that track an index would be VOO which is the Vanguard S&P 500 ETF, and QQQ which is the Invesco NASDAQ 100 ETF. Examples of ETFs tracking sectors would include GLD which is the primary ETF tracking gold, and VTV which is the Vanguard Value ETF.

ETFs are great for investors who know what they are doing, or for brokerage portfolios to help diversify at lower costs than mutual funds. You aren’t likely to invest mutual funds in a brokerage account, while ETFs are common.

Inverse ETFs are where ETFs get interesting. Inverse ETFs are trying to track an index, or market, but on the opposite side. When the index goes down in value, these go up. They use shorts, futures, and options, along with other potentially complicated investments, to make these very precise instruments. If the DOW goes down approximately 10, these DOW Inverse ETC will go up approximately 10.

Leveraged ETFs are where ETFs start amplifying. They can be 2x or 3x an index or other market. If the S&P goes up 5, a 3x S&P ETF will go up 15. Similarly if the S&P goes down 5, the 3x S&P index will go down 15. They can be combined with invested to get inverse leveraged ETFs. They work just like you’d expect, a -2x DOW ETF, if the down goes down 5, would go up 10. Similarly, if the DOW went up 10, the -2x DOW ETF would go down 20.

Sign up for free to take 5 quiz questions on this topic

Previous
Next  | 4.3 Open-end funds and exchange traded funds
All rights reserved ©2016 - 2026 Achievable, Inc.

Management companies in more detail

By far the most common investment companies any of you likely have been selling, likely will be selling, and likely will be supervising in principal or supervisory capacity, will be either open-end or closed-end management companies, with the majority likely being open-end. Sure, there are some UITs you all might have sold, or will supervise the sales of in the future, but the vast majority are management companies, and of those likely at least the simple majority were open-end management companies.

Changing investment policies

Any changes to investment policy must be approved by the voting shares. If you are investing in a growth mutual fund, for them to change to an income fund, a vote would be required. You might lose that vote, but, only after a majority of the voting shares approve could a mutual fund change its investment strategy.

Reasoning for purchase

Many reasons people purchase mutual funds is because of the consistent distributions. Mutual funds generally will distribute quarterly income/dividend distributions, and annual capital gains distribution. Every distribution from a mutual fund will contain a written statement that accompanies dividends payments by management companies to explain how it is taxed. Remember, if it is a divided distribution, that is coming from income, and would be taxed at ordinary income rates. If it is a capital gains distribution, that means it is coming from money raised from profits of selling something for more than they purchased it for, then it would be capital gains taxed. Whether long-term or short-term capital gains depend on how long the mutual fund held it, not how long the investor held the shares of the mutual fund before distribution. Very rarely would a mutual fund ever distribute short-term capital gains.

All investors purchase from mutual funds at the Public Offering Price (POP). No one except FINRA member firms may get a discount from the POP. Other member firms may not hold mutual fund shares in inventory, purchased at a discount from POP, that would be with a concession. Concession is merely the complicated term for the discount, the rebate, off of the POP, still above NAV, that the firm could take orders from clients at, thereby having a profit motive to help sell the shares.

NAV and POP in more details.

Net Asset Value (NAV) is the net assets divided by the number of outstanding shares. Net assets is simply total assets minus total liabilities. Outstanding SharesNet Assets​ or it could be written as Outstanding SharesTotal Assets−Total Liabilities​

Public Offering Price, (POP), is often though of as NAV+SC=POP, NAV plus the sales charge, equals POP. It actually is the sales charge coming from POP. NAV+SC is close, but you’d have to round up for the correct answer, or use the formula 1−Sales ChargeNAV​

Sidenote
Example of BDs buying from investment companies

Maybe ABC Mutual Fund has shares with a NAV of 47 and a POP of 50. MNO BD has a client that they want to sell the shares to, client pays $50, but MNO might be getting a $1.50 concession, so they are in effect paying $48.50, selling it to the client at the POP of $50, and that $1.50 they keep. The additional $1.50 over the NAV would be the profit of the mutual fund, and they didn’t have to do the work of selling it.

If the client returns the shares within 7 days, though, that concession and therefore our commission would be returned.

All redeemable securities that are redeemed must be cashed out within 7 days of tender of the security. When an investor sells their mutual funds, or UIT back to the issuer, they will get their money within 7 days. Usually it’s faster, 7 is the most.

Rule 12b-1

Open-end management investment companies cannot act as a distributor of their own securities except through an underwriter, unless the payments made by such company in connection with the distribution are made pursuant to a written plan, the 12b-1 plan. In most cases for the real world, we simply think of 12b-1 as the quarterly fees investors pay, in addition to the up-front load most would be paying with open-end, mutual fund shares. The maximum can be 1.00%, which has a maximum of 0.75% for distribution and 0.25% for service fees. They can, and often are lower, they cannot be higher.

The plan must be initially approved and implemented by approval of the majority of the outstanding voting shares, a majority of the entire board of directors, and a majority of the members of the board that are not interested, the “uninterested board of directors”.

The plan will be reviewed quarterly by the board of directors, but it must be reapproved annually to continue. The vote to continue 12b-1 will require the majority of the entire board of directors along with a majority of those uninterested board of directors. 60% of the board of directors, at most, can be interested; that means at least 40% must be uninterested. One way to think about this, could be that if at most 60% of the group could be male, that means at least 40% must be female. These are saying the same thing and the test could phrase it either way.

The 12b-1 plan can be terminated with either a majority of those same uninterested board of directors, or a majority of the outstanding voting shares. Make sure to pay attention to the or, the others are all ands. Either the uninterested board, OR the shares can end it.

Exchange-traded funds (ETFs)

ETFs seem very much like closed-end funds, in how they trade and work. There are a finite number of shares in an ETF, just like a closed-end fund, and unlike an open-end fund that creates and destroys shares daily. ETFs and closed-end funds trade on exchanges, while open-end are redeemed by the open-end company. The trickiness comes in that many ETFs are actually registered at open-end funds. They function as closed-end, even if technically registered as open-end. ETFs could be registered as closed-end or UITs as well, they just usually in this time, are registered as open-end, likely because of the computerized open-end fund models.

Some common examples of ETFs that track an index would be VOO which is the Vanguard S&P 500 ETF, and QQQ which is the Invesco NASDAQ 100 ETF. Examples of ETFs tracking sectors would include GLD which is the primary ETF tracking gold, and VTV which is the Vanguard Value ETF.

ETFs are great for investors who know what they are doing, or for brokerage portfolios to help diversify at lower costs than mutual funds. You aren’t likely to invest mutual funds in a brokerage account, while ETFs are common.

Inverse ETFs are where ETFs get interesting. Inverse ETFs are trying to track an index, or market, but on the opposite side. When the index goes down in value, these go up. They use shorts, futures, and options, along with other potentially complicated investments, to make these very precise instruments. If the DOW goes down approximately 10, these DOW Inverse ETC will go up approximately 10.

Leveraged ETFs are where ETFs start amplifying. They can be 2x or 3x an index or other market. If the S&P goes up 5, a 3x S&P ETF will go up 15. Similarly if the S&P goes down 5, the 3x S&P index will go down 15. They can be combined with invested to get inverse leveraged ETFs. They work just like you’d expect, a -2x DOW ETF, if the down goes down 5, would go up 10. Similarly, if the DOW went up 10, the -2x DOW ETF would go down 20.

More from Investment companies

  • Basics of Investment Companies