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39 Cards in this Set
- Front
- Back
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A tombstone advertisement for a mutual fund must contain which of the following? |
A notice of the availability of a prospectus. |
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Rule 482 (tombstone) advertisements: |
May not be accompanied by an application to invest. |
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Which act does the omission of material facts or the inclusion of misleading statements in a prospectus violate? |
Securities Act of 1933. |
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What requirements does an omitting (tombstone or rule 482) prospectus meet? |
It may be used as a basis of sale only if it includes a coupon requesting normal account opening information. |
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Under SEC Rule 482, an omitting prospectus may do which of the following? |
Contain performance data and not contain an application to invest. |
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The Laurel Government Securities Fund would be in violation of Rule 34b-1, the name rule, if it did not have at least what percentage of its assets invested in government securities? |
80%. The rule requires that any investment company whose name implies a certain type of portfolio composition must have at least 80% of its assets invested as implied. The rule is flexible enough, however, to permit the fund to change its portfolio mix on a short-term basis. |
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What is rule 34b-1? |
Rule 34b-1 of the Investment Company Act of 1940 deals with certain misleading statements contained in mutual fund marketing materials.
Rule 34(b)-1 applies to the sales literature of investment companies and variable annuity contracts |
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Rule 34b-1 requires sales literature that contains performance data to state that the rate of return and principal value of an investment will fluctuate, and that when an individual's investment is redeemed, an amount more or less than the original investment may be received. This requirement is applicable for: |
Variable annuity contracts and a fund investing in growth stocks. |
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What are the benefits of a money market account? |
Check-writing privileges, no-load feature, and daily interest calculations.
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What does money market funds invest in? |
Short-term, high-quality debt instruments that provide current income and relative safety of principle, without potential for long-term growth or capital gains. |
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What are some of the features of a money market account? |
1) Dividends accrue daily 2) Investors can buy and sell shares quickly and easily 3) Investors pay a management fee 4) The specified rates are not guaranteed 5) They have no redemption fee.
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Which is applicable if a mutual fund uses performance charts and return-on-investment statistics in its sales literature? |
1. In computing and reporting historical yields and return on investment, the fund should use the shares' maximum sales charge.
2. Current yield figures must be based only on the fund's income distributions |
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What is the SEC rule for performance histories? |
SEC rules require 10-year, not 5-year, performance histories, provided the fund is at least 10 years old. |
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What do the SEC rules on public communications prohibit? |
The quotation of a money market fund's total return without also stating the fund's current yield unless the current yield is stated. |
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What observation may a registered representative make when giving a sales presentation based on performance statements and charts? |
The fund has had a positive performance in the last few years. |
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According to SEC rules, what must a firm that advertises a money market fund state? |
Inform investors that it is possible to lose money by investing in the fund.
It must state the fund is not guaranteed by the US Gov't and that investors have no assurance the fund will maintain a stable net asset value. Must print effective yield and current yield in same size font.
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Under SEC Rule 135A, a generic advertisement may do what? |
1. Not refer to a specific security. |
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What makes sales literature that describes the redemption provisions of a mutual fund misleading? |
If it states that redemption is a method of guaranteeing the preservation of principal. |
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What can a tombstone advertisement for a variable annuity program contain? |
1) A statement of the objectives and policies of the separate account.
2) The name of the company offering the annuity.
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For a broker/dealer to list information about securities in a generic advertisement, which of the following conditions must be met? |
The broker/dealer must offer for sale the types of securities mentioned in the advertisement. |
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Which funds can be deemed misleading if the advertisement contained investment results for a 30-day period? |
1) precious metals 2) low-yield growth stocks 3) real estate
It's acceptable with money market instruments because they are considered short-term investments. |
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A mutual fund advertises simply that over the last 5 years it has averaged a 17.2% annual return on investors' capital. The fund does not mention that for most of that 5-year period, average returns to its investors were negative. A run-up in the market in the last 18 months caused the 5-year average to increase significantly. What is wrong? |
The advertisement is misleading if there is no warning that investment results for shorter periods may have been different than the results for the full period.
FINRA requires that performance data presentations provide the 1, 5, or 10 year history, or since inception. |
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A no-load fund charging a 12b-1 fee presents investment performance results in an advertisement. What is wrong? |
The advertisement is misleading if the investment performance results do not take into account the 12b-1 fee. |
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Advertisements for a fund that invests in high-yield bonds are likely to be misleading if comparisons of investment performance were made to the performance of: |
1. a growth stock fund.
2. a specialty fund. |
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A money market fund compares its current yield to the yield of bank certificates of deposit. This comparison is: |
Permitted if it mentions that bank certificates are insured, whereas investments in money market funds are not. |
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What is true concerning communications with the public? |
A statement of fact is not considered misleading if contained in an advertisement. |
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A customer asks you about the investment performance of a particular open-end management company for a particular period. You calculate the fund's yield for the period requested, but purposely do not take into account the sales charge. What is your verbal communication to your customer about the fund's yield? |
It is misleading because it omits material information. In this example, it's the sales load. |
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A fund which invests in high-yield bonds presents its 5-year total return in large type in an advertising circular. In a footnote in the circular, it is mentioned that these bonds involve substantial risk and are not appropriate for all investors. Is the circular misleading? |
It is misleading because sales literature must give equal prominence to the risks involved. |
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Sales literature for an open-end company presents historical performance data as well as the statement, "These results were obtained during a period of economic growth in which equity prices in general rose substantially." What is wrong with this statement? |
Nothing, it was presented so as not to make the fund's performance data misleading. |
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What factors are very likely to make investment company sales literature misleading? |
1. statements that are true but not fully explained.
2. representations that investment performance in the near future will be better than past investment performance because economic conditions have improved. |
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What are advertisements that do not refer to specific securities, but refer only to securities in general as a form of investment? |
1) Generic Advertising 2) Not considered an offer to sell securities |
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What investment performance information in sales literature is misleading? |
1) Representations about future performance 2) Representations about past performance if material facts are not disclosed |
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The local financial newspaper contains a complimentary article about a new fund your broker/dealer is selling. Would you violate an act if you were to send copies of that article to some of your prospects? |
You would be in violation of the Securities Act of 1933 unless a prospectus for that fund preceded or accompanied the article. |
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What must tombstone advertisements for mutual funds include? |
1. The name of the investment company.
2. A statement regarding the availability of a prospectus. |
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What is an advertisement that describes the general features of mutual funds but does not mention one? |
A Rule 135A generic ad. |
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When would an advertisement comparing money market fund yields to those available on bank CDs NOT be considered misleading? |
If the advertisement mentioned that CDs are covered by FDIC insurance, while there is no insurance coverage for money market funds. |
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When is a prospectus not required to be delivered? |
1) A member firm mails 50 invitations to a public seminar on investing for retirement. 2) A member firm mails 500 pamphlets describing the benefits of investing in mutual funds. The pamphlet makes no mention of any particular mutual fund. |
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What is a general advertisement that complies with SEC Rule 135A? |
1) May be used without prior or concurrent delivery of a prospectus.
2) May describe the objective of an investment company. |
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What constitute rule violations? |
1) sending a customer sales literature that represents a fund's performance history for the last 5 years only, when the fund has been in existence for more than 10 years. 2) selling a mutual fund without first distributing a prospectus. 3) showing a mutual fund's performance over the past 10 years in an advertisement that is not an omitting prospectus. *Sending a potential customer a prospectus & literature at the same time is not a violation. |
