Question 1

Under the Investment Company Act of 1940, what are the three main types of investment companies?

Accepted Answer

The three types are Management Companies (open-end and closed-end funds), Unit Investment Trusts (UITs), and Face Amount Certificate Companies.

Question 2

What is the key structural difference between an open-end fund and a closed-end fund?

Accepted Answer

An open-end fund continuously issues and redeems shares directly with investors at NAV; a closed-end fund issues a fixed number of shares in an IPO and trades on an exchange at market prices that may differ from NAV.

Question 3

How does a Unit Investment Trust (UIT) differ from a management company?

Accepted Answer

A UIT holds a fixed, unmanaged portfolio of securities and issues redeemable units; it has no board of directors and does not actively trade its portfolio, unlike a management company.

Question 4

What distinguishes a diversified management company from a non-diversified management company under the 1940 Act?

Accepted Answer

A diversified company must have at least 75% of its assets invested such that no more than 5% of total assets are in any one issuer and it holds no more than 10% of any issuer's voting securities; a non-diversified company does not meet these requirements.

Question 5

How are Exchange-Traded Funds (ETFs) classified under the Investment Company Act of 1940?

Accepted Answer

ETFs are typically registered as open-end management companies or UITs, but unlike traditional mutual funds, their shares trade intraday on an exchange at market prices rather than being redeemed directly at end-of-day NAV.

Investment Companies – Series 7 Exam Flashcards

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