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Question 1
Under the Investment Company Act of 1940, what are the three main types of investment companies?
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?
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?
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?
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?
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.