Pooled Investments

The whole unit on one sheet: the fund structures, how each one prices, and the traps the exam builds around them.

Which One-Liners Win Points?

• The Investment Company Act of 1940 classifies three statutory types: management companies (open-end and closed-end), unit investment trusts (UITs), and face-amount certificates (obsolete).
• Conventional mutual fund (an open-end fund): continuously issues and redeems shares, no fixed share count, bought and redeemed directly with the fund, never trades on an exchange.
• Closed-end fund: fixed shares issued once, then trades on exchanges like stock; does NOT redeem shares.
• Unit investment trust (UIT): fixed, unmanaged portfolio with a termination date, supervised by a trustee (no board of directors), issues redeemable units, no management fee.
• Exchange-traded fund (ETF): legally structured as an open-end fund or UIT, but trades intraday on an exchange like stock; mostly passively tracks an index.
• REIT: pools capital into real estate or mortgages, exempt from the ICA, and instead qualifies for pass-through taxation under the Internal Revenue Code.
• Private fund: not registered under the ICA; relies on the small-investor exemption (100 or fewer beneficial owners) or the qualified-purchaser exemption to avoid registration.
• Forward pricing: orders before the 4:00 PM Eastern close get that day's net asset value (NAV); orders after get the next day's.
• Conventional-mutual-fund shares can NOT be bought on margin or sold short; closed-end funds and ETFs CAN.
• ETF shares are created and redeemed in-kind by an authorized participant (AP), which is why ETFs are more tax-efficient than mutual funds; AP arbitrage keeps price near NAV.

Which Numbers Matter Most?

• Net asset value (NAV): (total assets minus total liabilities) divided by shares outstanding, calculated once daily after the 4:00 PM Eastern close.
• Public offering price (POP) for a mutual fund = NAV plus the sales charge; redemption is at NAV.
• Mutual funds must redeem shares within 7 calendar days.
• Diversified fund test (75/5/10): for at least 75% of assets, no more than 5% in any single issuer and no more than 10% of an issuer's voting securities; the other 25% is unconstrained. Fails the test = non-diversified.
• REIT qualification (75/75/90): at least 75% of assets in real estate/cash/government securities, at least 75% of gross income from real estate sources, and at least 90% of taxable income distributed annually. Add the 95% passive-income test, a 100-shareholder minimum, and the 5/50 rule (no more than 50% of shares held by 5 or fewer individuals).
• Hedge fund fee shorthand: 2 and 20 (roughly a 2% management fee plus a 20% performance fee).
• Private-fund investor limits: the small-investor exemption caps at 100 beneficial owners (up to 250 for a qualifying venture capital fund with $12 million or less in aggregate capital contributions and uncalled committed capital); the qualified-purchaser exemption has no investor-number cap.
• Accredited investor: net worth over $1 million (excluding primary residence) or income over $200,000 individual / $300,000 joint in each of the last two years. Qualified purchaser: $5 million+ in investments (individual) or $25 million+ (entity).

Which Gotchas Trip Students Up?

• Conventional-mutual-fund vs closed-end pricing is the top trap. A conventional mutual fund always transacts at NAV (plus any sales charge). If a fund trades at a premium or discount to NAV, it is NOT a conventional mutual fund; think closed-end, or an ETF (which is legally open-end but still trades on an exchange).
• Closed-end funds commonly trade at a discount. A fund at 95% of NAV is closed-end, not a mutual fund.
• UIT vs fund: a UIT has a fixed portfolio, a termination date, a trustee instead of a board, and no management fee. No ongoing advisory decisions means no management fee, the key tell.
• ETFs are legally open-end funds or UITs but trade like stocks; do not call them closed-end just because they trade on an exchange.
• ETF premiums or discounts are tiny thanks to AP arbitrage; large, persistent ones point to a closed-end fund.
• Only authorized participants create or redeem ETF shares; retail investors just trade on the exchange.
• REIT's 95% and 90% tests measure different things. 95% is where gross income comes from (passive sources); 90% is how much taxable income gets paid out to shareholders. REIT dividends are generally taxed as ordinary income, not the qualified-dividend rate.
• Accredited investor is a net-worth/income test; qualified purchaser is an investments-owned test. A person with a large house but few investments can be accredited without being a qualified purchaser.

One-Breath Recap

The Investment Company Act of 1940 defines management companies (open-end and closed-end funds), unit investment trusts, and obsolete face-amount certificates. Open-end funds issue and redeem directly with the fund at net asset value using forward pricing, redeem within 7 calendar days, and cannot be margined or shorted; closed-end funds issue fixed shares trading on an exchange at a premium or discount and can be margined and shorted; unit investment trusts hold a fixed, unmanaged portfolio under a trustee with a termination date and no management fee; exchange-traded funds trade intraday, kept tax-efficient by authorized-participant in-kind creation. REITs sit outside the Act, distributing 90% of taxable income, while private funds skip registration through the accredited-investor or qualified-purchaser exemption.

Need more than the recap? Read the full Pooled Investments unit.