Introduction

Welcome to Investment Companies and ETFs - the foundation of packaged products, covering how pooled investment vehicles are structured, priced, sold, and regulated under the Investment Company Act of 1940.

Exam Weight: Part of F3 (~18 questions est. for the Packaged Products & Alternatives chapter)

Video Resources

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What You'll Learn

In this unit, you'll cover:

  • Investment Company Classification: The three types under the 1940 Act and the 75-5-10 diversification test
  • Types of Mutual Funds: Fund categories by objective, plus interval fund mechanics
  • Fund Objectives and Policy Changes: Fundamental policies, shareholder voting, and board requirements
  • Open-End Fund Characteristics: Net Asset Value (NAV) calculation, forward pricing, Public Offering Price (POP) formulas, and exchange privileges
  • Fees and Expenses: Share classes (A, B, C), 12b-1 fees, management fees, and expense ratios
  • Sales Practices: Breakpoints, letters of intent, rights of accumulation, and dollar-cost averaging
  • Redemption: Contingent Deferred Sales Charge (CDSC) calculations, systematic withdrawal plans, and Class B conversion
  • Closed-End Funds: IPO distribution, premium/discount pricing, and leverage rules
  • Unit Investment Trusts (UITs): Fixed portfolios, no active management, and termination dates
  • Exchange-Traded Funds (ETFs): Creation/redemption mechanism, tax efficiency, and leveraged/inverse ETFs
  • Tax Treatment: Subchapter M conduit treatment, distribution types, and reinvestment taxation
  • Key Regulatory Provisions: Sections 12(a), 17(a), 18, 19, 22, 23, 35, 36, and 37 of the 1940 Act

Why This Matters

Investment companies represent one of the most heavily tested areas on the Series 7 exam. The exam covers not just what each product is, but how it's priced, what fees apply, how shares are redeemed, and which regulatory sections govern each type. The distinctions between open-end funds, closed-end funds, UITs, and ETFs appear in multiple question formats, from calculation problems (NAV, POP, breakpoints) to scenario questions about suitability and sales practices.

Let's start with the three types of investment companies under the 1940 Act.