Quick Answer
The Investment Company Act of 1940 defines three types: face-amount certificate companies, unit investment trusts, and management companies (open-end and closed-end). Open-end funds price once daily at net asset value using forward pricing; closed-end funds trade on an exchange at premiums or discounts. Know share classes, breakpoints, letters of intent, and variable annuities cold.
The whole unit on one sheet: how pooled products are built, priced, charged for, and disclosed.
Core Concepts
- Investment Company Act of 1940 (ICA) defines exactly three types: face-amount certificate companies, unit investment trusts (UITs), and management companies.
- Management companies split two ways: by structure (open-end vs. closed-end) and by concentration (diversified vs. non-diversified).
- Open-end (mutual fund): continuously issues and redeems shares at net asset value (NAV); no fixed share count; cannot be bought on margin or sold short.
- Closed-end fund: fixed shares via initial public offering (IPO), then trades on an exchange; can use leverage, margin, and short selling; the fund does not redeem.
- UIT: fixed, unmanaged portfolio; a trustee instead of a board or investment adviser; stated termination date; issues redeemable units of beneficial interest; proceeds distributed, never reinvested.
- Variable annuity: insurance product AND security; dual regulation (SEC + state insurance), dual licensing; sold by prospectus; separate-account sub-accounts; returns not guaranteed.
The One-Liners That Win Points
- Mutual fund shares are bought at public offering price (POP), redeemed at NAV.
- POP = NAV + sales charge; no-load means POP = NAV.
- Forward pricing: order before 4:00 PM ET gets that day's closing NAV; after gets the next business day's.
- Only closed-end funds trade at a premium or discount; open-end always transacts at NAV (plus any load). Most closed-end funds trade at a discount.
- Only Class A shares get breakpoints. B and C never do.
- Class C becomes the most expensive over time (its higher 12b-1 fee never goes away).
- Fixed annuities are not securities; only variable annuities are.
- 1035 exchange (annuity for annuity) is tax-free; a fund exchange within a family is a taxable event.
Numbers to Lock In
| Item | Value |
|---|---|
| Diversified test | 75% of assets: no more than 5% in one issuer, no more than 10% of an issuer's voting stock |
| Mutual fund redemption | within 7 calendar days |
| Max Class A front-end load | 8.5% of POP |
| Class A 12b-1 (typical) | up to 0.25% |
| Class B / C 12b-1 | up to 1% |
| Total 12b-1 cap | 1.00% (0.75% distribution + 0.25% service) |
| No-load fund 12b-1 | up to 0.25% |
| Letter of intent (LOI) window | 13 months forward, backdated up to 90 days |
| Early-withdrawal penalty (VA) | 10% before age 59 1/2 |
| Principal review of VA application | within 7 business days |
| VA exchange extra scrutiny | within 36 months |
The Volume-Discount Trio (Class A)
- Breakpoints: the more you invest, the lower the sales-charge percentage; each fund sets its own schedule.
- Rights of accumulation (ROA): existing holdings at current NAV plus the new purchase count toward breakpoints; combined across the same fund family; retroactive to current value, never a refund of prior charges.
- LOI: non-binding pledge to reach a breakpoint over 13 months; reduced charge applies to all purchases now; unfulfilled = higher charge collected retroactively from escrowed shares.
- To charge the full 8.5%, a fund must offer all three: breakpoints, rights of accumulation, and dividend reinvestment at NAV.
Top Gotchas
- UITs are not management companies: no board, no adviser, no management fee (creation/sales charge and trustee fee instead).
- A breakpoint sale (selling just below a breakpoint without disclosing it) is a violation by the representative, even without intent.
- Variable-annuity withdrawals are taxed as ordinary income, not capital gains.
- The prospectus (or summary prospectus) must be delivered before or at the time of sale; "after the sale" is always wrong.
- The Statement of Additional Information (SAI) is delivered only on request, never automatically.
- Sales charges (loads) are not part of the expense ratio; the expense ratio is ongoing costs only.
One-Breath Recap
Three ICA types, management companies split into open-end and closed-end, UITs run by a trustee. Buy at POP, redeem at NAV, forward-priced at 4:00 PM. Class A gets the volume discounts; variable annuities are dual-regulated securities. Know the boundaries and the numbers, and the packaged-products questions fall into place.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Packaged Products unit for the complete lesson.