SIE Understanding Products and Their Risks Question 49: Answer and Explanation

Question: 49

How is an open-end investment company, also known as a mutual fund, the same as closed-end investment companies?

• A. Both are traded at NAV, with possible adjustments for a sales load, redemption, and/or commission.
• B. Both are regulated by the Investment Company Act of 1940.
• C. Both issue their shares when organized, as typical public companies do.
• D. Both typically have a standing offer to redeem their shares for cash.

Correct Answer: B

Explanation:

B: Choice B is correct because the Investment Company of 1940 regulates open-end and closed-end investment companies, face-amount certificate companies, and unit investment trusts. Choice A is incorrect because mutual funds trade at NAV, with possible adjustments for sales charge or redemption fees, whereas closed-end investment companies trade throughout the trading day, according to supply and demand. Choice C is incorrect because open-end investment companies (mutual funds) issue new shares on an ongoing basis, whereas closed-end investment companies make an initial offering of stock, and do not issue shares on a continuing basis. Choice D is incorrect because only open-end investment companies (mutual funds) constantly offer to redeem their shares for cash. The closed-end investment companies do not offer to do so.