Glossary

The following terms can be found in the FASB Accounting Standards Codification (ASC) glossary:

  1. actual-income-available method. A method to calculate distributions to shareholders from net investment income in which actual net investment income that has been allocated to each class (as recorded on the books) is divided by the record date shares for each class to derive the dividend payable per share.
  2. affiliated entity. An entity that directly or indirectly controls, is controlled by, or is under common control with another entity; also, a party with which the entity may deal if one party has the ability to exercise significant influence over the other’s operating and financial policies [further industry-specific information is provided in the second section of this glossary].
  3. amortization. The process of reducing a recognized liability systematically by recognizing gains or by reducing a recognized asset systematically by recognizing losses. In accounting for pension benefits or other postretirement benefits, amortization also means the systematic recognition in net periodic pension cost or other postretirement benefit cost over several periods of amounts previously recognized in other comprehensive income, that is, gains or losses, prior service cost or credits, and any transition obligation or asset.
  4. amortized cost. The sum of the initial investment less cash collected less write-downs plus yield accreted to date.
  5. annuity contract. A contract in which an insurance entity unconditionally undertakes a legal obligation to provide specified pension benefits to specific individuals in return for a fixed consideration or premium. An annuity contract is irrevocable and involves the transfer of significant risk from the employer to the insurance entity. Annuity contracts are also called allocated contracts.
  6. board-contingent plan. A reimbursement 12b-1 plan that provides that, on the plan’s termination, a fund’s board of directors has the option, but not the requirement, to pay the distributor for any excess costs incurred by the distributor.
  7. callable obligation. An obligation is callable at a given date if the creditor has the right at that date to demand, or to give notice of its intention to demand, repayment of the obligation owed to it by the debtor [further industry-specific information is provided in the second section of this glossary under the term callable].
  8. call option. A contract that allows the holder to buy a specified quantity of stock from the writer of the contract at a fixed price for a given period [further industry-specific information is provided in the second section of this glossary].
  9. capital infusions. Expenditures made directly to the issuer to ensure that operations are completed, thereby allowing the issuer to generate cash flows to service the debt. Such expenditures are usually nonrecurring. In certain cases, bondholders may receive additional promissory notes, or the original bond instrument may be amended to provide for repayment of the capital infusions.
  10. compensation plan. A plan that provides for a 12b-1 fee, payable by the fund, based on a percentage of the fund’s average net assets. The 12b-1 fee may be more or less than the costs incurred by the distributor.
  11. conduit debt securities. Certain limited-obligation revenue bonds, certificates of participation, or similar debt instruments issued by a state or local governmental entity for the express purpose of providing financing for a specific third party (the conduit bond obligor) that is not a part of the state or local government’s financial reporting entity. Although conduit debt securities bear the name of the governmental entity that issues them, the governmental entity often has no obligation for such debt beyond the resources provided by a lease or loan agreement with the third party on whose behalf the securities are issued. Further, the conduit bond obligor is responsible for any future financial reporting requirements.
  12. control. 1. The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an entity through ownership, by contract, or otherwise [see FASB ASC 310, Receivables, and 850, Related Party Disclosures].
  13.     2. The direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise [see FASB ASC 954, Health Care Entities, and 958, Not-for-Profit Entities].
  14.     3. The same meaning as the meaning of controlling financial interest in FASB ASC 810-10-15-8 [this paragraph states that the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree]. [Further industry-specific information is provided in the second section of this glossary].
  15.     3. The same meaning as the meaning of controlling financial interest in FASB ASC 810-10-15-8 [“pending content” in FASB ASC 810-10-15-8 states that for legal entities other than limited partnerships, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree.] [Further industry-specific information is provided in the second section of this glossary.]
  16. convertible security. A security that is convertible into another security based on a conversion rate. For example, convertible preferred stock that is convertible into common stock on a two-for-one basis (two shares of common for each share of preferred).
  17. distributor.1 Usually the principal underwriter that sells the fund’s capital shares by acting as an agent (intermediary between the fund and an independent dealer or the public) or as a principal, buying capital shares from the fund at net asset value and selling shares through dealers or to the public (see definition of underwriter in Section 2(a)(40) of the Investment Company Act of 1940).

This glossary term is superseded by “pending content” in FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606).

  1. dividends. Dividends paid or payable in cash, other assets, or another class of stock and does not include stock dividends or stock splits (further industry specific information provided in the second section of this glossary).
  2. enhanced 12b-1 plan. A reimbursement 12b-1 plan that provides that, on termination of the plan, the fund is required to continue paying the 12b-1 fee to the extent the distributor has excess costs.
  3. equity security.2 1. Any security representing an ownership interest in an entity (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, and call options) or dispose of (for example, put options) an ownership interest in an entity at fixed or determinable prices. The term equity security does not include any of the following: a) written equity options (because they represent obligations of the writer, not investments; b) cash-settled options on equity securities or options on equity-based indexes (because those instruments do not represent ownership interests in an entity); or c) convertible debt or preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor [see FASB ASC topics 320, Investments—Debt and Equity Securities, 321, Investments—Equity Securities and 958, Not-for-Profit Entities].
  4.     2. Any security representing an ownership interest in an entity (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, and call options) or dispose of (for example, put options) an ownership interest in an entity at fixed or determinable prices. However, the term does not include convertible debt or preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor. [See FASB ASC topic 715, Compensation—Retirement Benefits.]

“Pending content” in the FASB ASC master glossary defines equity security as follows:

equity security. 1. Any security representing an ownership interest in an entity (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, forward purchase contracts, and call options) or dispose of (for example, put options and forward sale contracts) an ownership interest in an entity at fixed or determinable prices. The term equity security does not include any of the following: a) written equity options (because they represent obligations of the writer, not investments; b) cash-settled options on equity securities or options on equity-based indexes (because those instruments do not represent ownership interests in an entity); or c) convertible debt or preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor [see FASB ASC topics 320, Investments—Debt and Equity Securities, 321, Investments—Equity Securities and 958, Not-for-Profit Entities].

2. Any security representing an ownership interest in an entity (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, forward purchase contracts, and call options) or dispose of (for example, put options and forward sale contracts) an ownership interest in an entity at fixed or determinable prices. However, the term does not include convertible debt or preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor. [See FASB ASC topic 715, Compensation—Retirement Benefits.]

  1. exchange market. A market in which closing prices are both readily available and generally representative of fair value. An example of such a market is the New York Stock Exchange. [Further industry-specific information is provided in the second section of this glossary under the term exchange].
  2. fail-to-deliver. A fail-to-deliver is a securities sale to another broker-dealer that has not been delivered to the buying broker-dealer by the close of business on the settlement date.
  3. fail-to-receive. A fail-to-receive is a securities purchase from another broker-dealer not received from the selling broker-dealer by the close of business on the settlement date.
  4. fair value. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
  5. Fed Funds effective swap rate (or overnight index swap rate). The fixed rate on a U.S. dollar, constant-notional interest rate swap that has its variable-rate leg referenced to the Fed Funds effective rate with no additional spread over the Fed Funds effective rate on that variable-rate leg. That fixed rate is the derived rate that would result in the swap having a zero fair value at inception because the present value of fixed cash flows, based on that rate, equates to the present value of the variable cash flows.
  6. forward exchange contract. A forward exchange contract is an agreement between two parties to exchange different currencies at a specified exchange rate at an agreed-upon future date.
  7. front-end load. A sales commission or charge payable at the time of purchase of mutual fund shares.
  8. futures contract. A standard and transferable form of contract that binds the seller to deliver to the bearer a standard amount and grade of a commodity to a specific location at a specified time. It usually includes a schedule of premiums and discounts for quality variation.
  9. high-yield debt securities. Corporate and municipal debt securities having a lower-than-investment-grade credit rating (BB+ or lower by Standard & Poor’s, or Ba or lower by Moody’s). Because high-yield debt securities typically are used when lower-cost capital is not available, they have interest rates several percentage points higher than investment-grade debt and often have shorter maturities. These high-yielding corporate and municipal debt obligations are frequently referred to as junk bonds [further industry-specific information is provided in the second section of this glossary under the term junk bonds].
  10. interest method. The method used to arrive at a periodic interest cost (including amortization) that will represent a level effective rate on the sum of the face amount of the debt and (plus or minus) the unamortized premium or discount and expense at the beginning of each period.
  11. liquidity. An asset’s or liability’s nearness to cash. Donor-imposed restrictions may influence the liquidity or cash flow patterns of certain assets. For example, a donor stipulation that donated cash be used to acquire land and buildings limits and entity’s ability to take effective actions to respond to unexpected opportunities or needs, such as emergency disaster relief. On the other hand, some donor-imposed restrictions have little or no influence on cash flow pattern or an entity’s financial flexibility. For example, a gift of cash with a donor stipulation that it be used for emergency-relief efforts has a negligible impact on an entity if the emergency relief is one of its major ongoing programs [further industry specific information is provided in the second section of this glossary].
  12. mortgage-backed securities. Securities issued by a governmental agency or corporation (for example, Government National Mortgage Association [GNMA] or Federal Home Loan Mortgage Corporation [FHLMC]) or by private issuers (for example, Federal National Mortgage Association [FNMA], banks, and mortgage banking entities). Mortgage-backed securities generally are referred to as mortgage participation certificates or pass-through certificates. A participation certificate represents an undivided interest in a pool of specific mortgage loans. Periodic payments on GNMA participation certificates are backed by the U.S. government. Periodic payments on FHLMC and FNMA certificates are guaranteed by those corporations, but are not backed by the U.S. government.
  13. most advantageous market. The market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs.
  14. net asset value per share. Net asset value per share is the amount of net assets attributable to each share of capital stock (other than senior equity securities, that is, preferred stock) outstanding at the close of the period. It excludes the effects of assuming conversion of outstanding convertible securities, whether or not their conversion would have a diluting effect [further industry-specific information is provided in the second section of this glossary].
  15. nonregistered investment partnerships—financial highlights. Nonregistered investment partnerships, when disclosing financial highlights, shall interpret the terms classes, units, and theoretical investments as follows:

a.     Classes. Nonregistered investment funds typically have one of the following two classes of ownership interest, with one class being the management interest in the fund and the other being the investment interest:

1.     For unitized funds (that is, funds with units specifically called for in the governing underlying legal or offering documents), the management interest usually is a voting class and the investment interest is a nonvoting class. Temporary series of shares (that is, shares that are intended at the time of issuance to be consolidated at a later date with another specified series of shares that remains outstanding indefinitely) are not considered separate classes. Permanent series of a class of share shall be the basis for which that share’s financial highlights are determined and presented.

2.     For nonunitized funds, the management interest usually is the general partner class and the investment interest usually is the limited partner class. Generally, a class has certain rights as governed by underlying legal documents or offering documents and local law. Rights to certain investments that do not otherwise affect the rights available under the underlying legal documents and local law do not ordinarily represent a separate share class. For example, rights to income and gains from a specific investment attributed solely to investors at the date the investment is made (side-pocket investments) are not considered to give rise to a share class. Similarly, a temporary series of shares is not considered a share class.

b.     Units. Only funds with units specifically called for in the governing underlying legal or offering documents shall be considered unitized. Some funds may employ units for convenience in making allocations to investors for internal accounting or bookkeeping purposes, but the units are not required or specified by legal or offering documents, and for all other purposes operate like nonunitized investment partnerships. For per-share operating performance, those funds are not considered unitized.

c.     Theoretical investment. The term theoretical investment in FASB ASC 946-205–50-20 shall be considered as the actual aggregate amount of capital invested by each reporting class of investor as of the beginning of the fiscal reporting period, adjusted for cash flows related to capital contributions or withdrawals during the period.

  1. offering costs. Offering costs include all of the following:

a.     Legal fees pertaining to the investment company’s shares offered for sale

b.     Securities and Exchange Commission (SEC) and state registration fees

c.     Underwriting and other similar costs

d.     Costs of printing prospectuses for sales purposes

e.     Initial fees paid to be listed on an exchange

f.     Tax opinion costs related to offering of shares

g.     Initial agency fees of securing the rating for bonds or preferred stock issued by closed-end funds.

  1. payment-in-kind bonds. Bonds in which the issuer has the option at each interest payment date of making interest payments in cash or in additional debt securities. Those additional debt securities are referred to as baby or bunny bonds. Baby bonds generally have the same terms, including maturity dates and interest rates, as the original bonds (parent payment-in-kind bonds). Interest on baby bonds may also be paid in cash or in additional like-kind debt securities at the option of the issuer.
  2. public business entity. A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.
  1. a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
  2. b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
  3. c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
  4. d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
  5. e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

  1. put option. A contract that allows the holder to sell a specified quantity of stock to the writer of the contract at a fixed price during a given period [further industry-specific information is provided in the second section of this glossary].
  2. record-share method. A method to calculate distributions to shareholders from net investment income in which the sum of net investment income available for all classes after deducting allocated expenses, but before consideration of class-specific expenses, is divided by the total outstanding shares on the dividend record date for all classes to arrive at a gross dividend rate for all shares. From this gross rate, an amount per share for each class (the amount of incremental expenses accrued during the period divided by the record date shares outstanding for the class) is subtracted. The result is the per-share dividend available for each class.
  3. reimbursement plan. A plan that provides for a 12b-1 fee, payable by the fund, that may not exceed the lesser of an annual percentage of the fund’s average net assets or actual costs incurred by the distributor net of CDSL received by the distributor.
  4. repurchase agreement (repo agreement). An agreement under which the transferor (repo party) transfers a financial asset to a transferee (repo counterparty or reverse party) in exchange for cash and concurrently agrees to reacquire that financial asset at a future date for an amount equal to the cash exchanged plus or minus a stipulated interest factor. Instead of cash, other securities or letters of credit sometimes are exchanged. Some repurchase agreements call for repurchase of financial assets that need not be identical to the financial assets transferred.
  5. repurchase agreement accounted for as a collateralized borrowing (repo agreement). A transaction in which a seller-borrower of securities sells those securities to a buyer-lender with an agreement to repurchase them at a stated price plus interest at a specified date or in specified circumstances. A repurchase agreement accounted for as a collateralized borrowing is a repo that does not qualify for sale accounting under FASB ASC 860, Transfers and Servicing. The payable under a repurchase agreement accounted for as a collateralized borrowing refers to the amount of the seller-borrower’s obligation recognized for the future repurchase of the securities from the buyer-lender. In certain industries, the terminology is reversed; that is, entities in those industries refer to this type of agreement as a reverse repo (see reverse repurchase agreement accounted for as a collateralized borrowing).
  6. repurchase-to-maturity transaction. A repurchase agreement in which the settlement date of the agreement to repurchase a transferred financial asset is at the maturity date of that financial asset and the agreement would not require the transferor to reacquire the financial asset.
  7. return of capital. Distributions by investment companies in excess of tax-basis earnings and profits.
  8. reverse repurchase agreement accounted for as a collateralized borrowing (reverse repo or resale agreement). A transaction that is accounted for as a collateralized lending in which a buyer-lender buys securities with an agreement to resell them to the seller-borrower at a stated price plus interest at a specified date or in specified circumstances. The receivable under a reverse repurchase agreement accounted for as a collateralized borrowing refers to the amount due from the seller-borrower for the repurchase of the securities from the buyer-lender. In certain industries, the terminology is reversed; that is, entities in those industries refer to this type of agreement as a repo (see repurchase agreement accounted for as a collateralized borrowing).
  9. separate account. 1. A special account established by an insurance entity solely for the purpose of investing the assets of one or more plans. Funds in a separate account are not commingled with other assets of the insurance entity for investment purposes (see FASB ASC 960, Plan Accounting—Defined Benefit Pension Plans).
  10.     2. A separate investment account established and maintained by an insurance entity under relevant state insurance law to which funds have been allocated for certain contracts of the insurance entity or similar accounts used for foreign originated products. The term separate accounts includes separate accounts and subaccounts or investment divisions of separate accounts (see FASB ASC 944, Financial Services—Insurance). [Further industry-specific information is provided in the second section of this glossary.]
  11. simultaneous-equations method. A method to calculate distributions to shareholders from net investment income that seeks to ensure, by using simultaneous equations, that the distribution rates will differ among the classes by the anticipated differential in expense ratios.
  12. step bonds. Bonds that involve a combination of deferred-interest payment dates and increasing interest payment amounts over the bond lives and, thus, bear some similarity to zero-coupon bonds and to traditional debentures.
  13. stock dividend. An issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to give the recipient shareholders some ostensibly separate evidence of a part of their respective interests in accumulated corporate earnings without distribution of cash or other property that the board of directors or trustees deems necessary or desirable to retain in the business. A stock dividend takes nothing from the property of the corporation and adds nothing to the interests of the stockholders; that is, the corporation’s property is not diminished and the interests of the stockholders are not increased. The proportional interest of each shareholder remains the same.
  14. stock split. An issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to increase the number of outstanding shares for the purpose of effecting a reduction in their unit market price and, thereby, of obtaining wider distribution and improved marketability of the shares. Sometimes called a stock split-up.
  15. structured note. A debt instrument whose cash flows are linked to the movement in one or more indexes, interest rates, foreign exchange rates, commodities prices, prepayment rates, or other market variables. Structured notes are issued by U.S. government-sponsored enterprises, multilateral development banks, municipalities, and private entities. The notes typically contain embedded (but not separable or detachable) forward components or option components such as caps, calls, and floors. Contractual cash flows for principal, interest, or both can vary in amount and timing throughout the life of the note based on nontraditional indexes or nontraditional uses of traditional interest rates or indexes.
  16. traditional 12b-1 plan. A compensation or reimbursement plan pursuant to Rule 12b-1 that permits the use of a fund’s assets to pay distribution-related expenses under certain conditions. The 12b-1 fees under traditional 12b-1 plans are normally discontinued upon plan termination, but may continue to be paid after plan termination under a board-contingent plan.
  17. transfer. 1. The term transfer is used in a broad sense consistent with its use in FASB Concepts Statement No. 6, Elements of Financial Statements (such as paragraph 137), rather than in the narrow sense in which it is used in FASB ASC 860-10.
  18.     2. The conveyance of a noncash financial asset by and to someone other than the issuer of that financial asset. A transfer includes the following:

    a.     Selling a receivable

    b.     Putting a receivable into a securitization trust

    c.     Posting a receivable as collateral.

  19.     A transfer excludes the following

    a.     The origination of a receivable

    b.     Settlement of a receivable

    c.     The restructuring of a receivable into a security in a troubled debt restructuring (see FASB ASC 860, Transfers and Servicing). [Further industry-specific information is provided in the second section of this glossary.]

  20. variable annuity contract. An annuity in which the amount of payments to be made are specified in units, rather than in dollars. When payment is due, the amount is determined based on the value of the investments in the annuity fund [further industry-specific information is provided in the second section of this glossary under the term variable annuity].
  21. warrant. A security that gives the holder the right to purchase shares of common stock in accordance with the terms of the instrument, usually upon payment of a specified amount [further industry-specific information is provided in the second section of this glossary].
  22. workout expenditures. Professional fees (legal, accounting, appraisal) paid to entities unaffiliated with the investment company’s advisor or sponsor in connection with any of the following:

    a.     Capital infusions

    b.     Restructurings or plans of reorganization

    c.     Ongoing efforts to protect or enhance an investment

    d.     The pursuit of other claims or legal actions.

The following is a list of additional terms that have been used in this guide and further information on select terms defined in the FASB ASC glossary:

  1. 401(k) plan. A plan by which an employee may elect, as an alternative to receiving taxable cash as compensation or a bonus, to contribute pretax dollars to a qualified tax-deferred retirement plan.
  2. accumulation unit. The basic valuation unit of a deferred variable annuity. Such units are valued daily (on days the stock market is open) to reflect investment performance and the prorated daily deduction for expenses.
  3. adjustable rate mortgage. A mortgage loan whose interest is reset periodically to reflect market rate changes.
  4. adviser. See investment adviser.
  5. advisory and service fee (contract). The fee charged to an investment company by its investment adviser under a contract approved by vote of a majority of the company’s shares. The fee is usually computed as a percentage of the average net assets and may also provide for an additional bonus or penalty based on performance (see incentive fee).
  6. affiliated company (person). Under Sections 2(a)(2) and 2(a)(3) of the 1940 Act, an affiliated company means a company that is an affiliated person. An affiliated person of another person means (a) any person directly or indirectly owning, controlling, or holding, with power to vote, 5 percent or more of the outstanding voting securities of such other person; (b) any person 5 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other person; (c) any person directly or indirectly controlling, controlled by, or under common control with such other person; (d) any officer, director, partner, copartner, or employees of such other person; (e) if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and (f) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof (see control and controlled company).
  7. against the box. Short sale by the holder of a long position in the same stock.
  8. American depository receipt (ADR). A certificate issued by an American bank to evidence ownership of original foreign shares. The certificate is transferable and can be traded. The original foreign stock certificate is deposited with a foreign branch or correspondent bank of the issuing American bank.
  9. as-of transaction. A transaction recorded on the books of an investment company after the date on which the transactions should have been recorded. This term relates to shareholder purchases and redemptions and also portfolio security purchases and sales.
  10. asked price. The lowest price that a dealer is willing to accept to sell a security at a particular time (also known as the offer price).
  11. asset allocation. Apportioning of investment funds among categories of assets, such as cash equivalents, stocks, and fixed income instruments.
  12. baby bond. A bond having a par value of less than $1,000, usually $25–$500. Also refers to the distribution of additional bonds instead of cash payments in connection with interest payable on a payment-in-kind bond or similar security (also known as bunny bonds).
  13. banker’s acceptance. A time or sight draft drawn on a commercial bank by a borrower, usually in connection with a commercial transaction. The borrower is liable as is the bank, which is the primary obligor, to pay the draft at its face amount on the maturity date.
  14. basis point. A measurement of changes in price or yields for fixed-income securities. One basis point equals 0.01 percent, or 10 cents per $1,000 per annum.
  15. bid price. The highest price that a dealer is willing to pay to purchase a security at a particular time.
  16. bifurcation. When applied to securities traded in foreign currencies, the separation of underlying factors relating to a transaction initially measured in one currency and reported in a second currency. Any difference between originally recorded amounts and currently consummated or measured amounts can be split into changes in the foreign exchange rate and changes in foreign currency-denominated fair value.
  17. Blue Sky laws. State laws governing the sale of securities, including mutual fund shares, and activities of brokers and dealers within the particular state and applicable also in interstate transactions having some substantial connection with the state.
  18. bond discount. The difference between the face amount of a bond and the lower price paid by a buyer.
  19. bond premium. The difference between the face amount of a bond and the higher price paid by a buyer.
  20. book entry shares. Share ownership evidenced by records maintained by a transfer agent, rather than by physical stock certificates.
  21. break point. A quantity of securities purchased at which a lower sales charge takes effect. Also, an aggregate amount of investment company assets in excess of which a lower rate of investment advisory fee is chargeable.
  22. broker. Any person engaged in the business of effecting transactions in securities for the account of others (with certain exceptions). This does not include any person solely by reason of the fact that such person is an underwriter for one or more investment companies (see Section 2[a][6] of the 1940 Act).
  23. business development company (BDC). A company defined in Section 2(a)(48) of the 1940 Act as a closed-end investment company that chooses to be treated as a BDC under the act and is operated to make investments in eligible portfolio companies, follow-on investments in former eligible portfolio companies acquired by the company when the investee was an eligible portfolio company, and investments in certain bankrupt or insolvent companies.
  24. CBOE. Abbreviation for the Chicago Board Options Exchange, a national securities exchange based in Chicago that provides a continuous market for trading in put and call options.
  25. CFTC. Abbreviation for the Commodity Futures Trading Commission, an agency established by Congress to regulate U.S. commodity futures markets and futures commission merchants. Among other things, this agency establishes rules governing the minimum financial, reporting, and audit requirements of its members. Its function is similar to that performed by the SEC in regulating broker-dealers in securities and various securities markets.
  26. CUSIP (number). A means of uniformly describing and identifying specific security issues in numeric form. Developed by the Committee on Uniform Security Identification Procedure.
  27. callable. Redeemable by the issuer before the scheduled maturity. The issuer may pay the holders a premium price if such a security is retired early. Such securities are usually called when interest rates fall so significantly that the issuer can save money by floating new bonds at lower rates (defined in the FASB ASC glossary, as presented in the first section of this glossary under the term callable obligation).
  28. call option. A contract that entitles the holder to buy (call), at his or her option, a specified number of underlying units of a particular security at a specified price (strike price) either on (European style) or at any time until (American style) the stated expiration date of the contract. The option, which may be transferable, is bought in the expectation of a price rise above the strike price. If the price rises, the buyer exercises or sells the option. If the price does not rise, the buyer lets the option expire and loses only the cost of the option. There is a listed and also an over-the-counter (OTC) market in options. During the existence of an option, the exercise price and number of underlying units are adjusted on the ex-dividend date for cash dividends, rights, and stock dividends or splits. (Defined in the FASB ASC glossary, as presented in the first section of this glossary.)
  29. capital gain dividend. Under IRC Section 852 (and as used in chapter 6, “Taxes,” of this guide), any dividend or part thereof that is reported by the company as a capital gain dividend in written statements furnished to its shareholders, except in the case of excess reported amounts. If the aggregate reported amount with respect to the company for any taxable year exceeds the net capital gain of the company for such taxable year, a capital gain dividend is the excess of the reported capital gain dividend amount over the excess reported amount that is allocable to such reported capital gain dividend amount. In nontax contexts, however, this term is used interchangeably with capital gains distribution.
  30. capital gain or loss. A profit or loss realized from the sale of capital assets, such as portfolio securities, as defined in IRC Section 1221.
  31. capital gains distribution. A dividend paid to investment company shareholders from net capital gains realized by a regulated investment company on the disposition of portfolio securities (see Section 19[b] and Rules 19a-1 and 19b-1 of the 1940 Act).
  32. certificates of deposit. Short-term, interest-bearing certificates issued by commercial banks or savings and loan associations against funds deposited in the issuing institution.
  33. classes of shares. Securities offered by an investment company with different shareholder requirements and commitments. For example, class A shares may be sold with a front-end load, but class B shares may be sold with a 12b-1 asset-based charge and a contingent deferred sales charge.
  34. clearing agency. A central location at which security transactions of members are matched to determine the quantities to be received or delivered.
  35. closed-end fund. An investment company having a fixed number of shares outstanding, which it does not stand ready to redeem. Its shares are traded similarly to those of other public corporations. See Section 5(a) of the 1940 Act.
  36. collateralized mortgage obligation (CMO). A mortgage-backed bond that separates mortgage pools into different maturity classes called tranches. Each tranche is then sold separately.
  37. commercial paper. Short-term, unsecured promissory notes issued by corporations. Commercial paper is usually sold on a discount basis (see Section 3[a][3] of the Securities Act of 1933 [the 1933 Act] and Section 3[a][10] of the Securities Exchange Act of 1934 [the 1934 Act]).
  38. common (collective) trust fund. An account maintained by the trust department of a bank or trust company for the pooling of investment funds of its own trust account customers. It is exempt from the 1940 Act under Section 3(c)(3) or 3(c)(11).
  39. contingent deferred sales charge (CDSC). A charge related to an issuer’s payments for distribution pursuant to a Rule 12b-1 plan. It is imposed only on redemption and may be reduced or eliminated as the duration of ownership continues. Also known as a contingent deferred sales load (CDSL) or a back-end load.
  40. contractual plan. A type of accumulation plan under which the total intended investment is specified with provisions for periodic payments over a stated period. Such plans are sometimes called front-end load plans because a substantial portion of the sales charge applicable to the total investment is usually deducted from early payments (see Sections 2[a][27] and 27 of the 1940 Act concerning periodic purchase plans).
  41. control. Defined by Section 2(a)(9) of the 1940 Act as the power to exercise (regardless of whether exercised) a controlling influence over the management or policies of a company, unless that power results solely from an official position with the company (defined in the FASB ASC glossary, as presented in the first section of this glossary). Any person who owns beneficially, either directly or through one or more controlled companies, more than 25 percent of the voting securities of a company shall be presumed to control such company. Any person who does not so own more than 25 percent of the voting securities of any company shall be presumed not to control such company. A natural person shall be presumed not to be a controlled person within the meaning of this title. Any such presumption may be rebutted by evidence.
  42. controlled company. Defined by the 1940 Act as a direct or an indirect ownership of more than 25 percent of the outstanding voting securities of a company (see control and affiliated company).
  43. corporate actions. An action by a company’s board of directors or trustees, including dividend declarations, reorganizations, mergers, and acquisitions.
  44. corporate bonds. Debt instruments issued by private corporations as distinct from those issued by government agencies or municipalities. Corporate bonds have three distinguishing features: they are taxable; they normally have a par value of $1,000; and they normally have a term maturity.
  45. custodian. A bank; trust company; or, less frequently, a member of a national securities exchange responsible for receiving delivery and the safekeeping of an investment company’s cash and securities (see Section 17[f] of the 1940 Act).
  46. DTC. Acronym for the Depository Trust Company. A depository for eligible securities that facilitates clearance between member organizations and banks without the necessity of receiving or delivering actual certificates.
  47. DVP. Abbreviation for delivery versus payment, under which physical possession and ownership are transferred only upon cash payment.
  48. daily limits. Limits established by exchanges on fluctuations in prices of futures contracts (other than the current month’s delivery contracts) during a trading session.
  49. dealer. Any person engaged in the business of buying and selling securities for such person’s own account through a broker or otherwise (does not include an insurance or investment company). Mutual fund shares are frequently sold through dealers (see Section 3[a][5] of the 1934 Act and Section 2[a][11] of the 1940 Act).
  50. declaration date. The day on which the board of directors or trustees or, if so authorized, a committee of the board announces a distribution of cash or other specified assets to be paid at a specified future time to shareholders of record on a specified record date. The amount of distribution is usually specified on a per share basis, although investment company distributions are occasionally specified in an aggregate amount to assure the desired federal income tax consequence.
  51. deemed dividend. A dividend not paid in cash or other consideration. For a regulated investment company, the term is used in connection with net realized long-term capital gains that are retained undistributed, in whole or part, by the regulated investment company and on which it pays the federal income tax on behalf of shareholders as a whole. Each shareholder reports his or her share of the deemed dividend as a long-term capital gain and receives (a) a credit against his or her federal income tax liability for his or her share of the tax paid by the regulated investment company and also (b) an increase in basis of those shares. (See designated capital gain.)
  52. deficiency dividend. A special dividend attributable to the underdistribution of taxable income paid by a regulated investment company to protect its special tax status.
  53. delayed delivery contract. A transaction involving deferral of the settlement date beyond normal terms to some point further in the future, as agreed upon by both buyer and seller.
  54. depositor. A person other than the trustee or custodian who is primarily responsible for the organization of a unit investment trust (UIT) that deposits the portfolio with (that is, sells the portfolio to) the trustee and who has certain continuing responsibilities in administering the affairs of that trust (see Sections 17(a)(1)(C) and 26 of the 1940 Act).
  55. designated capital gain. A term used by a regulated investment company to refer to its election to retain long-term capital gains realized during the year (see deemed dividend).
  56. distributions. Dividends paid from net investment income and realized capital gains (see capital gains distribution).
  57. diversification. Investment of a portfolio in securities that have different kinds of investment risk in order to moderate the portfolio’s overall risk of loss. Most commonly refers to diversification by a securities issuer but can also be used in reference to industry exposure; creditworthiness or quality of security issuers taken as a whole; or, in international portfolios, exposure to national (or regional) economies. Sometimes, the term may be used in reference to security kinds (for example, fixed income versus equity securities).
  58. diversified investment company. A management investment company having at least 75 percent of its total assets in cash and cash items (including receivables), government securities, securities of other investment companies, and other securities limited to not more than 5 percent of its total assets in any one issuer and not more than 10 percent of the voting securities of any one issuer, in accordance with Section 5(b)(1) of the 1940 Act.
  59. dividends. Pro rata payments to shareholders, typically from earnings. In the context of investment companies, applied to payments derived from net investment income and realized capital gains (see distributions). (Defined in the FASB ASC glossary, as presented in the first section of this glossary.)
  60. dollar roll. A series of securities transactions in which an investment company purchases a mortgage-backed security (such as terms to be announced) and concurrently sells that security for settlement at a future date.
  61. eligible portfolio company. Defined by Section 2(a)(46) of the 1940 Act of 1940 as any issuer that (a) is organized under the laws of, and has its principal place of business in, any state or states; (b) is neither an investment company (other than a small business investment company [SBIC] that is licensed by the Small Business Administration [SBA] to operate under the Small Business Investment Act of 1958 and that is a wholly-owned subsidiary of the BDC) nor a company that would be an investment company, except for the exclusion from the definition of investment company in Section 3(c); and (c) satisfies one of the following: (i) does not have a class of securities registered on a national securities exchange or eligible for margin purchase under Federal Reserve Board rules; (ii) is actively controlled by a BDC, either alone or as part of a group acting together, and has an affiliate of the BDC on its board of directors; (iii) has total assets of not more than $4 million and capital and surplus (shareholders’ equity less retained earnings) of not less than $2 million; (iv) meets such other criteria as the SEC may, by rule, establish as consistent with the public interest, the protection of investors, and the purposes fairly intended by the policy and provisions of the 1940 Act. In most instances, it must be a company to which the BDC extends significant managerial assistance, either through the exercise of control or through an arrangement whereby the BDC, acting through its directors, officers, and employees, provides significant guidance and counsel concerning the management, operations, or business objectives and policies of the company.
  62. equalization. An accounting method used to prevent a dilution of the continuing shareholders’ per share equity in undistributed net investment income caused by the continuous sales and redemptions of capital shares.
  63. eurodollars. U.S. dollars deposited in banks outside the United States.
  64. evaluator. One who determines the daily or periodic value per unit for UITs.
  65. exchange. An organized forum for the trading of securities or commodities by members for their own accounts or the accounts of their customers. The most active U. S. securities exchange is the New York Stock Exchange (NYSE); the most active domestic commodities exchanges are the CBOE and the Chicago Mercantile Exchange. (Defined in the FASB ASC glossary, as presented in the first section of this glossary, under the term exchange market.)
  66. exchange privilege. The ability of a shareholder to redeem shares of an open-end fund and simultaneously purchase shares of another open-end fund within the same family of investment companies, often at no or reduced fees. When applied to variable annuities and variable life insurance contracts, refers to the ability of an investor to exchange shares of one fund owned indirectly through the contract for another fund offered as an investment option within that contract.
  67. exchange traded fund (ETF). A form of open-end investment company (or, less frequently, a UIT), the shares of which are traded on a stock exchange. An ETF also permits subscriptions or redemptions daily but only through the in-kind receipt or delivery of specified quantities of specific securities in exchange for a minimum number of ETF shares (referred to as a creation unit).
  68. excise tax. A 4 percent tax imposed if a regulated investment company (RIC) fails to make minimum distributions to shareholders each calendar year. The required distribution is the sum of 98 percent of net investment income for the calendar year and 98.2 percent of capital gain net income for the 12 months ended October 31. The difference between actual distributions and the required distribution is subject to the tax. If the RIC distributed less than 100 percent of income in a prior year, the shortfall increases the current-year required distribution.
  69. ex-dividend or ex-distribution date. Synonym for shares being traded without dividend or capital gains distribution. The buyer of a stock selling ex-dividend does not acquire a right to receive a previously declared but not-yet-paid dividend. Dividends are payable on a fixed date to shareholders recorded on the stock transfer books of the disbursing company as of a previous date of record (see record date). For example, a dividend may be declared as payable to holders of record on the books of the disbursing company on a given Friday. Because three business days are allowed for delivery of the security in regular-way transactions, the stock is declared ex-dividend as of the opening of the market on the preceding Wednesday (or on one business day earlier for each intervening nontrading day). Therefore, anyone buying the stock on and after Wednesday is not entitled to the dividend. For nontraded shares of mutual funds, the ex-dividend date is the same as the record date.
  70. expense limitation. An agreement between an investment company and its investment adviser in which the adviser agrees to limit its advisory fee or the total expenses of the company to an amount that is usually based on a stipulated relationship between total expenses and average net assets. Limitations may be either contractual or voluntary.
  71. ex-rights. Similar to ex-dividend. The buyer of a stock selling ex-rights is not entitled to a rights distribution.
  72. ex-warrants. Stocks or bonds trading without attached warrants, entitling holders to subscribe to additional shares within specified periods and at specified prices.
  73. FINRA. Financial Industry Regulatory Authority, formed by the combination of the regulatory functions of the National Association of Securities Dealers, Inc. (NASD) and the NYSE.
  74. face amount certificate company. As defined by Section 28 of the 1940 Act, an investment company that issues installment-type certificates, as defined by Section 2(a)(15) of the act.
  75. fixed income security. A preferred stock or debt security with a stated percentage or dollar income return.
  76. flat. A method of trading in certain kinds of bonds, usually income bonds that do not pay interest unless it has been earned and declared payable, or bonds on which the issuer has defaulted in paying interest. The seller of a bond trading flat is not entitled to receive the interest that has accrued since the date of the last interest payment and delivers the bond with all unpaid coupons attached or a due bill authorizing the buyer to collect interest, if any, which may be paid by the issuer in the future.
  77. forward placement commitment contract. An OTC contract for delayed delivery of securities in which the buyer agrees to buy, and the seller agrees to deliver, a specified security at a specified price at a specified future date.
  78. forward pricing. The pricing of mutual fund shares for sale, repurchase, or redemption at a price next computed after an order has been received. Mutual fund shares are usually priced once or twice per day.
  79. guaranteed investment contract. Nontradeable contract that guarantees the return of principal and a specific minimum rate of return on invested capital over the life of the contract. Many contracts also provide for withdrawals of principal at par at specified dates or upon specified conditions before maturity, or both. Most frequently used by pension and retirement plans in which withdrawals are permitted to fund retirement benefits, payments to employees leaving the company, or transfers of benefits among investment options (see also FASB ASC 946-210-45 and 946-210-50).
  80. hedge fund. A general, nonlegal term used to describe private, unregistered investment pools that are not widely available to the public and have traditionally been limited to accredited investors and large institutions. Hedge funds likely originated as private investment funds that combined long and short equity positions within a single leveraged investment portfolio. Currently, hedge funds employ a wide variety of trading strategies and techniques to generate financial returns, and may or may not utilize complex derivative instruments or leverage in the investment portfolio. Hedge funds are not mutual funds and, as such, are not subject to certain regulations that apply to mutual funds for the protection of its investors.
  81. hedging. A means of risk protection against loss, typically reducing market price risk, market interest rate risk, foreign exchange risk, or credit risk.
  82. hypothecate. To pledge securities to brokers as collateral for loans made to purchase securities or cover short sales.
  83. illiquid. Not readily convertible into cash, such as a stock, bond, or commodity that is not actively traded and would be difficult to sell in a current sale. Not more than 15 percent of the net assets of an open-end investment company registered under the 1940 Act (5 percent for money market funds) may be invested in illiquid securities.
  84. inadvertent investment company. An industrial or service company deemed to be an investment company because it inadvertently meets the criteria of Section 3(a) of the 1940 Act and must register under that act and comply with its provisions. Under the 1940 Act, also known as a transient investment company.
  85. incentive allocation. A partnership allocation based upon the fund’s performance reallocating profits from the capital account of a limited partner to the capital account of a general partner. The incentive may be an absolute percentage of the fund’s performance or a percentage of performance in excess of a specified benchmark.
  86. incentive fee. A fee paid to an investment adviser based upon the fund’s performance for the period. The incentive may be an absolute share of the fund’s performance or a share of performance in excess of a specified benchmark. For registered investment companies offered to the general public, any performance fee must be based on a comparison of performance to a specified index and must provide for an equivalent penalty if the performance fails to match the index return.
  87. index. A statistical composite that measures changes in the economy or financial markets.
  88. index option. Calls or puts on indexes of stock, or less frequently, other securities.
  89. indexed security. A security whose value is based on the absolute or relative value, over a period of time or at a point in time, of a financial indicator, such as a measure of interest rates, exchange rates, commodity prices, or stock prices.
  90. indexing. Constructing a portfolio to match the composition or performance of a broad-based index.
  91. initial margin deposit. A commodity transaction term meaning the amount of money or its equivalent specified by the commodity exchange under which the contract is traded, held as a good faith deposit to make sure that the customer meets the variation margin requirement. Maintenance margin refers to additional deposits. (See margin, a securities transaction term.)
  92. interested person. Under Section 2(a)(19) of the 1940 Act, a person affiliated with an investment company, a member of his or her immediate family (as defined), a person affiliated with the company’s investment adviser or principal underwriter, an investment company’s legal counsel, any broker or dealer or its affiliated persons, and any other person as so determined administratively by the SEC based on relationships.
  93. interval fund. A form of closed-end fund registered using Form N-2 under the 1933 Act and the 1940 Act, which may sell shares to investors on a regular basis (as frequently as daily) but only repurchases shares at specified intervals (for example, monthly or quarterly).
  94. inverse floater. A floating rate note in which the rate paid increases (decreases) at a multiple of declines (rises) in the floating market rate.
  95. investment adviser (manager). Under Section 2(a)(20) of the 1940 Act, any person who, pursuant to contract with an investment company, regularly furnishes advice with respect to the desirability of investing in, purchasing or selling securities or other property, or is empowered to determine what securities or other property shall be purchased or sold.
  96. Investment Advisers Act of 1940. Provides for the registration and regulation of most persons who render investment advice to individuals or institutions, including investment companies, for compensation.
  97. investment advisory agreement. An agreement between an investment company and investment manager engaging the investment manager to provide investment advice to the investment company for a fee (see Sections 15[a], 15[c], and 36[b] of the 1940 Act).
  98. investment company. An entity that pools shareholders’ funds to provide the shareholders with professional investment management.
  99. Investment Company Act of 1940. Provides for the registration and regulation of investment companies.
  100. investment company trade associations. Such associations as the Investment Company Institute, the National Investment Company Service Association, the Mutual Fund Education Alliance, the National Association of Small Business Investment Companies, the Mutual Fund Directors Forum, the Independent Directors Council, and the Closed-End Fund Association.
  101. investment grade bonds. Bonds rated by a rating service in one of its top four categories (AAA to BBB/Baa).
  102. investment partnership. A partnership, usually a limited partnership, organized under state law to invest and trade in securities.
  103. junk bonds. Bonds with a rating of BB+/Ba or lower issued by a company without a long record of sales and earnings or with questionable credit strength, which often include step-interest and payment-in-kind bonds. (Also known as high-yield bonds and defined in the FASB ASC glossary, as presented in the first section of this glossary, under the term high-yield debt securities.)
  104. LIBOR (London Interbank Offered Rate). The rate of interest that the most creditworthy international banks dealing in eurodollars charge each other for large loans. Various instruments’ rates are tied to LIBOR.
  105. letter of intent. An agreement by which a shareholder agrees to buy a specified dollar amount of mutual fund shares, usually over 13 months, in return for a reduction in the sales charge applicable to a comparable lump-sum purchase.
  106. leverage. Borrowing to enhance return. Buying securities on margin is an example of leverage.
  107. liquidity. A measure of the ease with which a security trades in large blocks without a substantial drop in price (defined in the FASB ASC glossary, as presented in the first section of this glossary).
  108. listed security. A security listed and traded on a stock exchange.
  109. long. Denotes ownership or right to possession of securities.
  110. management fee. An amount charged by an investment adviser under a contract approved by the holders of a majority of a registered investment company’s outstanding shares. The fee may gradually decline as a fixed or reducing percentage of the average net assets and may also provide for an additional bonus (or penalty) based on performance. (See incentive fee.)
  111. management investment company. Under Section 4(3) of the 1940 Act, a management company (often referred to as a management investment company) is defined as any investment company other than a face amount certificate company (as defined in Section 4[1]) or a UIT (as defined in Section 4[2]). The term management company is sometimes used to refer to the investment adviser of an investment company.
  112. margin. A securities transaction term meaning the amount of money or its equivalent, specified by the Board of Governors of the Federal Reserve System, that a customer must deposit with a broker in a securities transaction on margin (see initial margin deposit, a commodity transaction term).
  113. margin account. A means of leveraging offered by security brokers or dealers to permit their customers to buy securities, in part, with borrowed funds. The difference between the price of a security and funds provided by the customer is loaned by the broker or dealer to the customer.
  114. market price. Usually the last reported price at which a security has been sold or, if the security was not traded or trading prices are not reported, a price arrived at based on recent bid and asked prices.
  115. mark-to-market. A procedure to adjust the carrying value of a security, an option, or a futures contract to fair value. (This term is synonymous with subsequent measurement at fair value or changes in fair value, which are terms used throughout FASB ASC.)
  116. matrix pricing. A mathematical technique used to value normal institutional-sized trading units of debt securities without relying exclusively on quoted prices of the specific security. Factors such as the issue’s coupon or stated interest rate, maturity, rating, and quoted prices of similar issues are considered in developing the issue’s current market yield.
  117. money market fund. A mutual fund whose investments are primarily or exclusively in short-term debt securities designed to maximize current income with liquidity and capital preservation, usually maintaining per share net asset value at a constant amount, such as $1.
  118. money market investments. Short-term government obligations, commercial paper, bankers’ acceptances, and certificates of deposit, of high credit standing and typically with remaining terms to maturity of one year or less.
  119. municipal bond fund. An investment company whose shares represent holdings solely or largely of securities on which interest is exempt from federal income taxes.
  120. municipal notes and bonds. Securities that are issued by states, cities, and other local government authorities to fund public projects. The interest on these bonds is often exempt from federal taxes and, under certain conditions, is exempt from state and local taxes. Municipal notes usually mature in less than three years.
  121. mutual fund. The popular name for an open-end management investment company (see open-end investment company).
  122. NASDAQ. Abbreviation for the NASDAQ Stock Market, an electronic stock market (formerly known as the National Association of Securities Dealers Automated Quotation System).
  123. NASD. Acronym for the National Association of Securities Dealers, Inc. Formerly an association of broker-dealers doing business in the OTC market. Prior to its incorporation into FINRA, NASD supervised and regulated the trading conduct and sales practices of its members.
  124. NSCC. Abbreviation of the National Securities Clearing Corporation, a subsidiary of the Depository Trust & Clearing Corporation that provides trade processing, clearance, delivery, and settlement services to its members. It deals with brokers, dealers, and banks in the United States and Canada.
  125. NYSE. Acronym for the New York Stock Exchange. It is the largest securities exchange in the United States. The NYSE also furnishes facilities for its members, allied members, member firms, and member corporations to aid them in conducting securities business.
  126. net assets. The term used by an investment company to designate the excess of the fair value of securities owned, cash, receivables, and other assets over the liabilities of the company.
  127. net asset value per share. The value per share of outstanding capital stock of an investment company computed (usually daily by mutual funds) by dividing net assets by the total number of shares outstanding. (See Rule 2a-4 of the 1940 Act; defined in the FASB ASC glossary, as presented in the first section of this glossary).
  128. no-action letter. A letter issued to an investment adviser or investment company (registrant) by the staff of the SEC in response to a request filed by the registrant describing a proposed business activity that may or may not conform to SEC rules and regulations. In a no-action letter, the SEC staff indicates whether, based on the facts presented by the registrant, the SEC staff will recommend no action be taken against the registrant for engaging in the proposed activity. A no-action letter does not have the force of law; however, it represents an interpretation of the SEC staff that may be applied in a situation in which the registrant is engaging in an activity not addressed by existing SEC rules and regulations.
  129. no-load fund. A mutual fund selling and redeeming its shares at net asset value without adding sales charges, although some such funds have Rule 12b-1 plans permitting payment of distribution expenses with fund assets. A mutual fund may not call itself no load if a 12b-1 fee is levied exceeding 0.25 percent of fund assets per year. Investors deal directly with the fund, not through an investment dealer or broker.
  130. nondiversified investment company. A management investment company other than a diversified company, as defined in Section 5(b) of the 1940 Act.
  131. offering price. The price at which mutual fund shares or investment trust units can be bought, often equaling net asset value plus a sales load.
  132. offset. A closing transaction involving the purchase or sale of an option or futures contract having the same features as one already held. This could be a hedge, such as a short sale of a stock, to protect capital gain or the purchase of a futures contract to protect a commodity price or a straddle representing the purchase of offsetting put and call options on a security.
  133. offshore fund. An investment company organized outside the United States.
  134. open contract. An unperformed or unsettled contract. May be used in referring to new issues traded when, as, and if issued or in referring to commodity futures trading. The term is used to designate contracts bought or sold and still outstanding.
  135. open-end investment company. A mutual fund that is ready to redeem its shares at any time and that usually offers its shares for sale to the public continuously (see Section 5[a][1] of the 1940 Act).
  136. original issue discount. A federal income tax term for interest to the holder of a bond that represents the difference between the face amount of a bond and its original sales price.
  137. over-the-counter (OTC). A securities trading market made up of broker-dealers that may or may not be members of a securities exchange. Securities are traded in the OTC market between broker-dealers acting either as principals (dealers) or agents for customers (brokers). The OTC market is the principal market for U.S. government bonds, corporate bonds, and municipal securities, and a substantial number of U.S. equity securities are traded on an OTC basis.
  138. passive foreign investment company (PFIC). A foreign corporation is a PFIC if either 75 percent of its gross income is passive, or 50 percent or more of the average value of its assets, computed quarterly, produce or could produce passive income, as defined in the IRC.
  139. payable date. The date on which a dividend is payable to holders of record on some previous record date.
  140. penny-rounding method. A method permitted by Rule 2a-7 of the 1940 Act under which the net asset value per share of a money market fund is computed based on the fair values of all investments and then rounded to the nearest 1 percent.
  141. performance fee. See incentive fee.
  142. periodic payment plan. See accumulation unit and Sections 2(a)(27) and 27 of the 1940 Act.
  143. personal holding company. An income tax term defined as a corporation of which 60 percent of adjusted ordinary gross income is personal holding company income, as defined in the IRC, and 5 or fewer individuals own more than 50 percent in value of its outstanding stock during the last half of the taxable year.
  144. point. A rise or decline of $1 per share used to refer to the purchase or sale of stocks. If used for the purchase or sale of bonds, the term means a rise or decline of $10 per $1,000 principal amount.
  145. portfolio. Securities owned by an investment company or other investor in securities.
  146. portfolio turnover rate. A measure of portfolio activity calculated for an investment company by dividing the lesser of purchases or sales of securities, excluding securities having maturity dates at acquisition of one year or less, by the average value of the portfolio securities held during the period (see Form N-SAR instructions to item 71, Form N-1A Item 13 Instruction 4(d), and Form N-2 Item 4 Instruction 17).
  147. premium on redemptions (repurchases). See redemption (repurchase) fee (or charge).
  148. price make-up sheet. A detailed computation of the net asset value of a mutual fund.
  149. principal. A person, especially a dealer, who buys or sells securities for his or her own account. Also refers to the face amount of a security without accrued interest.
  150. principal underwriter. See distributor, defined in the FASB ASC glossary, as presented in the first section of this glossary, and the definition of underwriter in Section 2(a)(40) of the 1940 Act.
  151. private equity fund. A general, nonlegal term used to describe private, unregistered pools that are not widely available to the public and have traditionally been limited to accredited investors and large institutions. Private equity funds typically seek to generate returns through longer term appreciation from investments in privately held and nonlisted publicly traded companies. Private equity funds often obtain majority controlling interests or significant minority interests that allow for active involvement in investee operations, restructuring, and merger and acquisition activity, through board oversight positions.
  152. private placement. The direct sale of a block of securities of a new or secondary issue to a single investor or group of investors. The sale or placement is usually made through an investment banker, and the securities’ public resale is restricted if they are not registered under the 1933 Act. (See restricted security.)
  153. prospectus. A circular required by the 1933 Act describing securities being offered for sale to the public (see Section 2[a][31] of the 1940 Act).
  154. proxy. A person authorized to vote the shares of an absent shareholder at a meeting of shareholders. Also refers to the written authorization given to that person. (See Section 20[a] of the 1940 Act.)
  155. proxy statement. A publication sent to stockholders by a board of directors or trustees or its adversaries or others usually containing financial reports (for merger and other financial proposals), stockholders’ meeting notices, and voting information on certain matters to solicit proxies from the holders (see Rule 20a-1 under the 1940 Act and Regulation 14A under the 1934 Act).
  156. put option. A contract that entitles the holder to sell (put), at his or her option, a specified number of underlying units of a particular security at a specified price (strike price) either on (European-style) or at any time until (American-style) the contract’s stated expiration date. The option, which may be transferable, is bought in the expectation that the price will decline below the strike price. If the price declines below the strike price, the buyer exercises or sells the option. If the price does not decline below the strike price, the buyer lets the option expire and loses only the cost of the option. There are both listed and OTC markets in options. During the existence of an option, the exercise price and number of underlying units are adjusted on the ex-dividend date for cash dividends, rights, and stock dividends or splits (defined in the FASB ASC glossary, as presented in the first section of this glossary).
  157. real estate mortgage investment conduit (REMIC). An investment vehicle created to hold pools of mortgages and to issue two classes of interest in the REMIC: regular interest and residual interests. The vehicle is not subject to taxation and may be used to protect investors in mortgage-related instruments from double taxation.
  158. realized gain or loss. See capital gain or loss.
  159. record date. The date on which an owner of a share of stock must be registered on the books of a company as a shareholder to receive a declared dividend or, among other things, to vote on company affairs.
  160. recordkeeping agent. An outside service bureau, bank, or other agency engaged by an investment company to maintain records of purchases and sales of investments, sales and redemptions of fund shares, and shareholders’ account statements.
  161. redemption. A stockholder’s tender of investment company shares to the company or person designated by the company, requiring liquidation of such shares in exchange for proceeds, usually in cash, representing the net asset value of the shares tendered, occasionally less a redemption fee (see Section 2[a][32] of the 1940 Act).
  162. redemption in kind. Redemption of investment company shares by payment in portfolio securities, not cash. Permissible in certain circumstances for many mutual funds and tax-free exchange funds. (see Rule 18f-1 under the 1940 Act).
  163. redemption or repurchase price. The price, net asset value less a redemption fee, at which a share of a mutual fund is redeemed or repurchased (see Section 2[a][32] of the 1940 Act).
  164. redemption (repurchase) fee (or charge.) A percentage of net asset value that may be charged to the investor on redemptions or repurchases of an open-end investment company’s shares (see Section 10[d][4] of the 1940 Act).
  165. registered investment company. An investment company that has filed a registration statement with the SEC as an investment company, in accordance with the requirements of the 1940 Act. The investment company, as defined in Section 3(a) of the act, primarily invests, reinvests, or trades in securities; issues face-amount certificates; or engages in investing and owning investment securities, other than government securities, that have a value exceeding 40 percent of the company’s total assets (Section 3[a][1]), with some exceptions to the latter (stated in Section 3[b]).
  166. registrar. Usually a trust company or bank responsible for preventing the issuance of more stock than authorized by the issuing company (see transfer agent).
  167. regulated investment company (RIC). An investment company that qualifies for the special tax treatment provided for by IRC subchapter M.
  168. Regulation S-X. Accounting rules for the form and content of financial statements and schedules required under the 1933 Act, the 1934 Act, and the Energy Policy and Conservation Act of 1975. Article 6 applies to financial statements for, and specified rules in article 12 apply to financial schedules of, registered investment companies.
  169. reinvestment. The automatic purchase of additional shares using the proceeds of dividends and capital gain distributions.
  170. repurchase. Liquidation of investment company shares through a principal underwriter or a broker-dealer on behalf of shareholders, sometimes for a purchase or service charge or brokerage commission.
  171. repurchase agreement. An agreement under which an investment company pays for and receives (purchases) securities from a seller who agrees to repurchase them within a specified time at a specified price. A repurchase agreement is known on the side of a selling broker-dealer or other seller as a reverse repurchase agreement.
  172. restricted security. A portfolio security that may be sold privately but that is required to be registered with the SEC or exempted from such registration before it may be sold in a public distribution. A private placement stock is frequently referred to as letter stock.
  173. return. See yield.
  174. reverse repurchase agreement. An agreement under which the investment company transfers (sells) securities for cash to another party (purchaser), usually a broker, and agrees to repurchase them within a specified time at a specified price. A reverse repurchase agreement is known in the broker-dealer industry as a repurchase agreement.
  175. right. A privilege offered by a corporation to its shareholders pro rata to subscribe to a certain security at a specified price, often for a short period. Rights may or may not be transferable.
  176. right of accumulation. A method permitting aggregation of mutual fund shares being acquired with shares previously acquired and currently owned to qualify for a quantity discount that reduces the sales charge on a single purchase.
  177. Rule 2a-7. A rule under the 1940 Act that permits money market funds to value investments at amortized cost or through the use of the penny-rounding method.
  178. Rule 12b-1. A rule under Section 12 of the 1940 Act that permits the use of a fund’s assets to pay distribution-related expenses under conditions prescribed therein (see board-contingent plan and enhanced 12b-1 plan defined in the FASB ASC glossary, as presented in the first section of this glossary).
  179. Rule 144A. A rule under the 1933 Act that provides a safe harbor exemption from the registration requirements for resales of restricted securities to qualified institutional buyers.
  180. SBA. Acronym for the Small Business Administration, an agency established by Congress to administer the Small Business Investment Company Act of 1958.
  181. SBIC. Acronym for a small business investment company, an investment company registered under the Small Business Investment Company Act of 1958 and established to provide capital to small business enterprises.
  182. SEC. Acronym for the Securities and Exchange Commission, an agency established by Congress to administer federal securities laws.
  183. sale against the box. Similar to a short sale, except that the seller already owns the stock being sold but keeps possession of it and, therefore, has to borrow the equivalent stock to deliver to the purchaser.
  184. sales charge. An amount providing for the underwriter’s and dealer’s commission that is added to the net asset value of an open-end investment company’s shares in computing the offering price and stated as a percentage of the offering price. A sales charge can also be imposed on redemption.
  185. Section 4(2). A section of the 1933 Act that exempts transactions by an issuer not involving a public offering from registration under that act.
  186. Securities Act of 1933 (1933 Act). Principal federal law regulating the public offering of corporate securities. Among other things, it regulates the contents of prospectuses and similar documents and is intended to ensure that potential investors receive adequate information to make reasonably informed investment decisions.
  187. Securities Exchange Act of 1934 (1934 Act). Regulates securities brokers and dealers, stock exchanges, transfer agents, and the trading of securities in the securities markets. Also, among other things, establishes requirements for periodic reporting by registrants.
  188. Securities Investor Protection Corporation (SIPC). A federal corporation established for the purpose of protecting customers of broker-dealers in financial difficulty.
  189. securities lending. The practice of lending portfolio securities, usually for delivery against a short sale. The loan is usually collateralized by cash or government securities.
  190. seed money. An initial amount of capital contributed to a company at its inception (see Section 14[a] of the 1940 Act).
  191. senior security. Under Section 18 of the 1940 Act, any obligation constituting a security (as defined) and evidencing indebtedness and any class of equity security having priority over any other class with respect to distribution of assets and payment of dividends.
  192. separate account. An account established and maintained by an insurance company that holds particular assets allocated to that account and is credited or charged with income, gains, or losses from these assets separately from income, gains, or losses of the insurance company’s general accounts. Sometimes referred to as a variable account, a separate account funds variable annuities or variable life insurance policies. Although it is not an entity but is only an account within the insurance company, it may be an investment company within the meaning of the 1940 Act. (See Section 2[a][37] of the act; defined in the FASB ASC glossary, as presented in the first section of this glossary.)
  193. series fund. An investment company that offers multiple segregated portfolios of common stock (see Rule 6-03[j] of Regulation S-X).
  194. settlement date. The date on which security transactions are settled by delivering or receiving securities and receiving or paying cash pursuant to an earlier agreement of purchase and sale called a trade (see trade date).
  195. short. A stock record position representing the physical location of a security (such as box, transfer, and so forth) or meaning that the security is due from others (such as failed to receive or owed to the brokerage concern by a customer due to a short sale).
  196. short sale. A sale of securities that requires borrowing equivalent securities to make delivery to the purchaser.
  197. Small Business Investment Incentive Act of 1980. Amended the 1940 Act by, among other things, allowing closed-end companies to elect to be regulated as BDCs under Section 2(a)(48) and Sections 54–65 of the 1940 Act (see business development company [BDC]).
  198. Small Business Investment Company Act of 1958. Authorizes the SBA to provide government funds to small business investment companies licensed under that act.
  199. spread. A combination of put and call options at different prices — one below and the other above the current market price — for the same quantity of a security. Also refers to the difference between the bid and asked prices of a security and to the dealer’s commission on a security offering.
  200. standby commitment contract. An agreement to accept future delivery of a security at a guaranteed price or fixed yield on exercise of an option held by the other party to the agreement.
  201. straddle. A combination of one put and one call option, identical with respect to the security issue, number of shares, exercise price, and expiration date.
  202. stripping. The brokerage practice of separating a fixed income security into its corpus and coupons, which are then sold separately.
  203. synthetic floaters. A structured instrument that uses the principal of, and a portion of the interest payments from, long-term municipal bonds, (in some cases combined with interest rate swaps), to create an investment that pays a floating short-term interest rate. Often issued in tandem with inverse floaters. Many synthetic floaters are known as “tender option bonds”, as they include the right to put the instruments to the issuer or a third party at regular intervals, or upon the occurrence of certain events, at a stated price (usually par).
  204. TBA. Abbreviation for to be announced future government-sponsored enterprises’ pools that are bought and sold for future settlement. TBA refers to the announcement of the specific pools to be delivered or received.
  205. tender offer. A public offer to buy from all current holders not less than a specified amount of an issuer’s securities at a fixed price.
  206. total return. A periodic measure of a fund’s overall change in value that assumes the reinvestment of dividends and capital gain distributions. (Total return is a standardized method prescribed by the SEC, as described in item 26 of Form N-1A.)
  207. trade. An agreement of purchase and sale in a securities market to be settled or performed by payment and delivery on a later settlement date.
  208. trade date. The date that a security transaction is actually entered into to be settled on a later settlement date.
  209. transfer. A change of ownership of registered securities on the books of the issuer (defined in the FASB ASC glossary, as presented in the first section of this glossary).
  210. transfer agent. An agent for a securities issuer who keeps records of the names of the issuer’s registered shareholders, their addresses, and the number of shares that they own. The agent must be sure that certificates presented to the office for transfer are canceled and that new certificates are issued in the name of the transferee. (See registrar.)
  211. turnover. The frequency at which securities are purchased and sold by an investment company.
  212. undertaking. An agreement between a registrant and the SEC staff in connection with the filing of a registration statement whereby the registrant agrees to take a future action requested by the staff but not otherwise necessarily or expressly required by the securities’ statutes but (in a federal registration) that may be required by SEC rules or SEC forms that have the same legal status as the rules by which they were adopted.
  213. underwriting. The act of distributing a new issue of securities (primary offering) or a large block of previously issued securities (secondary offering). A firm-commitment underwriting obligates the underwriter to purchase the underwritten securities, regardless of whether they can be resold. A best-efforts underwriting only obligates the underwriter to buy from the issuer only those securities that it is able to sell to purchasers.
  214. unit investment trust (UIT). An investment company organized under a trust indenture that issues only redeemable securities, each of which represents an undivided interest in a unit of specified (usually unmanaged) securities (see Section 26 of the 1940 Act).
  215. unlisted security. A security that is not listed on a securities exchange (see over-the-counter [OTC]).
  216. unrealized appreciation or depreciation. The excess (appreciation) or deficiency (depreciation) of the fair value of securities over (under) their cost.
  217. unregistered securities. Securities that are not registered under the 1933 Act.
  218. variable annuity. An annuity having a provision for the accumulation of an account value, benefit payments, or both that vary according to the investment experience of the separate account to which the amounts paid for the annuity are allocated (defined in the FASB ASC glossary, as presented in the first section of this glossary, under the term variable annuity contract).
  219. variation margin. A term used in commodity operations. Refers to last-day point fluctuation — a difference between the settling price of the day before and the last day’s settling price — on net positions long and short.
  220. venture capital investment company. A closed-end investment company whose primary investment objective is capital growth and whose capital is usually invested wholly or largely in restricted securities in negotiated transactions to form or develop companies with new ideas, products, or processes.
  221. warrant. A type of option to purchase additional securities from the issuer. Commonly affixed to the certificates for other securities at the time when the combined securities units are originally issued and usually separable, sometimes, on and after a subsequent date. Also, a document evidencing options to purchase shares. (Defined in the FASB ASC glossary, as presented in the first section of this glossary.)
  222. wash sale. A sale of stock or other securities in which a taxpayer has acquired or entered a contract or option to acquire substantially identical stock or other securities within a period beginning 30 days before and ending 30 days after the date of the sale (a 61-day period). A loss resulting from such a sale is not deductible for federal income tax purposes, but a gain is taxable. (See IRC Section 1091.)
  223. when-issued. A short form designation for when, as, and if issued. The term indicates a conditional transaction in a security authorized for issuance but not yet actually issued. All such transactions are settled if and when the actual security is issued.
  224. yield. The return on investment that an investor receives from dividends or interest expressed as a percentage of the current market price of the security or, if the investor already owns the security, the price paid. Yield also may refer to the SEC yield, a standardized yield calculation method prescribed by the SEC based upon interest and dividend income of the fund (see item 26 of the instructions to Form N-1A).
  225. yield to maturity. The rate of return on a debt security held to maturity, giving effect to the stated interest rate, accrual of discount, and amortization of premium.
  226. zero coupon bond. A type of debt instrument that makes no periodic interest payment but is issued at a deep discount from its face value. The holder derives his or her return from the gradual appreciation in the value of the security, which redeems at face value at a specified maturity date.

Notes

__________________________

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset