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Question

Difficulty: MediumInvestment Companies and Managed Funds

An investor contacts a registered representative at 2:15 PM EST on a Tuesday to place a purchase order for Class A shares of an open-end mutual fund. The fund calculates its net asset value (NAV) each business day at the close of regular trading on the New York Stock Exchange (4:00 PM EST). Which of the following best describes the price per share the investor will pay for this order?

  1. The net asset value calculated at 4:00 PM EST on Tuesday plus any applicable front-end sales chargeAnswer
  2. B
    The prevailing exchange market price of the fund's shares at 2:15 PM EST when the order was entered
  3. C
    The net asset value calculated at 4:00 PM EST on the preceding Monday
  4. D
    The net asset value calculated at 4:00 PM EST on Wednesday after regular-way settlement occurs

Answer

The investor will pay the net asset value calculated at the close of trading (4:00 PM EST) on Tuesday, plus any applicable front-end sales charge.
Under SEC rules, open-end investment companies (mutual funds) utilize forward pricing. All purchase and redemption orders received before the fund's daily pricing cutoff (typically the 4:00 PM EST close of the NYSE) are executed at the next computed Net Asset Value (NAV) per share. For Class A shares, the Public Offering Price (POP) paid by the investor is the next calculated NAV plus the front-end sales load.

Step-by-Step Solution

1
Identify the type of investment company product being purchased.
The product is an open-end management investment company (mutual fund).
Open-end funds issue and redeem shares continuously through primary market transactions with the fund.
2
Apply SEC Rule 22c-1 (Forward Pricing Rule) to the trade order timing.
Since the order was received at 2:15 PM EST (prior to the 4:00 PM EST close of regular market trading), the order qualifies for Tuesday's 4:00 PM EST valuation.
Orders submitted before the fund's daily valuation cutoff time receive the next computed net asset value per share.
3
Factor in share class pricing adjustments (Class A shares).
Class A mutual fund shares are sold at the Public Offering Price (POP), which equals NAV plus any applicable front-end sales charge.
Investors purchasing Class A shares pay the POP determined at the next NAV calculation.

Key Concept

Forward Pricing Rule for Open-End Mutual Funds
Estimated Time:1m 15s
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Topics

Investment Companies and Managed Funds

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