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Zorluk: OrtaInvestment Companies and Managed Funds

A retail investor wants to use margin to purchase shares of an investment company and asks a registered representative which product can be bought on margin immediately. Which of the following investment company securities is eligible for immediate margin purchase in the secondary market?

  1. Closed-end fund shares trading on a national securities exchangeCevap
  2. B
    Class A open-end mutual fund shares purchased directly from the issuer at the Public Offering Price
  3. C
    Newly issued Unit Investment Trust (UIT) units purchased from the sponsoring underwriter
  4. D
    Class C open-end mutual fund shares purchased with no front-end sales charge

Cevap

Closed-end fund shares trading on a national securities exchange are eligible for immediate margin purchase in the secondary market.
Closed-end management investment fund shares trade in the secondary market on stock exchanges or over-the-counter after their initial public offering. Because they trade like regular corporate stocks in the secondary market, investors can purchase closed-end fund shares on margin immediately in accordance with Regulation T.

Adım Adım Çözüm

1
Identify the trading venue and issuance mechanism for each investment company type.
Open-end mutual funds and newly issued UIT units are primary market transactions continuously sold by the issuer/sponsor. Closed-end fund shares trade in the secondary market on exchanges after their initial public offering.
Margin regulations differ between primary market new issue distributions and secondary market exchange transactions.
2
Apply Federal Reserve Regulation T margin rules for new issues versus secondary market securities.
Under Regulation T and SEC rules, primary market purchases (new issues) cannot be bought on margin. Open-end mutual fund shares must be paid for in full and held for 30 days before they can be used as margin collateral. In contrast, exchange-traded secondary market securities, such as closed-end fund shares, can be purchased on margin immediately.
Regulation T restricts margin borrowing on new issue distributions to prevent excessive leverage during public offerings.

Anahtar Kavram

Marginability of Open-End vs. Closed-End Investment Company Shares
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Konular

Investment Companies and Managed Funds

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