Investment Companies - Buying and Redeeming Mutual Funds


Mutual fund shares are a continuous public offering as defined by the SEC. All sales must be accompanied by a prospectus. Because of the continuous offering nature of mutual fund shares, a rule called Regulation T prohibits the purchase of mutual fund shares on margin.

An investor can redeem fractions or whole shares of a mutual fund by selling them at the NAV. When will the redemption price be determined? At the same time that the fund company computes the daily NAV for the fund and determines at what price investors purchased shares after the close of trading yesterday or before the close of trading today, or 4pm.

Mutual fund companies must pay the proceeds of the redemption amount to the investor within seven calendar days.


Look Out!
You will need to know the time within which an investment company has to forward the proceeds of the mutual fund redemption to the investor. Do not confuse this time period with stock or bond settlement, and remember: CALENDAR days, not business days like other securities!


Offers of Exchange
Section 11 of the Investment Company Act of 1940 requires offers of exchange to be made at NAV only. This applies to exchanges within a single fund family and to exchanges from one fund family into another. The only exception to this rule is if the terms of the offer have been submitted to and approved by the SEC.

Distribution, Redemption and Repurchase
Section 22 of the Investment Company Act of 1940 requires the following for investment companies:

  • They must determine a method for computing the minimum price at which a member of a securities association may purchase shares.

  • They must prescribe the minimum time period that must pass after the sale or issue of shares before any resale to the investment company by a member or its redemption upon surrender by a member.

  • No investment company can sell any redeemable security it has issued at any price except the public offering price, except to or through a principal underwriter for distribution.

  • A securities association may prohibit its members from purchasing redeemable shares from the issuer except at a price equal to the public offering price minus a commission, spread or discount.
Introduction


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