Forward Pricing

The New York Stock Exchange closes early, at 1:00 p.m. Eastern time, on the Friday after Thanksgiving. Halvard Fund prices its shares as of the close of regular trading on the NYSE. Marisabel places a purchase order with the fund at 2:30 p.m. that Friday. At what price is her order executed?

1. A.At the net asset value computed on the last full trading day before the holidayForward pricing never uses a past price. Doing so would let investors trade on known values, which is exactly what the rule prevents.
2. B.At whichever of the two prices is lower, since the early close was outside her controlThere is no favorable-price provision. Every order receives the next computed net asset value, regardless of circumstances.
3. C.At that Friday's net asset value, since she placed the order before the usual 4:00 p.m. cutoffThe 4:00 p.m. figure is a convention, not a rule. The fund prices at the actual exchange close, which was 1:00 p.m. that day.
4. D.At the next net asset value computed after her order arrives, which is the following business day's priceCorrect. Her 2:30 p.m. order missed the 1:00 p.m. pricing, so forward pricing carries it to the next computed net asset value.

Why: Forward pricing means an order is executed at the next net asset value computed after the fund receives it. Halvard prices as of the NYSE close, so on an early-close day the pricing time moves to 1:00 p.m. Marisabel's 2:30 p.m. order arrives after that day's pricing and therefore receives the next computed net asset value, which is the following business day's. The clue is that the fund's pricing time is defined by reference to the exchange close rather than a fixed clock time. Review: forward pricing. Trap: assuming 4:00 p.m. is always the cutoff.

Thaddeus tells his representative at Fernleigh Securities to buy Wexbury Growth Fund "but only if the price is 24.00 dollars a share or lower, otherwise skip it." The representative should explain that:

1. A.The firm may accept the limit order and hold it until the fund's next computed price satisfies it.A fund does not maintain a continuous market against which a resting limit could be worked. There is nothing for the firm to hold the order against.
2. B.Open-end fund shares are bought only at the next computed public offering price, so limit and stop instructions cannot be accepted.Correct. Forward pricing means the price is unknown at entry, and there is no continuous market, so price-contingent instructions are not available.
3. C.The order may be entered as good-til-cancelled and will execute on the first day the price condition is met.Good-til-cancelled instructions apply to exchange-traded securities. Fund orders are executed at the next computed price or not at all.
4. D.The representative may exercise time and price discretion to fill the order near 24.00 dollars.Time and price discretion cannot create a price-contingent fund order, because every order that day receives the same next computed price.

Why: Open-end fund shares are sold only at the next computed public offering price under forward pricing, and the price is not known when the order is entered. Because there is no continuous market and no bid to hit, a fund order cannot carry a limit or stop instruction. The customer may only decide how many dollars or shares to buy, not at what price.

Perpetua drops a completed purchase order for Kingsbridge Income Fund into her broker-dealer's night depository at 7:00 p.m. on a Friday. The fund prices its shares once each business day at 4:00 p.m. Eastern. At what price will her order be executed?

1. A.The net asset value computed at 4:00 p.m. the following Monday, plus any sales chargeCorrect. Forward pricing gives the order the next NAV computed after receipt. Friday's 4:00 p.m. price was already struck three hours before the order arrived, so Monday's pricing is the first one that follows receipt.
2. B.The net asset value in effect on the day the fund's transfer agent receives her paymentPricing keys off receipt of the ORDER in proper form, not receipt of the money. Payment timing affects whether the trade is completed or cancelled, not which NAV applies.
3. C.The lower of Friday's or Monday's computed net asset valueNo fund may give an investor a choice between two prices. Offering the better of two NAVs would dilute existing shareholders and is a form of backward pricing.
4. D.The net asset value computed at 4:00 p.m. that same Friday, plus any sales chargeFilling a 7:00 p.m. order at the 4:00 p.m. price already computed that day is backward pricing, which Rule 22c-1 was written specifically to stop. It would let an investor act on news released after the market closed.

Why: Rule 22c-1 requires forward pricing: an order is filled at the first net asset value the fund computes AFTER the order is received, plus any applicable sales charge. An order that reaches the firm after Friday's 4:00 p.m. pricing cannot get Friday's price. The next price the fund computes is Monday's 4:00 p.m. NAV, so that is the basis for her purchase.

Marisol Ferrer submits a request to redeem her shares of the Larkfield Growth Fund, an open-end investment company. Under the Investment Company Act of 1940, the fund must transmit payment to her:

1. A.Within two business days, matching regular-way settlement for listed equities.Wrong. Equity settlement conventions govern secondary market trades. A fund redemption is governed by the seven-day rule.
2. B.Within 30 days of her request.Wrong. Thirty days is far outside the statutory limit and would undermine the redeemability that defines an open-end company.
3. C.On the next business day following her request.Wrong. Many funds pay faster in practice, but the statutory requirement is seven days, not one business day.
4. D.Within seven days of the tender of her shares.Correct. The Investment Company Act requires payment of redemption proceeds within seven days, at the net asset value next computed.

Why: Redeemability on demand is the defining feature of an open-end company. The shares are redeemed at the net asset value NEXT computed after the fund receives the request - forward pricing - and the fund must transmit payment within seven days of the tender. The seven-day requirement is why open-end funds must hold portfolios that can be liquidated readily, and it is the practical reason mutual funds are limited in how much illiquid stock they may own. The SEC may suspend the obligation only in narrow circumstances, such as an emergency or a closure of the New York Stock Exchange.