Open-end Investment Company

An investor sends money to an open-end investment company and receives shares that the fund will redeem at net asset value. Those shares are:

1. A.Not a security, because the fund itself redeems the shares rather than other investors buying them.Wrong. Redeemability describes how the investor exits, and redeemable securities are expressly inside the statutory definition.
2. B.Not a security, because the investor may reclaim the money at net asset value on demand.Wrong. Liquidity is not an exemption, and a demand right does not lift an interest out of the securities laws.
3. C.A security, but only as to the portion of the portfolio invested in stocks rather than bonds.Wrong. Classification attaches to the fund share itself, never to a look-through of whatever the portfolio currently holds.
4. D.A security, because the investor holds a pooled interest whose value depends on a manager's results.Correct. Pooled money, professional management and a value that moves with portfolio results is the classic security.

Why: Investment company shares are securities in their own right, and the statutory definition names redeemable securities specifically. The investor supplies money, it is pooled with that of other shareholders, and the return depends entirely on how the adviser manages the portfolio. That is both a statutory category and a straightforward Howey fit. The result would not change for a closed-end fund; what differs there is how the investor exits, not whether the share is a security.

An investor sends money to an open-end investment company and receives newly issued shares. In which market did the transaction occur, and who receives the money?

1. A.The secondary market, and the money goes to the shareholder who sold the shares.Wrong. There is no selling shareholder, because the shares did not previously belong to anyone.
2. B.The secondary market, and the money goes to the fund's distributor.Wrong. The distributor is compensated out of any sales charge and is not the recipient of the investment.
3. C.The primary market, and the money goes to the broker executing the order.Wrong. The executing firm earns a concession where one applies, while the invested amount goes to the fund.
4. D.The primary market, and the money goes to the fund itself.Correct. An open-end fund creates new shares on demand, so every purchase is a fresh issuance.

Why: An open-end fund is in a continuous primary offering: it creates new shares whenever an investor buys and cancels them on redemption. Because the shares are newly issued, the money paid becomes part of the fund's portfolio, less any sales charge. Every purchase is therefore a primary market transaction, which is why a prospectus must be delivered even for a routine purchase by a long-standing shareholder. A redemption reverses the flow, with the fund paying the investor out of portfolio assets.