Seven-Day Redemption Rule

Genevieve holds Larkhall Equity Fund inside her brokerage account at Denbigh Securities and redeems 20,000 dollars of shares on a Tuesday before the fund's pricing time. She asks when she can wire the cash out of the account. Absent any restriction, the cash is normally available:

1. A.On Wednesday, when the redemption settles on the standard one-business-day cycle.Correct. The redemption is priced Tuesday and settles the next business day, so the cash is available Wednesday.
2. B.Immediately on Tuesday afternoon, as soon as the fund computes its net asset value.Pricing and settlement are different steps. Computing the price does not credit cash to the account.
3. C.On the seventh calendar day after the request, as required by the Investment Company Act.The seven-day rule is the maximum the fund may take, not the normal settlement schedule.
4. D.Only after the fund's transfer agent mails a cheque, which may take up to fifteen business days.Shares held in a brokerage account settle into that account; no cheque from the transfer agent is involved, and no fifteen-day period applies.

Why: The redemption is priced at Tuesday's next computed net asset value, and the trade settles on the standard one-business-day cycle, so the proceeds are credited to Genevieve's brokerage account on Wednesday and may be withdrawn then. The Investment Company Act's seven-day requirement is an outer limit on the fund's payment obligation, not the normal timetable.

Cressida holds shares of Ravelston Government Money Market Fund and shares of Ravelston Growth Fund at the same broker-dealer. She redeems from both on the same business day before each fund's pricing time. Her representative explains that the proceeds will not reach her account on the same schedule. The MOST likely reason is that:

1. A.The money market fund is exempt from forward pricing, so its redemption is priced immediately on receipt.Forward pricing applies to money market funds as well. The difference is the settlement schedule, not the pricing rule.
2. B.The growth fund must be paid within seven days while the money market fund must be paid within one day.The seven-day maximum is an outer limit that applies to open-end funds generally. It does not set the normal settlement date for either fund.
3. C.Money market funds are commonly structured for same-day settlement, while the growth fund settles on the standard one-business-day cycle.Correct. Same-day settlement is a normal feature of money market funds; conventional funds settle on the standard cycle.
4. D.The money market fund maintains a stable price, which removes the need to compute a net asset value before paying.A stable price does not remove the pricing step, and many money market funds price at a floating value. The settlement schedule is the operative difference.

Why: Money market funds are commonly structured to settle on a same-day basis, so redemption proceeds can be credited the same business day the order is priced. A conventional equity fund such as the growth fund settles on the standard cycle of one business day after the trade date. Both orders are priced at the next computed net asset value, but the settlement schedules differ.

Years ago Endicott requested and received physical certificates for his Verrall Equity Fund shares. He now mails the fund a properly completed redemption request but keeps the certificates in his safe. Under the Investment Company Act payment requirement, the fund's obligation to pay:

1. A.Began when the fund received his written redemption request, because that request was complete on its face.A request is not in proper form while certificates remain outstanding, no matter how complete the paperwork looks.
2. B.Began on the date Endicott mailed the request, under the ordinary mailbox rule for shareholder communications.The period runs from the fund's receipt in proper form, not from mailing.
3. C.Does not begin until Endicott surrenders the properly endorsed certificates to the fund.Correct. The fund cannot cancel certificated shares it does not hold, so the payment period starts on surrender of the endorsed certificates.
4. D.Is suspended entirely, because a fund may refuse to redeem shares once certificates have been issued.The fund will redeem the shares; it simply needs the certificates first. There is no refusal to redeem certificated shares.

Why: The maximum payment period runs from receipt of a redemption request in proper form. Where shares are certificated, the request is not in proper form until the properly endorsed certificates themselves are surrendered, because the fund cannot cancel shares it does not have. The clock therefore does not begin until the certificates arrive.

Under the Investment Company Act of 1940, when a shareholder tenders open-end fund shares for redemption, the fund must pay the redemption proceeds:

1. A.Within three business days, matching the standard securities settlement cycleThe statutory redemption deadline is seven days and is independent of the settlement cycle.
2. B.Within thirty days, at the fund's discretionThirty days would defeat the redeemability that defines an open-end fund.
3. C.Within seven days after tender, absent an SEC-recognized emergency or exchange closureCorrect. Section 22(e) sets a seven-day payment requirement with only narrow suspension grounds.
4. D.Whenever the fund can sell portfolio holdings without adverse market impactPortfolio illiquidity is not a permitted basis for delaying payment beyond seven days.

Why: Section 22(e) of the Investment Company Act requires a registered open-end fund to pay redemption proceeds within seven days after tender of the shares. The obligation may be suspended only in narrow circumstances, such as when the New York Stock Exchange is closed other than for customary weekends and holidays, when trading on the exchange is restricted, during an emergency declared by the SEC, or by SEC order for the protection of shareholders. This redeemability on demand is the defining feature separating open-end funds from closed-end funds.