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Investment Companies and Investment Advisers
Professor Bradford
May 5, 2003
9:00 a.m.
3 Hours and 5 Minutes
INSTRUCTIONS
(PLEASE READ BEFORE PROCEEDING!)
1. This is an open book exam. You may use the casebook, the statutory supplement,
your notes, outlines, and any other materials you wish to use. You may not consult with or
communicate with any other person during this exam.
2. You have three hours and five minutes (3:05) to complete the exam. The time at
which the exam ends will be posted on the board. Writing anything after time is called is an
Honor Code violation. You may not even finish a word or sentence.
3. If you finish the exam more than five minutes early, you may turn in your answers in
the Dean's Office. Otherwise, you must turn in your answers in this room--regardless of where
you take the exam.
4. This exam has seven (7) pages, including the instructions. The page numbers appear
on the top right-hand corner of each page. Please check to be sure that this copy has all the
pages.
5. The exam consists of four (4) questions. The recommended time for each question is
as follows:
Question 1……………………………45 Minutes
Question 2……………………………60 Minutes
Question 3……………………………40 Minutes
Question 4……………………………40 Minutes
Each question will be weighted in accordance with its recommended time.
CONTINUE TO THE NEXT PAGE.
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6. You may take the exam in this room or in a designated special purpose room (typing
or overflow room) posted on the board. If you decide to take the exam in a special purpose
room, remember that (1) time will be called only in this room, and (2) when time is called, you
must either be present in this room or have already turned in your answers.
7. Do not spend all of your time writing. Think about the issues and organize your
answers before writing. Be concise. Be organized. Long, disorganized, rambling answers will
be penalized.
8. Please write legibly. I can=t give you credit for what I can=t read.
9. This exam will require you to interpret and apply many of the statutory provisions and
regulations we have examined. YOU SHOULD NOT JUST STATE GENERAL
PRINCIPLES, BUT SHOULD CITE THE RELEVANT SECTIONS AND SUBSECTIONS
OF THE STATUTES AND REGULATIONS AND EXPLAIN HOW THOSE
PROVISIONS APPLY TO THE FACTS OF THE QUESTION.
10. If you believe that additional facts are necessary to answer a question, state exactly
what those facts are and how they would affect your answer. If you believe that a question is
ambiguous or unclear, note the ambiguity or lack of clarity and indicate how it affects your
answer.
11. The questions should be answered in blue books, or on typing paper if you type your
exam. Please write or type on only one side of each page. Double-space if you type. BE SURE
TO WRITE YOUR EXAM IDENTIFICATION NUMBER ON EACH BLUE BOOK OR
PIECE OF TYPING PAPER THAT YOU USE. Do not put your name on any materials you
turn in.
12. The Honor Code is in effect.
13. Good luck and have a pleasant summer.
DO NOT TURN THIS PAGE UNTIL YOU ARE GIVEN THE SIGNAL TO START.
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QUESTION ONE
(45 Minutes)
Felony Investments (“Felony”) is a federally registered, open-end investment company.
Vandal, Inc. (“Vandal”) is a federally registered, closed-end investment company. Betty Biz
(“Biz”) is the Treasurer of Felony. Biz is also a director of Vandal.
On December 1, 2003, Felony purchased 10,000 shares of Vandal’s voting stock for $2.5
million cash. The 10,000 shares were 2.5% of Vandal’s 400,000 outstanding voting shares.
After Felony’s purchase, Felony and other investment companies owned a total of 11% of
Vandal’s voting securities. Vandal’s total assets have a value of $20 million.
Felony has 650,000 outstanding voting shares, none of which are owned by other
investment companies. Vandal’s shares are the only shares of other investment companies
owned by Felony. Felony’s total assets have a value of $30 million.
Biz negotiated the purchase for Felony as part of her regular duties. Felony usually pays
all of its full-time employees 1% of their annual salaries as a “Christmas bonus.” However, this
year, Biz received an extra $500, along with a note saying, “Thanks for your great work handling
the Vandal purchase.”
Discuss any and all possible violations of sections 12(d) and 17 of the Investment
Company Act.
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QUESTION TWO
(60 Minutes)
Plus Computers, Inc. (“Plus”) is a corporation whose stock is traded on NASDAQ. Its
business is making computer software. Discuss whether, as of each of the following times, Plus
was an “investment company” within the meaning of the Investment Company Act of 1940.
1. November 1, 2000
The manufacture of computer software accounted for 70% of Plus’s assets, revenues, and
income. Plus also owned the common stocks of several smaller companies in the computer
software and hardware business (“the computer companies”), but not more than a 10% interest in
any one company. The computer company investments accounted for the remaining 30% of
Plus’s assets, revenues, and income.
2. December 1, 2000
An antitrust judgment Plus won against Microsoft became final and Microsoft paid Plus a
huge amount of cash. Plus invested some of that money in federally insured certificates of
deposit. It put the rest in a stock trading account, and actively traded stocks in that account. Plus
continued to make computer software and it still owned the stock of the computer companies.
Each of these accounted for the following percentages of Plus’s assets, revenues, and income:
Computer software
CDs
Stock trading account
Computer companies
20%
38%
37%
5%
3. August 1, 2002
Plus’s situation was essentially unchanged from December 1, 2000.
4. May 1, 2003
Plus continues to sell software, but it liquidated the CDs and the stock account and sold
the stock of the computer companies. Plus has acquired 60% of the voting stock of Flyways,
Inc., an airline; 40% of the voting stock of Honk Corporation, a trucking company; and 20% of
the voting stock of Food Corporation, a grocery store. These operations accounted for the
following percentages of Plus’s assets, revenues, and income:
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Computer software
Flyways
Honk
Food
20%
20%
20%
40%
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QUESTION THREE
(40 Minutes)
Pam Prof (“Prof”) is an assistant professor of Marketing at a local junior college. She has
an M.B.A. from Harvard University. In addition to her college duties, she conducts seminars on
financial planning and investment on her own time outside the college. In the seminars, she
discusses what stocks and bonds are, how the markets work, what brokers do, how to locate a
broker and trade securities, and various other topics of interest to inexperienced investors. Many
brokers refer their new clients to Prof’s seminars; some even pay their clients’ fees.
Prof does not recommend any specific securities in her seminar. She does, however,
discuss the risk and return characteristics of different types of investments. She also advises
seminar participants what categories of investments might be appropriate for particular stages of
life. For example, she might say that a person in his fifties should have 20% invested in income
stocks, 40% in growth stocks, 30% in blue-chip bonds, and 10% in government-guaranteed
securities and cash. However, she is always careful to warn participants that their individual
situations may vary and they should consult with their own financial advisors to see what’s best
for them.
Prof charges $100 a person for the seminar, but the fees usually just cover the cost to rent
the room and the cost of materials and refreshments. The seminars produce little or no income
for Prof.
Discuss whether Prof is an “investment adviser” within the meaning of the Investment
Advisers Act of 1940.
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QUESTION FOUR
(40 Minutes)
Invesco is a federally registered investment company. Invesco is considering asking June
Jones (“Jones”) to join its board of directors, but only if she would not be an “interested person”
of Invesco. Discuss whether, based on the following facts, Jones is an interested person of
Invesco:
1. Jones’s mother (“Mom”) is a partner in the Law ‘R Us law firm, which represents
Invesco from time to time. Mom has not personally done any legal work for Invesco.
2. Jones’s daughter is married to Ivan Idiot (“Idiot”), who works for Underwriter
Corporation (“Underwriter”), a principal underwriter for Invesco. Idiot also owns 3%
of the voting stock of Underwriter.