CFM Fund Administration & Operations 3 — Questions and Answers
Question 1: A fund's expense ratio is 1.25%. If the fund has $500 million in average net assets for the year, what is the annual expense amount charged to the fund?
- $5,000,000
- $6,250,000 (Correct answer)
- $12,500,000
- $1,250,000
Correct answer: $6,250,000
Annual expenses = $500 million × 1.25% = $6,250,000, which is accrued daily and deducted from the fund's gross returns.
Question 2: Which operational risk is most directly mitigated by requiring dual authorization (four-eyes principle) for wire transfers?
- Market risk from adverse price movements
- Counterparty risk from broker default
- Fraud or unauthorized disbursement of fund assets (Correct answer)
- Liquidity risk from large redemptions
Correct answer: Fraud or unauthorized disbursement of fund assets
Requiring two authorized individuals to approve wire transfers significantly reduces the risk of fraudulent or unauthorized transfer of fund assets.
Question 3: In the context of U.S. mutual funds, what is the significance of the '4 p.m. ET cutoff' for purchase and redemption orders?
- Orders received before 4 p.m. ET receive the current day's NAV; later orders receive the next business day's NAV (Correct answer)
- Orders can only be placed between 9:30 a.m. and 4 p.m. ET
- The 4 p.m. cutoff applies only to institutional investors
- Orders placed after 4 p.m. ET incur a late trading fee
Correct answer: Orders received before 4 p.m. ET receive the current day's NAV; later orders receive the next business day's NAV
Under the SEC's forward pricing rule, mutual fund orders received before the 4 p.m. ET close receive that day's closing NAV; orders after that cutoff receive the next day's NAV.
Question 4: What is 'side pocket' accounting in a hedge fund?
- A separate account for manager compensation
- A segregated portfolio used to hold illiquid or hard-to-value assets (Correct answer)
- An offshore account for tax efficiency
- A reserve account for future redemptions
Correct answer: A segregated portfolio used to hold illiquid or hard-to-value assets
Side pockets segregate illiquid or difficult-to-value investments from the main fund, ensuring that only investors present when the illiquid investment was made share in its outcome.
Question 5: A fund administrator receives a subscription agreement with an incomplete AML/KYC section. What is the appropriate action?
- Process the subscription and request AML/KYC documents later
- Reject the subscription permanently without further action
- Place the subscription on hold and request the missing AML/KYC documentation before onboarding the investor (Correct answer)
- Estimate the missing data based on other investor profiles
Correct answer: Place the subscription on hold and request the missing AML/KYC documentation before onboarding the investor
AML/KYC regulations require complete investor due diligence before onboarding; subscriptions must be held pending receipt and verification of all required documentation.
Question 6: Which of the following best describes 'NAV per share dilution' risk in a mutual fund?
- The fund issuing too many shares reduces earnings per share
- Large redemptions forcing asset sales at depressed prices reduce NAV for remaining shareholders (Correct answer)
- Currency fluctuations reducing the value of foreign holdings
- Management fee increases reducing overall fund returns
Correct answer: Large redemptions forcing asset sales at depressed prices reduce NAV for remaining shareholders
When large redemptions force a fund to sell assets at unfavorable prices, transaction costs and market impact can reduce the NAV received by remaining shareholders.
Question 7: What information does a fund's 'Statement of Additional Information' (SAI) provide that is NOT typically in the prospectus?
- The fund's investment objectives
- Detailed financial statements and information about directors and their compensation (Correct answer)
- The fund's expense ratio
- The minimum initial investment amount
Correct answer: Detailed financial statements and information about directors and their compensation
The SAI contains detailed information such as financial statements, director biographies and compensation, portfolio turnover history, and other technical details not summarized in the prospectus.
CFM Fund Administration & Operations 3
A fund's expense ratio is 1.25%.
If the fund has $500 million in average net assets for the year, what is the annual expense amount charged to the fund?