Series 66: Chapter Three

Chapter Three

Investment Companies and Life Insurance Products

(5 questions out of 100)

An investment company is a company whose primary business is to invest in and issue securities. It collects and pools money from a number of clients and invests it in packages of securities whose profits and losses are shared in proportion to the clients’ ownership share of that package. In this way, investment companies offer investors in securities an economical way to diversify risk. Investment companies are also known as packaged securities.

The Investment Company Act of 1940 defines three types of investment companies: face-amount certificates, unit investment trusts, and management companies. Face-amount certificates are debt securities backed by assets such as real property or other securities. Because face-amount certificates are not very common, we will focus primarily on the other two. A unit investment trust is a holding company that purchases a pool of securities and holds them until a set termination date. The pool of securities does not change from the time that the trust was created, so the trust is considered unmanaged. A management company, by contrast, manages and trades the securities wit