Typically, an investment company sells its ownership interests, invests the proceeds to achieve its investment objectives, and provides returns to its investors from the net income earned on its investments and net gains realized on the disposal of its investments.
Once an investment company has been organized to do business, it usually engages immediately in its planned principal operations, that is, the sale of capital stock and investment of funds. Employee training, development of markets for the sale of capital stock, and similar activities are usually performed by the investment adviser or other agent, and the costs of these activities are not borne directly by the investment company. However, an investment company, particularly one not engaging an agent to manage its portfolio and to perform other essential functions, may engage in such activities and may bear those costs directly during its development stage.
Venture capital investment companies, including most small business investment companies and private equity investment companies, differ from other types of investment companies. The typical open-end or closed-end investment company is a more passive investor, whereas a venture capital investment company is more actively involved with its investees. In addition to providing funds, whether in the form of loans or equity, a venture capital investment company often provides technical and management assistance to its investees as needed and requested. That assistance is provided for maximizing the overall value of the investment rather than for other benefits. The portfolio of a venture capital investment company may be illiquid by the very nature of the investments, which are usually securities with no public market. Often, gains on those investments are realized over a relatively long holding period. The nature of the investments therefore requires valuation procedures that may differ from those used by the typical investment company primarily addressed by this Subtopic. Venture capital investment companies also may incur liabilities not generally found in other investment companies.
Some expense limitation agreements may provide that reimbursements by the fund adviser of expenses incurred by the fund in excess of the maximum permitted by the prospectus or offering document will be carried over to a future period and reimbursed to the fund adviser when, and to the extent that, the total expense ratio falls below the permitted maximum. Such agreements may provide that reimbursement of excess expenses to the fund adviser is not required after a specified date or upon conclusion of a specified period from the time the fund initially incurred, or the adviser initially reimbursed, the expenses, such as three years. Under most excess expense plans, a fund is obligated to repay a servicer for expenses incurred previously only if, during a defined period, the fund retains the service provider and can reduce its expense ratio to a low enough level to permit payment, and maintain that ratio at a sufficiently low level thereafter. Many substantive conditions could cause the fund to have no obligation to the servicer, including failure to attract assets, significant redemptions of shares by investors, market depreciation, and significant increases in other expenses, all of which could drive expenses up to or beyond the maximum under which payment would otherwise be made.
An investment company may have a brokerage service arrangement with a broker-dealer or an affiliate of a broker-dealer under which the broker-dealer (or its affiliate), in connection with the investment company's brokerage transactions directed to the broker-dealer, provides or pays for services to the investment company (other than brokerage and research services as those terms are used in section 28(e) of the Securities Exchange Act of 1934).
Investment companies organized as limited partnerships typically receive advisory services from the general partner. For such services, a number of partnerships pay fees chargeable as expenses to the partnership, whereas others allocate net income from the limited partners' capital accounts to the general partner's capital account, and still others employ a combination of the two methods.
An adviser or a third party may voluntarily or involuntarily waive its fee and reimburse expenses (waivers). An example of an involuntary waiver is when the advisory agreement (or other regulation or agreements that are either outside the adviser's control or require shareholder approval) provides that the adviser should reimburse the investment company for expenses in excess of a specified percentage of average net assets.
Many municipal bond funds, primarily those organized as unit investment trusts with fixed portfolios, arrange for insurance for the payment of principal and interest when due. The insurance applies to portfolio securities only while they are owned by the fund, and its coverage is not transferable to buyers of the securities. That arrangement differs from those in which the issuer of the securities acquires the insurance, making the insurance feature an element of the securities and transferable on changes in ownership.
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Traditional Enhanced Compensation Reimbursement Nonboard Contingent Board Contingent \"Annual review and approval of plan by board, with ability to terminate plan\" X X X X Fund Payment Terms (a) Payment based on average net assets X X X X \"Annual or cumulative limitation, or both, based on actual distribution costs\" X X X \"Upon termination of 12b-1 plan, board has option, but not obligation, to pay excess costs\" X \"Upon termination of 12b-1 plan, fund is required to continue paying 12b-1 fee to the extent the distributor has excess costs\" X (a)\t\"Excludes front-end and contingent deferred sales load payments, which are made by shareholders and not the fund.\"