2.5 Closed-End and Interval Funds, UITs, Money Market Funds, 529 Plans, and Investment Risks

Investment Company and Variable Contracts Products Principal Series 26

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1 Chapter 1: Registration of the Broker-Dealer and Its Associated Persons

1.1 Broker-Dealer Registration, FINRA Membership, and Firm Filings 1.2 Individual Registration: Forms U4 and U5, Registration Categories, and Exempt Persons 1.3 Pre-Hire Screening, Fingerprinting, and Statutory Disqualification 1.4 Heightened Supervision, Interim Plans, and the Taping Rule 1.5 Broker-Dealers, Investment Advisers, Dual Registrants, and Unregistered Entities

2 Chapter 2: Training, Continuing Education, and Product Knowledge

2.1 Continuing Education (Rule 1240), the Maintaining Qualifications Program, and the Annual Compliance Meeting 2.2 The Investment Company Act of 1940: Classifications, Registration, and Fund Governance 2.3 Mutual Fund Pricing, Redemption, Exchanges, Sales Charges, and Share Classes 2.4 Variable Annuities and Variable Life Insurance: Structure, Charges, and Rule 2320 2.5 Closed-End and Interval Funds, UITs, Money Market Funds, 529 Plans, and Investment Risks

3 Chapter 3: Supervisory System, Conduct Standards, Insider Trading, and Discipline

3.1 The Supervisory System, Written Supervisory Procedures, and Standards of Conduct 3.2 Insider Trading, Information Barriers, and Personal Trading Supervision 3.3 FINRA Investigations, Disciplinary Proceedings, Sanctions, and Exemptions

4 Chapter 4: Communications with the Public

4.1 Communications Categories, Principal Approval, Filing, and Recordkeeping (Rule 2210) 4.2 Content Standards, Investment Company Advertising, and Professional Designations 4.3 Variable Contract Communications, Fund Rankings, Bond Fund Volatility Ratings, and Investment Analysis Tools 4.4 Correspondence and Internal Communications, Social Media, Public Appearances, and Telemarketing

5 Chapter 5: Recommendations, Customer Accounts, and Product Sales Supervision

5.1 Regulation Best Interest, Conflicts, and Form CRS 5.2 Know Your Customer, FINRA Suitability, and Institutional Accounts 5.3 New Accounts, Customer Authority, Discretion, and Order Handling 5.4 Mutual Fund Breakpoints, Share Classes, and Switching Supervision 5.5 Deferred Variable Annuities and the Seven-Business-Day Principal Review 5.6 Prospectuses, Summary Prospectuses, SAIs, and Ongoing Disclosures

6 Chapter 6: Compensation, Outside Activities, and Personal Conduct

6.1 Cash Compensation, Distribution Arrangements, and Conflicts 6.2 Gifts, Gratuities, and Business Entertainment (Rule 3220) 6.3 Training Meetings, Sales Contests, and Non-Cash Compensation 6.4 Referral Payments, Bank Networking, and Unregistered Persons 6.5 Outside Business Activities, Private Securities Transactions, and Rule 3290 Transition 6.6 Outside Accounts, Borrowing and Lending, Account Sharing, and Guarantees

7 Chapter 7: Customer Account Operations, Transfers, and Privacy

7.1 Account Records, Trusted Contacts, Confirmations, and Statements 7.2 Cash Accounts, T+1 Settlement, Regulation T, Extensions, and Freeriding 7.3 ACATS Transfers, Transfer-on-Death Accounts, and Account Changes 7.4 Regulation S-P, Incident Response, Service Providers, and Identity Theft

8 Chapter 8: Anti-Money Laundering, Customer Identification, and Sanctions

8.1 AML Program, Independent Testing, Training, and Governance 8.2 Customer Identification, Due Diligence, and Beneficial Ownership 8.3 SARs, CTRs, OFAC, Information Sharing, and AML Red Flags

9 Chapter 9: Supervisory Controls, Business Continuity, and Regulatory Reporting

9.1 Supervisory Controls, Annual Testing, and CEO Certification 9.2 Business Continuity, Systems Resilience, Cybersecurity, and Vendors 9.3 Rule 4530, FOCUS and Annual Reports, and Customer-Asset Events

10 Chapter 10: Office Classifications, Inspections, and Records

10.1 OSJs, Branches, RSLs, and Inspection Cycles 10.2 Inspection Reports, Independent Review, Signage, and Office Files 10.3 Broker-Dealer Books and Records, Electronic Storage, and Correspondence

11 Chapter 11: Complaints, Arbitration, Mediation, and Expungement

11.1 Customer Complaints, Investigation, Retention, and Reporting 11.2 Predispute Agreements, Arbitration Codes, Eligibility, Panels, and Awards 11.3 Mediation and Customer-Dispute Expungement

12 Chapter 12: Financial Responsibility, Membership Changes, and Investor Protection

12.1 Net Capital, Minimum Tiers, Haircuts, and Early Warning 12.2 Customer Protection, Possession or Control, Reserve Formula, and Exemptions 12.3 New-Product Review and Continuing Membership Applications 12.4 SIPC, Fidelity Bonds, Proxy Materials, and Financial Reports

2.5 Closed-End and Interval Funds, UITs, Money Market Funds, 529 Plans, and Investment Risks

Key Takeaways Explain This Topic AI

A Series 26 principal may supervise sales of closed-end fund shares only during the original distribution; secondary-market closed-end trades fall under general securities registrations.

Interval funds are closed-end funds that make periodic repurchase offers under Rule 23c-3, so investors may be able to sell only a limited portion of their shares at each interval.

Money market funds operate under Rule 2a-7, and no money market fund is insured or guaranteed by the FDIC or the U.S. government.

529 plans are municipal fund securities regulated by the MSRB, so a Series 6 may sell them but supervision requires an MSRB principal qualification such as the Series 51 or 53.

Reasonable-basis diligence requires the firm to understand each product's risks, including market, interest rate, credit, liquidity, concentration, inflation and, for variable contracts, the insurer's claims-paying ability.

Last updated: September 2026

The outline's Task 1.2 asks for knowledge of "product types, characteristics, fees and charges" and the "risk characteristics of investment companies and underlying products." Principals use that knowledge to train representatives (Rule 1240's Firm Element) and to apply the reasonable-basis component of Reg BI and suitability (Section 5.2).

Closed-End Funds and Interval Funds

A closed-end fund raises capital in an initial offering and then lists its shares on an exchange. The share count is fixed, and shares trade at market prices that can be above ( premium ) or below ( discount ) NAV. Closed-end funds may use leverage through borrowing or preferred shares, which magnifies gains and losses. Because Rule 1220(b)(7) limits Series 6 activity to closed-end securities "during the period of original distribution only," a Series 26 principal supervises closed-end IPO sales but not later exchange trades.

An interval fund is a closed-end fund that continuously offers shares and makes periodic repurchase offers under Rule 23c-3 , typically every three, six or twelve months, for a stated percentage of outstanding shares. If more shareholders ask to sell than the offer covers, repurchases are prorated. Rule 2341's sales charge limits apply to these continuously offered interval funds. Principals should make sure clients understand the limited liquidity before approving recommendations.

Unit Investment Trusts

A UIT holds a fixed portfolio under a trust indenture, has no board and no active manager , and issues redeemable units . Many UITs terminate on a set date, and rolling proceeds into a new series can generate new sales charges. Supervisors watch for rollovers that serve compensation rather than customer goals. UITs are also the structure behind most variable annuity separate accounts.

Money Market Funds

Money market funds invest in short-term, high-quality debt under Rule 2a-7 , which sets maturity, quality, diversification and liquidity limits. Government and retail money market funds may seek to keep a stable $1.00 share price, while institutional prime funds use a floating NAV . Required disclosure makes clear that an investor could lose money . A money market fund is not FDIC-insured and is not guaranteed by the U.S. government , even if it holds only government securities. Section 35(a) of the 1940 Act and Rule 2210's fair-and-balanced standard both apply when representatives describe these funds. Money market funds are usually sold without loads, and Rule 2212 exempts them from the minimum-time-period rules for rankings.

529 Plans and Other Municipal Fund Securities

529 college savings plans are sponsored by states and are municipal fund securities under MSRB rules. A Series 6 representative may sell them, but the MSRB's Rule G-3 requires a municipal securities principal qualification for supervision, typically the Series 51 or Series 53 . Key supervisory points include state tax benefits that may be lost if a customer buys another state's plan, the unit classes (A-type and C-type pricing similar to mutual funds), and the MSRB's own suitability, disclosure and advertising rules. A Series 26 principal supervising a branch that offers 529 plans must coordinate with the firm's MSRB-qualified principal rather than approve 529 recommendations alone.

Exchange-Traded Products

ETFs are registered investment companies, but investors generally buy and sell their shares on exchanges rather than redeeming them with the fund. Leveraged and inverse ETFs reset daily and can diverge sharply from the multiple of an index's return over longer periods. A principal limited to the Series 26 must confirm that the firm's representatives and supervisors hold the registrations required for any exchange-traded product before it is offered.

Risk Characteristics a Principal Must Recognize

Risk Products most affected Supervisory point

Market (systematic) risk Equity funds; VA equity subaccounts Match exposure to the customer's risk tolerance and horizon

Interest rate risk Bond funds; long-duration portfolios Bond fund prices fall when rates rise; volatility ratings and duration help explain this

Credit / default risk High-yield and emerging-market bond funds Yield is not "safe income"; the fair-and-balanced standard applies

Liquidity risk Interval funds; closed-end funds; VA surrender periods Confirm the customer has liquid assets for foreseeable needs

Concentration / non-diversification Sector funds; non-diversified funds Avoid overconcentration across the customer's holdings

Inflation (purchasing power) risk Money market and short-term bond funds Long-term goals may need growth assets

Currency and political risk International and global funds Explain exchange-rate effects on returns

Leverage risk Leveraged closed-end funds; leveraged ETFs Magnified losses and, for daily-reset products, path dependence

Insurer (claims-paying) risk VA and VLI guarantees and fixed accounts Guarantees depend on the insurer's financial strength

Cost drag High-load share classes; VA M&E and rider fees Costs are a mandatory factor under Reg BI's care obligation

Fund risk disclosure appears in the summary section of the prospectus under "principal risks," so representatives and principals should use it as the starting point for their explanations. Reasonable-basis diligence under Rule 2111.05(a) and Reg BI's care obligation require the firm to understand these risks before a product is approved for sale. Section 12.3 covers the new-product review process.