clearlycanadian

Which of the following statements best compares the legal and regulatory constraints when managing a pension plan versus managing an endowment fund?

A) Endowment funds are managed according to the "prudent expert" rule while benefit plans are managed under the "prudent investor" rule.

B) State pension laws generally supersede Federal pension laws regarding pension plans whereas endowment funds are primarily regulated at the Federal level.

C) Pension plans are managed according to the Employee Retirement Income Security Act while endowment funds are governed by the Uniform Management Institutional Funds Act.

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With respect to the legal and regulatory constraints, pension plans are regulated by the Employee Retirement Income Security Act (ERISA) while endowment funds are governed by the Uniform Management Institutional Funds Act (UMIFA).

Pension plans are held to a higher standard known as the “prudent expert” rule which states that ERISA fiduciaries must discharge their duties…” with care, skill, prudence, and diligence under circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and aims.”
By diversifying the investments of the plan we minimize the risk of large losses.

Endowment plans are held to a standard known as the “prudent investor” rule, which states that fiduciaries must adhere to fundamental duties of loyalty, impartiality and prudence as well as maintain overall portfolio risk at a reasonable level and provide for the reasonable diversification of investments.
Fiduciaries must also act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents.

clearlycanadian

Which of the following objectives and/or constraints would be found in an investment policy statement (IPS) for a private foundation but NOT necessarily for an endowment?

A) Set spending rates.

B) Total return approach.

C) Moderate to high risk tolerance.

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Both foundation and endowment IPS should include a return objective that specifies a total return approach. Additionally, both foundations and endowments have moderate to high risk tolerance levels. Only private foundations are required to set spending rates.

clearlycanadian

Which of the following entities could be subject to unrelated business income tax (UBIT)?

A) Only foundations.

B) Endowments and foundations.

C) Only endowments.

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UBIT must be paid by both endowments and foundations if income is produced that is not substantially related to a foundations’/endowments’ charitable purpose.

clearlycanadian

The investment policy statement (IPS) of which of the following entities may include language pertaining to net interest spread?

A) Insurance companies.

B) Endowments.

C) Defined benefit plans.

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Net interest spread is the difference between interest earned and interest credited to policyholders. Therefore, net interest spread may be talked about in the return objectives of an insurance company’s IPS.

clearlycanadian

Which of the following is the most appropriate return objective for a private foundation that has been established to provide support in perpetuity?

A) The long-term treasury bond return plus inflation.

B) The market return plus expected inflation.

C) 5.3% of assets plus expected inflation.

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Private foundations are required to pay out 5% of assets annually. Also, foundations set up to provide perpetual support must be concerned with the preservation of capital. Hence, 5.3% plus an adjustment for inflation is a useful guideline for quantifying the return objective for a private foundation.

clearlycanadian

Which of the following CORRECTLY describes the primary source of invested funds to meet funding requirements for an endowment fund and an investment company?

Endowment Fund

Investment Company

A) Own assets Own assets[/td][tr][/tr]

B) Assets pooled from investors Assets pooled from investors

C) Own assets Assets pooled from investors

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The primary difference between investment companies and other institutional investors such as an endowment fund is the source and use of their invested funds. The endowment fund will invest its own assets to meet various funding requirements while the investment company will collect funds from investors to meet the needs of the investors.

clearlycanadian

Dr. Jack Wolfe, a finance professor with the University of Tulsa asked his students to identify differences between a pension fund and a growth mutual fund. Kelly Musch, a student in Wolfe’s class, turned in a paper with two statements:

Statement 1:	The pension fund is likely to have more flexibility to significantly change its asset allocation.
Statement 2:	The pension fund could invest in the mutual fund, but the mutual fund could not invest in the pension fund.

When grading Musch’s paper, Dr. Wolfe should:

A) agree with Statement 1 and Statement 2.

B) disagree with Statement 1, but agree with Statement 2.

C) disagree with Statement 1 and Statement 2.

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When grading the paper, Dr. Wolfe should agree with both of Musch’s statements. Musch has indirectly hit on the two key differences between a mutual fund (investment company) and other types of institutional investors such as pension funds. The pension plan uses its own assets to meet various funding requirements while the mutual fund invests money pooled from investors based on advertised objectives and constraints. It would be relatively easy for the pension fund to have a meeting and decide to adjust its asset allocation, while the growth mutual fund, which advertises its objectives in a prospectus would likely have to change the prospectus that governed the objective of the fund and possibly hold a shareholder proxy vote. Statement 2 is also correct. The mutual fund invests funds on behalf of other investors, while the pension fund is part of a company. Since the pension is an investor itself, the pension fund could invest in the mutual fund, but the mutual fund could not invest in the pension.

clearlycanadian

Connie King prepared a memo for her supervisor that listed the similarities and differences between the investment objectives of a life insurance company versus the investment objective of a commodity pool. The memo contained the following statements:

Statement 1:	Both life insurance companies and commodity pools are taxable entities.
Statement 2:	Life insurance companies invest in order to meet various funding requirements while commodity pools invest according to objectives advertised to investors.
Statement 3:	The source of invested assets for both life insurance companies and commodity pools are assets pooled from investors.

King’s memo is:

A) correct with respect to Statements 1 and 2, but incorrect with respect to Statement 3.

B) correct with respect to Statements 1, 2, and 3.

C) correct with respect to Statement 2, but incorrect with respect to Statements 1 and 3.

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King is correct with respect to Statement 1. Both commodity pools and life insurance companies are taxable entities. The primary difference between commodity pools, and other institutional investors (like life insurance companies) is the source and use of their invested funds. King is correct with respect to Statement 2 in that the use of funds for the two types of investors is different. Life insurance companies invest in order to meet various funding requirements while commodity pools invest according to objectives advertised to investors. King is incorrect with respect to Statement 3, however. The source of invested funds for a life insurance company is its own assets (likely gathered from premium payments) while the source of funds for a commodity pool is assets pooled from investors.

clearlycanadian

The liquidity requirements of a pension fund differ from the liquidity requirements of a life insurance company in that the liquidity requirements of a pension fund:

A) will be dictated by state statutes, whereas the liquidity requirements of a life insurance company will be dictated by federal statute.

B) will be a direct function of the age of employees and the retired-lives portion of participants, whereas the liquidity requirements of a life insurance company will be a function of the liability requirements of products sold.

C) and the liquidity requirements of an insurance company will be dictated by federal statute.

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Pension fund liquidity is often dictated by the age of employees and the retired-lives portion of participants. Life insurance companies, on the other hand, will have liquidity requirements that are generated by the differential products sold to policy holders.

clearlycanadian

Which of the following statements regarding the time horizons for endowments and foundations is CORRECT? The time horizon for:

A) an endowment is longer than that for a foundation.

B) an endowment and the time horizon for a foundation are usually infinite and hence will differ mainly due to specific entity considerations.

C) a foundation is longer than that for an endowment.

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Most endowments and foundations are created to perpetually fund specific operating entities (hospitals, universities, museums, etc.). Hence, their time horizons are typically infinite. Their time horizons may differ, however, due to specific considerations.