Canadian Securities Course (CSC) Level 2 Practice Exam

When initiating a mutual fund redemption, what steps should be followed regarding client contact, NAVPS calculation, and distribution of capital gains or losses?

1. Calculate NAVPS first, contact client for trade request, distribute capital gains to client

2. Contact client, distribute capital gains first, calculate NAVPS for payment

3. Contact client, place trade request, calculate NAVPS, distribute capital gains but hold capital losses

4. Hold capital gains, distribute capital losses, calculate NAVPS, contact client for payment

The correct answer is: Contact client, place trade request, calculate NAVPS, distribute capital gains but hold capital losses

The correct approach when initiating a mutual fund redemption involves a systematic process to ensure that all necessary elements are addressed appropriately. Firstly, contacting the client to discuss their trade request is a critical first step. This ensures that the client is informed and confirms their intention to redeem shares. Following client contact, the next step is to place the trade request. This action formally initiates the redemption process. Then, calculating the Net Asset Value Per Share (NAVPS) is essential, as it determines the price at which the shares will be redeemed. This calculation provides the basis for the payment the client will receive. Finally, distributing any capital gains or losses becomes relevant in the context of year-end distributions. However, it’s key to note that capital gains typically are distributed as required by tax regulations, while capital losses would generally offset gains for tax purposes and are not distributed. This sequencing helps ensure that the client receives the correct final amount based on the current NAVPS and any relevant gains or losses. In contrast, the other options misprioritize these important steps, either by calculating NAVPS after contacting the client without acknowledging the trade request or incorrectly ordering the treatment of capital gains and losses. Properly managing the order of operations is crucial for a smooth and compliant redemption process