An appraisal of the investment merits of periodic payment plans

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Content AN APPRAISAL OP THE INVESTMENT MERITS
OP PERIODIC PAYMENT PLANS
A T h e s is
P r e s e n t e d t o
t h e F a c u l t y o f t h e S c h o o l o f Commerce
The U n i v e r s i t y o f S o u th e rn C a l i f o r n i a
In P a r t i a l F u l f i l l m e n t
o f t h e R e q u ire m e n ts f o r t h e D e g ree
M a s te r o f B u s in e s s A d m i n i s t r a t i o n
i
by
R o b e rt J e s b e r g
Ju n e 1952
UMI Number: EP43325
All rights reserved
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This thesis, written by
R o b e rt J e s b e r g
under the guidance of h..X§..Facuity Committee,
and approved by all its members, has been
presented to and accepted by the Council on
Graduate Study and Research in partial fullfill-
ment of the requirements for the degree of
M a s te r o f B u s in e s s A d m i n i s t r a t i o n
Faculty Com m ittee
Ghatrhian
TABLE OP CONTENTS
CHAPTER PAGE i
I . THE PROBLEM AND THE PROCEDURE..................................... 1
The p r o b l e m ............................................................................. 2
D e f i n i t i o n s o f te rm s u s e d .......................................... 3
S o u rc e s o f I n f o r m a t i o n ............................................. . . 5
O r g a n iz a t i o n o f t h e r e m a in d e r o f t h e t h e s i s 6
H i s t o r y and d e v e lo p m e n t o f p e r i o d i c paym ent
p l a n s ............................................................ . 7
I I . NATURE AND GROWTH OP PERIODIC PAYMENT PLANS
UP TO THE INVESTMENT COMPANY ACT OP 1940. . 11
G e n e ra l o p e r a t i o n o f p l a n s . . . . . . . . ^ . 11
A buses l e a d i n g to g o v ern m en t c o n t r o l o f 1
p l a n s .............................. 17
The d i s t r i b u t i o n o f p e r i o d i c paym ent p l a n
c e r t i f i c a t e s ....................................................................... 311
E x p e r ie n c e o f p e r i o d i c paym ent p l a n
s u b s c r i b e r s ......................................................... 36
I I I . HISTORY AND DEVELOPMENT OP PERIODIC PAYMENT
PLANS SINCE THE INVESTMENT COMPANY ACT
OP 1940 ............................................................................................. 38
IV . MECHANISM AND STRUCTURE OP PERIODIC PAYMENT
P L A N S.......................................... .................................................. 60
V. CRITICAL ANALYSIS OP THE MERITS AND DEFECTS ^
I v
CHAPTER PAGE
OP PERIODIC PAYMENT PLANS FOR ACQUISI
TION OP INVESTMENT COMPANY SHARES . . . . 85
V I. CRITICAL ANALYSIS OP THE MERITS AND DEFECTS
OP PERIODIC PAYMENT PLANS FOR ACCUMU
LATION OP AN INDIVIDUAL COM M ON STOCK. . . 108
V I I . FUTURE OUTLOOK FOR BOTH TYPES OP PLANS. . . 115
V I I I . SUMMARY AND CONCLUSIONS................................................ 120
BIBLIOGRAPHY......................................................................... 123
LIST OP TABLES
TABLE PAGE
I . C om parison o f N e t Amount I n v e s t e d i n U n d er
l y i n g S e c u r i t i e s i n I n s t a l l m e n t ' I n v e s tm e n t
P la n s W ith A c cu m u lated Amount o f #10
M o n th ly S a v in g s P ro g ram W ith I n t e r e s t a t
2-|$ p e r Annum Compounded S e m ia n n u a lly . . . 29
I I . D iv id e n d S h a r e s , I n c .......................................................... . 44
I I I . T r e a s u r y D e p a r tm e n t’ s Incom e Break-Down -
1 9 4 6 .......................................................................................... 50
IV . P e r c e n t a g e s o f P e r s o n s i n V a rio u s Incom e
G roups H aving S e c u r i t i e s , I n s u r a n c e , Bank
D e p o s i t s .............................................. 55
V. P la n T e r m in a tio n o f One C o m p a n y ......................... 77
V I. L i f e I n s u r a n c e Incom e D o l l a r — U n ite d S t a t e s
C o m p a n i e s .................................................. 89
V I I. R e tu rn on #1200 I n v e s tm e n t i n a C om m ercial
B ank. . . . . . . . . . . ......................................... 91
V I I I . R e tu r n on #1200 I n v e s tm e n t i n a F e d e r a l
S a v in g s and Loan A s s o c i a t i o n . . . . . . . . 92
IX . R e tu r n on a $1200 Endowment P l a n . . . . . . . 93
X. R e tu rn on $1200 I n v e s tm e n t i n P ace Amount
C e r t i f i c a t e P l a n . . . . .............................................. 94
X I. The A l l o c a t i o n o f P aym ents U nder*a P e r i o d i c
Paym ent P l a n . . . . . . . . . ............................... 96
v l
TABLE PAGE
X I I . R e tu rn on #1200 I n v e s tm e n t In a P e r i o d i c
Paym ent P la n f o r t h e A c c u m u la tio n o f
S h a re s of a n I n v e s tm e n t Company S to c k • • 97
X I I I . H y p o t h e t i c a l T r a n s c r i p t o f a Q uinby P la n
B ased on Common S to c k o f E astm an Kodak
C o m p a n y .............................. . . . . ................................. 99
XIV. Y ear-E n d R e s u l t s o f #50 M o n th ly I n v e s t e d
in M a s s a c h u s e tts I n v e s t o r s T r u s t . . . . . 104
XV. Summary o f R e s u l t s o f D o ll a r - C o s t- A v e r a g i n g
P ro g ra m s; #50 M o n th ly In v e s tm e n t In
S h a re s o f M a s s a c h u s e tts I n v e s t o r s T r u s t • 105
LIST OP CHARTS
CHART : PAGE
1 . D o l l a r C o st A v e ra g in g .................................... 103
CHAPTER I
THE PROBLEM M D THE PROCEDURE
The a d v e n t o f p e r i o d i c paym ent o r i n s t a l l m e n t i n
v e s tm e n t p l a n s r e l a t i n g t o in v e s tm e n t company s e c u r i t i e s
b r o u g h t f o r t h a new I n v e s tm e n t medium s h o r t l y a f t e r t h e
c o l l a p s e o f t h e s t o c k m a rk e t i n 1 929. The b a s i c t h e o r y
b e h in d t h e p ro g ram w as s o u n d , b u t t h e In a d e q u a c y o f p r o p e r
c o n t r o l s a n d s a f e g u a r d s l e d t o many a b u s e s and f r a u d u l e n t
p r a c t i c e s b e in g im posed upon p e r i o d i c p ay m en t s u b s c r i b e r s .
I n e s s e n c e , t h e b a s i c t h e o r y w as t o a t t r a c t p e r s o n s
who c o u ld a f f o r d , a f t e r p r o v i d i n g f o r a d e q u a te l i f e I
I n s u r a n c e and an em erg en cy s a v i n g s a c c o u n t , t o I n v e s t a
s m a ll am ount p e r m o n th , o r a t o t h e r r e g u l a r i n t e r v a l s , in |
a fu n d r e p r e s e n t i n g a w ide d i v e r s i f i c a t i o n o f b o n d s o r
s t o c k s o r b o t h . T h is m ethod o f in v e s tm e n t a tt e m p t e d t o
s a t i s f y an econom ic n e e d among a g ro u p o f p e o p le n e v e r
b e f o r e p a r t i c i p a t i n g i n t h e o w n e rs h ip o f A m erican i n d u s t r y
th r o u g h t h e a c q u i s i t i o n o f s t o c k s . The p ro g ra m f a i l e d
m i s e r a b l y , h o w e v er, b e c a u s e o f i n a d e q u a t e l e g i s l a t i o n to
p r e v e n t some i n d i v i d u a l s fro m t a k i n g a d v a n ta g e o f th e
o t h e r f e l l o w when g iv e n t h e c h a n c e .
The I n v e s tm e n t Company A ct o f 1940 s u p p l i e d t h e
n e c e s s a r y l e g i s l a t i o n t o c u rb t h e a b u s e s c o n n e c te d w i t h
p e r i o d i c paym ent p l a n s and g a v e t h e p u b l i c a d e q u a te
2
in v e s tm e n t p r o t e c t i o n * The d e v e lo p m e n t o f t h i s s a f e g u a r d
g o v e rn in g t h e s e p l a n s l e d t o t h e r a p i d d i s a p p e a r a n c e o f
t h i s m ethod o f i n v e s tm e n t .
S in c e t h e I n v e s tm e n t Company A c t, h o w e v e r, p e r i o d i c
paym ent p l a n s h a v e a g a in come h a c k i n t o t h e in v e s tm e n t
f i e l d * The g ro w th h a s b e e n much s lo w e r i n t h e d e c a d e j
f o l l o w i n g t h e s t o c k m a rk e t d e c l i n e o f 1929. R e c e n tl y
p l a n s o f f e r i n g s h a r e s o f an i n d i v i d u a l common s t o c k on a
p e r i o d i c paym ent b a s i s h a v e b e en d e v e lo p e d *
i
I . PROBLEM
I
S ta te m e n t o f t h e p r o b le m . I t i s t h e p u r p o s e o f
t h i s t h e s i s t o p r o p e r l y a p p r a i s e t h e in v e s tm e n t m e r i t s o f j
p e r i o d i c paym ent p l a n s a s t h e y e x i s t a t t h e p r e s e n t tim e*
I n o r d e r t o a t t a i n t h i s g o a l , i t i s n e c e s s a r y t o r e l a t e
t
, t h e m ain f e a t u r e s o f t h e s e p l a n s a s t h e y e x i s t e d p r i o r t o
1940 and show how t h e i n v e s tm e n t m e r i t s h a v e b e e n f o r t i
f i e d s i n c e t h a t tim e* I t i s t h e i n t e n t o f t h i s t h e s i s
n o t o n ly t o a p p r a i s e t h e i n v e s tm e n t m e r i t s o f p e r i o d i c
p ay m en t p l a n s f o r t h e a c c u m u la tio n o f in v e s tm e n t company I
| |
s e c u r i t i e s a n d t h e i n v e s tm e n t m e r i t s f o r t h e a c q u i s i t i o n |
I o f s h a r e s o f an i n d i v i d u a l common s t o c k , , b u t t o com pare ’
I
i n a n a l y t i c a l fo rm t h e a d v a n ta g e s an d d i s a d v a n t a g e s
i n h e r e n t i n t h e s e two t y p e s o f p e r i o d i c paym ent p ro g r a m s .
3
Im p o rta n c e o f t h e p r o b le m . The im p o r ta n c e o f t h e
p ro b le m r e s t s i n th e g ro w th o f t h e s e i n s t a l l m e n t p l a n s
s i n c e t h e I n v e s tm e n t Company A c t. I s t h i s ty p e o f d e v e lo p
m ent a d e q u a te a s a d e s i r a b l e m ethod o f a t t r a c t i n g i n v e s t
m ent f u n d s from t h e low incom e g ro u p s ? What i s t h e
r e l a t i o n s h i p o f t h e e x i s t i n g r e g u l a t o r y m e a s u re s t o t h e
d e s i r a b l e g ro w th o f t h e s e p l a n s ? j
i
The im p o r ta n c e i s c l e a r l y e v id e n c e d by t h e slow b u t !
s t e a d y i n c r e a s e i n th e n um ber an d s i z e o f t h e s e p l a n s w i t h
t h e p u r p o s e o f a t t r a c t i n g . t h e i n v e s t o r fro m t h e lo w e r - j
!
m id d le incom e g r o u p .
I I . DEFINITIONS OF TEBMS USED i
I n v e s tm e n t c o m p an ies a r e d e f i n e d b y A r th u r
W ie s e n b e rg e r a s :
F i n a n c i a l i n s t i t u t i o n s w hose s o l e b u s i n e s s i s t o
I n v e s t money e n t r u s t e d t o them i n s e l e c t e d s t o c k s
an d b o n d s o f c o m p an ies i n l e a d i n g i n d u s t r i e s , su c h
a s o i l , c h e m ic a l, s t e e l , u t i l i t i e s a n d m e r c h a n d i s i n g . 1
I n v e s tm e n t co m p a n ie s a r e d i v i s i b l e i n t o t h r e e m ain
c l a s s e s a n d a r e d e f i n e d b y t h e I n v e s tm e n t Company A c t o f
1940 a s :
i
I
•F a c e -a m o u n t c e r t i f i c a t e com pany1 m eans an i n v e s t
m ent company w h ic h i s e n g ag ed o r p r o p o s e s t o en g ag e
1
A r th u r W ie s e n b e r g e r , I n v e s tm e n t C om panies (New
Y ork: A r th u r W ie s e n b e rg e r & Company, i d 5 0 ) , p • 1 6 .
4
i n t h e b u s i n e s s o f I s s u i n g fa c e - a m o u n t c e r t i f i c a t e s
o f t h e i n s t a l l m e n t t y p e , o r w h ic h h a s b e e n e n g ag ed
i n su c h b u s i n e s s and h a s a n y su c h c e r t i f i c a t e o u t
s t a n d i n g .
• U n it in v e s tm e n t t r u s t ’ m eans an i n v e s tm e n t company
w h ic h (A) i s o r g a n iz e d u n d e r a t r u s t i n d e n t u r e
c o n t r a c t o f c u s t o d i a n s h i p o r a g e n c y o r s i m i l a r
i n s t r u m e n t , (B) d o e s n o t h a v e a b o a rd o f d i r e c t o r s ,
and (C) i s s u e s o n ly re d e e m a b le s e c u r i t i e s , e a c h o f
w h ich r e p r e s e n t s an i n d i v i d u a l i n t e r e s t i n a u n i t
o f s p e c i f i e d s e c u r i t i e s ; b u t d o e s n o t i n c l u d e a
v o t i n g t r u s t *
•M anagem ent com pany’ m eans a n y I n v e s tm e n t company
o t h e r th a n a fa c e - a m o u n t c e r t i f i c a t e company o r a
u n i t in v e s tm e n t t r u s t . 2
W eissm an d e f i n e s i n s t a l l m e n t in v e s tm e n t o r p e r i o d i c
paym ent p l a n s a s :
• . • e s s e n t i a l l y d e v i c e s f o r s e l l i n g in v e s tm e n t
company s e c u r i t i e s on a p e r i o d i c o r i n s t a l l m e n t
p l a n b a s i s . 3
The i n d e n t u r e i s t h a t i n s t r u m e n t w h ich s t a t e s i n
f u l l d e t a i l t h e r i g h t s and o b l i g a t i o n s p e r t a i n i n g t o t h e
s p o n s o r , t h e t r u s t e e , o r c u s t o d i a n , and t h e c e r t i f i c a t e
h o l d e r o f p e r i o d i c paym ent p l a n s .
The t r u s t e e i s e i t h e r a l a r g e b a n k in g i n s t i t u t i o n
o r t r u s t company a c t i n g a s t h e c u s t o d i a n o f t h e fu n d s an d
p r o p e r t y o f t h e c e r t i f i c a t e h o l d e r and t h e s p o n s o r company.
The s p e c i f i c f u n c t i o n s o f t h e t r u s t e e a r e e n u m e ra te d i n
® The I n v e s tm e n t Company A c t o f 1 940, p . 1 2 .
3
R ud olp h L . W eissm an, The I n v e s tm e n t Company and
t h e I n v e s t o r (New Y o rk ; H a rp e r an d B r o t h e r s P u b l i s h e r s ,
1 § 5 1 ) , p . xx*
5
t h e i n d e n t u r e .
The s p o n s o r com pany i s t h a t o r g a n i z a t i o n w h ich
c a r r i e s o u t t h e f o r m a tio n o f a p e r i o d i c paym ent p l a n a s
s p e c i f i e d by t h e S e c u r i t i e s and E xch ange C om m issio n. A lso
a d e f i n i n g f e a t u r e o f t h e s p o n s o r company i s t h e d e v e lo p
m en t a n d m a in te n a n c e o f t h e s a l e s o r g a n i z a t i o n .
The c e r t i f i c a t e h o l d e r i s t h a t p e r s o n o r p e r s o n s
who s u b s c r i b e t o , i n v e s t i n , o r c o n t r i b u t e p e r i o d i c a l l y
a c e r t a i n sum o f money t o a s p e c i f i e d t r u s t e e upon t h e
s o l i c i t a t i o n o f a s p o n s o r company f o r t h e p e r i o d i c
p u r c h a s e o f s e c u r i t i e s w h e th e r t h e y be i n v e s tm e n t company
s e c u r i t i e s o r s h a r e s o f an i n d i v i d u a l common s t o c k . i
I I I . SOURCES OP INFORMATION
The c h i e f s o u r c e s o f i n f o r m a t i o n f o r t h i s t h e s i s .
i
, h a v e b e e n t h e p r o s p e c t u s e s an d s a l e s l i t e r a t u r e o f t h e
i n d i v i d u a l c o m p a n ie s . G e n e r a l i n f o r m a t i o n on I n v e s tm e n t
c o m p a n ie s was o b t a i n e d fro m A r t h u r W ie s e n b e rg e r » s I n v e s t
m en t C o m p an ies. 1950 e d i t i o n , a n d o t h e r b o o k s r e l a t i n g t o
p e r i o d i c paym ent p l a n s . The c h i e f s o u r c e s o f p e r i o d i c a l I
I
i n f o r m a t i o n h a v e b e e n The C om m ercial a n d F i n a n c i a l j
C h r o n i c l e . B a rro n s N a t i o n a l B u s in e s s a n d F i n a n c i a l W eek ly . |
i
W a ll S t r e e t J o u r n a l , U n ite d S t a t e s N ew s, a n d The
I n v e s tm e n t D e a l e r s D i g e s t . V a r io u s p u b l i c a t i o n s o f t h e
6
S e c u r i t i e s an d E xchange C om m ission h a v e b een a s o u r c e o f
v a l u a b l e i n f o r m a t i o n .
IV . ORGANIZATION OF THE REMAINDER OF THE THESIS
I
—C h a p te r I I w i l l e m p h a siz e t h e n a t u r e a n d g ro w th o f j
i
p e r i o d i c paym ent p l a n s up t o The I n v e s tm e n t Company A c t j
o f 1 9 4 0 . The g e n e r a l o p e r a t i o n o f t h e p l a n s , a b u s e s
l e a d i n g t o g o v ern m en t c o n t r o l , d i s t r i b u t i o n o f p l a n c e r t i
f i c a t e s a n d e x p e r i e n c e o f s u b s c r i b e r s w i l l be d i s c u s s e d .
C h a p te r I I I w i l l b e d e v o te d t o t h e h i s t o r y a n d d e v e lo p m e n t
t
o f p e r i o d i c paym ent p l a n s s i n c e t h e I n v e s tm e n t Company Act.;
The m echanism a n d s t r u c t u r e o f e x i s t i n g p l a n s w i l l b e i
i
d i s c u s s e d I n C h a p te r IV ; e m p h a sis w i l l be p l a c e d upon t h e j
s p o n s o r com pany, t h e i n d e n t u r e , t h e t r u s t e e , t h e u n d e r l y
i n g s e c u r i t i e s , t h e l o a d i n g f a c t o r s and t a x a t i o n .
C h a p te r s V and VI w i l l p e r t a i n t o a c r i t i c a l a n a l y s i s o f
t h e m e r i t s an d d e f e c t s o f b o th t y p e s o f p l a n s ; t h e m e r i t s
an d d e f e c t s o f b o th t y p e s w i l l be c o n t r a s t e d . The f u t u r e
o u t lo o k f o r t h e s e p l a n s , b o t h fro m t h e v ie w p o in t o f t h e
i n v e s t i n g p u b l i c a n d t h e s p o n s o r , w i l l b e r e f l e c t e d i n
C h a p te r V I I . The summary and c o n c l u s i o n s o f t h e s tu d y
w i l l a p p e a r i n C h a p te r V I I I . /
7
V. HISTORY AND DEVELOPMENT OP PERIODIC PAYMENT PLANS4
P e r i o d i c paym ent p l a n s had t h e i r b e g in n i n g s i n 1930,
h a v in g b e e n c r e a t e d w ith t h e hope t h a t an econom ic n e e d
c o u ld b e m et* T h is n e e d was t o be fo u n d m a in ly i n t h e
p e o p le o f t h e wage e a r n i n g and m o d e ra te s a l a r y c l a s s w ith
a s m a ll b u t r e g u l a r in c o m e . T h ro u g h p e r i o d i c s a v i n g s from !
t h e i r w ages o r incom e a c e r t a i n sum, o f t e n a s low a s f i v e
d o l l a r s p e r m o n th , w as u s e d f o r t h e p u r c h a s e b y i n s t a l l
m e n ts o f an i n v e s tm e n t company s e c u r i t y o r c e r t i f i c a t e *
i
The u n d e r l y i n g i s s u e s o f t h e in v e s tm e n t com pany s e c u r i t y
o r c e r t i f i c a t e w e re common s t o c k s o r s h a r e s o f a d e s i g
n a t e d I n v e s tm e n t t r u s t o r i n v e s tm e n t company o f t h e o p e n -
end o r c lo s e d - e n d ty p e .® The m ethod w a s, i n a c t u a l i t y , a !
|
m eans o f a t t r a c t i n g a new c l a s s o f p e o p le f o r I n v e s tm e n t
i n common s t o c k s ; t h i s m ethod g i v i n g many o f t h e I n v e s t
m ent " a d v a n ta g e s " f o r m e r l y e n jo y e d o n ly b y t h e w e a lth y . !
A v e r y f a v o r a b l e s a l e s a p p e a l w as a n t i c i p a t e d w h ich
4
A lso known a s i n s t a l l m e n t i n v e s tm e n t p l a n s a n d
t h r i f t p l a n s .
5
L e t t e r fro m C hairm an o f t h e SEC T r a n s m i t t i n g ,
P u r s u a n t t o Law, A R e p o rt on C om panies S p o n s o rin g I n s t a l l
m en t I n v e s tm e n t P T a n s, S e p tem b er 2 8 , 1939 (W a s h in g to n ,
D .C .: “ U n ite d S t a t e s G overnm ent P r i n t i n g O f f i c e , 1 9 4 0 ),
H ouse Docum ent 4 8 2 , 7 6 t h C o n g r e s s , 2d S e s s i o n . (H ence
f o r t h , t o be r e f e r r e d t o i n t h i s s t u d y a s SEC R e p o rt on
C om panies S p o n s o r in g I n s t a l l m e n t I n v e s tm e n t P l a n s .
8
w ould r e a c h a l a r g e g ro u p o f p e o p le i n t h e s m a ll incom e
b r a c k e t s . Many o f t h e p l a n s o f f e r e d l i f e i n s u r a n c e p r o
t e c t i o n a s an a t t r a c t i o n to w a rd s t r e n g t h e n i n g t h e s a l e s
a p p e a l.® I n m ost e a s e s c e r t i f i c a t e h o l d e r s o r s u b s c r i b e r s
p a y m e n ts w ere p a i d t o t h e s p e c i f i e d t r u s t e e , who p u r c h a s e d
t h e u n d e r l y i n g s e c u r i t i e s a f t e r d e d u c t in g c e r t a i n c h a r g e s
and f e e s . O f te n , h o w e v e r, t h e s e c e r t i f i c a t e h o l d e r s o r
s u b s c r i b e r s p a y m e n ts w ere p a i d t o t h e s p o n s o r who i n t u r n
p a s s e d t h e fu n d s on t o t h e t r u s t e e . The p l a n s p r o v id e d
f o r e q u a l p e r i o d i c p a y m e n ts o v e r a s p e c i f i e d p e r i o d o f
t i m e . The m o st common t y p e was f o r t h e paym ent o f §10 p e r
m on th o v e r a p e r i o d o f t e n y e a r s . As e ac h paym ent was
m ad e, t h e u n d e r l y i n g s h a r e s r e p r e s e n t a t i v e o f t h e am ount
p a i d - i n an d t h e p r e s e n t v a lu e o f t h e u n d e r l y i n g u n i t a t
t h e tim e o f p a y m e n t, w ere p u r c h a s e d and c r e d i t e d by t h e
t r u s t e e t o th e c e r t i f i c a t e h o l d e r ’ s a c c o u n t . 7
P r e d e c e s s o r s l e a d i n g t o t h e f o r m a tio n o f t h e s e
p l a n s w ere v a r i e d . S to c k o w n e rs h ip th r o u g h i n s t a l l m e n t
b u y in g by e m p lo y ees o f i n d u s t r i a l o r g a n i z a t i o n s h a d b een
q u i t e common s i n c e t h e t u r n o f t h e c e n tu ry .® A lso
® SEC R e p o rt on C om panies S p o n s o rin g I n s t a l l m e n t
— . — A - , — - ..I ■ L - . rfl ....... * .............................................. W . - I . , , .1 I I I
I n v e s tm e n t P l a n s , p . 3 .
7 I b i d . , p . 4 .
R o b e rt F o r e s t e r and E l s e D i e t a l , E taployee S to c k
O w nership i n t h e U n ite d S t a t e s ( 1 9 2 6 ) , P r i n c e t o n
U n i v e r s i t y , a s q u o te d i n i b i d . , p . 5 .
9
r e p r e s e n t a t i v e o f i n s t a l l m e n t b u y in g w e re t h r i f t p l a n s
o f s a v i n g s b a n k s , endowm ent p l a n s o f i n s u r a n c e c o m p an ies
and i n s t a l l m e n t p l a n s o f b u i l d i n g and lo a n a s s o c i a t i o n s *
The p e r i o d i c paym ent p l a n s f o r s e c u r i t y i n v e s tm e n t d i f f e r
ed from t h e s e p l a n s i n t h a t t h e s u b s c r i b e r o r c e r t i f i c a t e i
h o l d e r w a s, i n e s s e n c e , t h e p u r c h a s e r o f s e c u r i t i e s r e p r e - j
s e n t a t i v e o f an in v e s tm e n t company an d d i d n o t o c cu p y t h e
p o s i t i o n o f a c r e d i t o r t o t h e in v e s tm e n t com pany. A lso
t h e incom e and v a lu e o f t h e u n d e r l y i n g c e r t i f i c a t e s was
d e p e n d e n t upon th e c o n d i t i o n s p r e v a i l i n g i n t h e s t o c k
t
m a rk e t and t h e m a r k e t v a lu e o f t h e s t o c k s o r b o n d s u n d e r - |
l y i n g in v e s tm e n t company s e c u r i t i e s o r c e r t i f i c a t e s . In
t h e o t h e r t y p e s o f i n s t i t u t i o n s m e n tio n e d , t h e b e n e f i c i a r y
r e c e i v e s a c e r t a i n am ount o f money o r f i x e d incom e f o r a
s p e c i f i e d p e r i o d w h ich i s n o t d e p e n d e n t upon t h e c o n d i t i o n
o f t h e m a rk e t v a lu e o f t h e u n d e r l y i n g s e c u r i t y .®
F iv e p e r i o d i c paym en t p l a n s u n d e r t h e s p o n s o r s h ip
o f f o u r co m p a n ie s o r i g i n a t e d i n 1 9 3 0 . I n D ecem ber o f
1 9 2 9 , t h e U nion D e p o s it Company o f f e r e d U nion I n v e s tm e n t
T r u s t C e r t i f i c a t e s t o t h e p u b l i c on an i n s t a l l m e n t p l a n
t
b a s i s # The f o u r s p o n s o r s com m encing o p e r a t i o n s i n 1930
SEC R e p o r t on C om panies S p o n s o rin g I n s t a l l m e n t
. #—— m m mm m — — — A — — wmm—i, ■■■ , — mtmm—m rnrnim t — — — I I
I n v e s tm e n t P l a n s , p . 6 .
10
w e re E u c lid I n v e s t o r s , I n c . , F i n a n c i a l In d e p e n d e n c e
F o u n d e r s , I n c . , In d e p e n d e n c e Fund o f N o r th A m e ric a , I n c . ,
and T h r i f t I n v e s tm e n t A s s o c i a t i o n . 1®
T h e re w e re f o r t y f i v e p l a n s i n e x i s t e n c e b y t h e end
o f 1 9 3 6 . T h e re w as a s t e a d y y e a r l y i n c r e a s e i n s a l e s o f
(
t h e i n v e s tm e n t c e r t i f i c a t e s e x c e p t i n t h e y e a r 1 9 3 2 . The j
g r e a t e s t g a in i n s a l e s i n te rm s o f d o l l a r s w as i n 1936 i
when a 50 p e r c e n t I n c r e a s e i n s a l e s f o r t h e e n t i r e
i n d u s t r y w as e n c o u n t e r e d .11 The s t e a d y i n c r e a s e i n s a l e s
volum e was a t t r i b u t e d m a in ly t o t h e e x p a n s io n o f s a l e s
i
d e p a r tm e n ts o f s p o n s o r in g c o m p a n ie s a n d th e i n s t i g a t i o n o f !
m ore a g g r e s s i v e s a l e s m e th o d s . By t h e c l o s e o f 1 9 3 5 ,
p e r i o d i c paym en t p l a n s had e s t a b l i s h e d th e m s e lv e s i n 45
s t a t e s a s w e l l a s i n Panam a, D i s t r i c t o f C olum bia a n d a
few t e r r i t o r i a l p o s s e s s i o n s .
One m ig h t be le d t o m in im iz e t h e im p o rta n c e o f th e s e
p l a n s s i n c e t h e t o t a l a s s e t s o f a l l i n s t a l l m e n t p ro g ra m s
o f t h i s n a t u r e i n 1936 a c c o u n te d f o r o n ly one h a l f o f one
p e r c e n t o f t h e com bined t o t a l a s s e t s o f a l l t h e i n v e s t
m ent c o m p a n ie s . The i m p o r t a n t f a c t o r , h o w e v e r, i s t h a t
t h e t y p e o f i n v e s t o r u s u a l l y a t t r a c t e d t o t h e s e p l a n s was
t h e o n e who c o u ld l e a s t a f f o r d t h e c a p i t a l l o s s .
, I b i d . , p . 9 .
L * 1 - - - - - - - - -
^ 9 P • H e
CHAPTER I I
NATURE AND GROWTH OP PERIODIC PAYMENT PLANS UP TO
THE INVESTMENT COMPANY ACT OP 1940
I . GENERAL OPERATION OP PLANS
The s p o n s o r com pany* The s p o n s o r company i n s t i
g a te d t h e p e r i o d i c paym ent o r i n s t a l l m e n t in v e s tm e n t p la n *
The c e r t i f i c a t e s r e p r e s e n t a t i v e o f t h e p l a n w e re d i s t r i b
u t e d by t h e s p o n s o r . G e n e r a l o p e r a t i o n and s u c c e s s o f
t h e p l a n d e p e n d e d upon t h e s e p r o m o te r s i n t h e c o n d i t i o n s
and te r m s s e t f o r t h b y them i n e a c h p l a n ’ s i n d e n tu r e * j
The m ain f u n c t i o n o f t h e s p o n s o r company was t h e a c t u a l
s e l l i n g o f t h e p l a n . O th e r l e s s e r i m p o r t a n t f u n c t i o n s i
w ere c h o o s in g t h e u n d e r l y i n g s e c u r i t y , s e l e c t i n g a s u i t
a b l e t r u s t com pany o r b a n k in g i n s t i t u t i o n and th e a d o p ti o n
o f a s u i t a b l e i n d e n t u r e * The o p e r a t i o n o f t h e p l a n and
! t h e c o n t e x t o f t h e i n d e n t u r e w as a p p ro v e d o r d is a p p r o v e d
by t h e t r u s t e e *
A l l t h e s p o n s o r c o m p a n ie s w e re c o r p o r a t e i n o r g a n
i z a t i o n ; many i n d e n t u r e s c o n ta in e d s p e c i f i c p r o v i s i o n s t o
t h e e f f e c t t h a t n o o f f i c e r s , i n c o r p o r a t o r s , d i r e c t o r s o r
s t o c k h o l d e r s o f t h e company s p o n s o r in g t h e p l a n c o u ld b e
h e l d p e r s o n a l l y l i a b l e f o r s i t u a t i o n s p e r t a i n i n g t o t h e
- _____ I
1 SEC R e p o rt on C om panies S p o n s o r in g I n s t a l l m e n t
I n v e s tm e n t P l a n s . p . ^ C o ^ V ............................................................. ....
12
I n d e n t u r e an d c e r t i f i c a t e s .2 I n m o st i n s t a n c e s a v e r y
s m a ll am ount o f c a p i t a l w as r e q u i r e d o f t h e s p o n s o r
company i n f o u n d in g a p l a n . U s u a lly s t o c k w as i s s u e d t o
t h e p r o m o te r s and v a r i o u s o f f i c e r s o f t h e s p o n s o r company
f o r t h e i r s e r v i c e s i n c o n n e c tio n w i t h t h e p ro m o tio n and
f o r m a tio n o f t h e p l a n . The m a jo r c a p i t a l e x p e n d i t u r e was i
i
e n c o u n te r e d i n s e l l i n g o p e r a t i o n s .®
In s h a r p c o n t r a s t t o t h e c a p i t a l i z a t i o n o f s p o n s o r
c o m p a n ie s I s t h e in co m e r e a l i z e d by t h e s e o r g a n i z a t i o n s .
As o f D ecem ber 3 1 , 1 9 3 6 , t h e r e w e re a p p r o x i m a t e ly 22
t
s p o n s o r s r e s p o n s i b l e f o r t h e g r e a t e r p o r t i o n o f g r o s s i n - !
come a c c r u i n g t o t h i s I n d u s t r y . The t o t a l p a y m e n ts o f I
t h e I n v e s t o r s i n t h e s e 22 p l a n s am ounted t o # 3 0 ,5 0 0 ,0 0 0
w h e re a s # 6 ,6 4 0 ,0 0 0 o f t h i s am ount w ent t o t h e s p o n s o r in g
c o m p a n ie s a s in c o m e . T r u s t e e ’ s f e e s and s e c o n d a r y s a l e s
l o a d s a r e n o t i n c l u d e d i n t h e f i g u r e o f # 6 , 6 4 0 ,0 0 0 .4
The t r u s t e e . The t r u s t e e , i n a l l c a s e s , w as e i t h e r -
a t r u s t company o r a b a n k in g i n s t i t u t i o n . I t s p r i n c i p l e
p u r p o s e w as t o a c t a s c u s t o d i a n o f t h e c e r t i f i c a t e
h o l d e r ’ s fu n d s and p r o p e r t y . A lso t h e t r u s t e e m a i n t a i n e d
2 I b i d . , p . 1 0 9 .
3
I b i d . , p . 1 1 0 .
4
I b i d . , p . 1 1 1 .
13
t h e a c c o u n ts o f c e r t i f i c a t e h o l d e r s and c a r r i e d o u t t h e
b u y in g a n d s e l l i n g o f t h e u n d e r l y i n g s e c u r i t i e s a c c o r d i n g
t o t h e p r o v i s i o n s o f t h e s p o n s o r and th e in d e n tu re * ®
The t r u s t e e * s f u n c t i o n was a c t u a l l y t h e m e c h a n ic a l
o p e r a t i o n o f t h e p l a n and was d e l i m i t e d i n t h e i n d e n t u r e
o r b y t h e s p o n s o r company* M ost o f t h e i n d e n t u r e s c o n
t a i n e d p r o v i s i o n s a t t e m p t i n g t o e x o n e r a t e t h e t r u s t e e from
a lm o s t a n y a c t e x c e p t t h o s e o f g r o s s a b u s e . T h e se p r o v i
s i o n s w e re u s u a l l y c o n t r a r y t o s t a t u t e s o r common la w s
r e g u l a t i n g t h e a c t s o f t r u s t e e s * 6 The f o l l o w i n g c l a u s e
i s t y p i c a l o f t h o s e fo u n d i n m o st i n d e n t u r e s :
The t r u s t e e , sa v e f o r i t s own g r o s s n e g l i g e n c e
o r w i l f u l d e f a u l t , s h a l l n o t b e p e r s o n a l l y l i a b l e
f o r a n y l o s s o r damage* The t r u s t e e s h a l l n o t b e
l i a b l e f o r th e e x e r c i s e o f a n y d i s c r e t i o n o r pow er
h e r e u n d e r o r f o r m is ta k e s o r e r r o r s o f Ju d g m en t,
n o r o t h e r w i s e , i n c o n n e c tio n w i t h t h i s t r u s t , e x c e p t
f o r i t s own w i l f u l m is c o n d u c t o r g r o s s n e g l i g e n c e . ”
I t was common p r a c t i c e f o r s a l e s l i t e r a t u r e o f
p l a n s n o t t o m e n tio n t h e e x c u l p a t o r y p r o v i s i o n s r e g a r d i n g
t h e s p o n s o r and t h e t r u s t e e i n t h e in d e n t u r e .®
The t r u s t e e ' s f e e was o f t e n c o l l e c t e d by t h e
® I b i d . , p* 1 2 5 .
6
I b i d * , p . 1 2 9 .
7 --------
I b i d * * p . 1 3 0 .
S
I b i d . , p . 1 3 1 .
14
s p o n s o r and t h e n fo rw a rd e d t o t h e t r u s t e e . I n c a s e s w here
a s p o n s o r r e f u s e d t o t u r n o v e r t h e s e c o l l e c t e d f e e s t o t h e
t r u s t e e , t h e t r u s t e e h a d t h e r i g h t t o e x a c t i t s f e e s from
t h e f u n d s o f t h e c e r t i f i c a t e h o l d e r s o v e r w h ic h t h e t r u s t
i n s t i t u t i o n h a d c u s t o d i a n s h i p . 9
The u l t i m a t e r e a s o n f o r th e u s e o f a l a r g e t r u s t
company o r b a n k in g i n s t i t u t i o n a s i d e fro m a c t i n g a s c u s
t o d i a n o f t h e i n v e s t o r ' s s e c u r i t i e s , c o l l e c t i n g p e r i o d i c
p a y m e n ts , k e e p in g c e r t i f i c a t e h o l d e r s a c c o u n ts a n d
r e c o r d s , and h a n d li n g w it h d r a w a l s was t o o f f e r t o c e r t i
f i c a t e h o l d e r s p r o t e c t i o n a g a i n s t d e f a l c a t i o n o f t h e i r
f u n d s . H ow ever, i n some p l a n s , t h e s p o n s o r c o l l e c t e d a l l
t h e p a y m e n ts and fo r w a r d e d t h e am ount t o b e i n v e s t e d i n J
t h e u n d e r l y i n g s e c u r i t i e s o n to t h e t r u s t e e . A ls o , some
s p o n s o r in g c o m p a n ie s m a i n t a i n e d t h e r i g h t t o p u r c h a s e t h e
u n d e r l y i n g s e c u r i t i e s . I n o n e c a s e t h e s p o n s o r m a i n t a i n e d
c u s t o d i a n s h i p o v e r t h e u n d e r l y i n g s e c u r i t i e s . 10
I n c a s e t h e t r u s t e e r e s i g n e d o r w as rem oved d u r in g
a p l a n ' s o p e r a t i o n , t h e r e g e n e r a l l y w ere p r o v i s i o n s i n
t h e i n d e n t u r e f o r t h e a p p o in tm e n t o f a s u c c e s s o r t r u s t e e . 11
9
I b i d . ,
P*
132 *
10
I b i d . ,
P-
13 3 .
11
I b i d . ,
P*
1 3 4 .
\
15
I f i t was im p o s s i b l e t o s e c u r e t h e s e r v i c e s o f a s u c c e s s o r
t r u s t e e , th e n p r o v i s i o n s s t a t e d t h a t e a c h c e r t i f i c a t e
h o l d e r 's fu n d w ould b e l i q u i d a t e d an d t h e p r o c e e d s w ould
be d i s t r i b u t e d p r o p o r t i o n a t e l y * U nder m o st p l a n s , t h e
re m o v a l o f t h e t r u s t e e w as p e r m i s s i b l e a t t h e d i s c r e t i o n
o f th e s p o n s o r * ^
I
The i n d e n t u r e * The p r i n c i p a l p u r p o s e o f t h e i n
d e n t u r e o f t h e s e p l a n s w as t o s t a t e s p e c i f i c a l l y t h e
o b l i g a t i o n s a n d r i g h t s o f t h e c e r t i f i c a t e h o l d e r , t h e
t r u s t e e and t h e sp o n s o r* S e c u r i t i e s r e g i s t r a t i o n s t a t e
m e n ts w e re f i l e d u n d e r t h e S e c u r i t i e s A ct o f 1 9 3 3 . The
c e r t i f i c a t e s h e l d by t h e i n v e s t o r s o f t e n d e l e t e d m uch o f j
t h e m a t e r i a l c o n t a i n e d i n th e i n d e n t u r e * By t h e . a c c e p t a n c e 1
o f a c e r t i f i c a t e , an i n v e s t o r a u t o m a t i c a l l y becam e a p a r t y
t o t h e o b l i g a t i o n s and r i g h t s s e t f o r t h i n t h e i n d e n t u r e *
C e r t i f i c a t e h o l d e r s o c c u p ie d t h e p o s i t i o n o f t r u s t b e n e
f i c i a r i e s . ^
V o tin g r i g h t s p e r t a i n i n g t o t h e u n d e r l y i n g s e c u r i
t i e s w e re v e s t e d i n t h e s p o n s o r i n m o st i n s t a n c e s , b u t
i c e r t i f i c a t e h o l d e r s w ere g iv e n r i g h t s i n some p l a n s upon
s u b m is s io n o f a r e q u e s t f o r t h e r i g h t t o v o te * T h e re w e re
—
I b id * * p* 135*
13 ;
I b i d . , p* 136*
16
few i n s t a n c e s i n w h ich a c e r t i f i c a t e h o l d e r r e q u e s t e d t h e
r i g h t t o v o t e . The sp o n s o r u s u a l l y r e q u i r e d t h e t r u s t e e
t o su b m it p o w e rs o f a t t o r n e y o r p r o x i e s so t h e s p o n s o r
c o u ld v o t e t h e s h a r e s u n d e r l y i n g t h e p l a n . I n c a s e s w here
t h e t r u s t e e v o te d t h e u n d e r l y i n g s e c u r i t i e s , v o t i n g was
c a r r i e d o u t a c c o r d i n g t o t h e s p o n s o r ’ s d i r e c t i o n . 1 4
I
P r a c t i c a l l y a l l o f t h e p l a n s p r o v i d e d f o r amend
m e n ts t o t h e i n d e n t u r e . H ow ever, t h e c e r t i f i c a t e h o l d e r
was r a r e l y g iv e n t h e r i g h t t o a c c e p t o r r e j e c t a n y in d e n
t u r e am endm ent. I t was s t a t e d , h o w e v e r, t h a t t h e am end-
I
m e n ts b r o u g h t a b o u t by t h e s p o n s o r and t r u s t e e w ere n o t
t o Im p a ir o r w ork a d e t r i m e n t a l e f f e c t on c e r t i f i c a t e
h o l d e r ’ s r i g h t s . T h is p r o v i s i o n l e d t o c o n t r o v e r s y s i n c e j
a c e r t i f i c a t e h o l d e r h ad t o d e te r m in e w h e th e r o r n o t t h e
amendment was d e t r i m e n t a l t o h i s p o s i t i o n . I f an i n v e s
t o r ’ s p o s i t i o n had b e e n im p a ire d by su c h an am endm ent,
t h e i n v e s t o r w o u ld h a v e t o r e f e r to h i s r i g h t s i n th e
i n d e n t u r e and b r i n g f o r t h a l i t i g a t i o n . V ery few c e r t i f i
c a t e h o l d e r s w e re f i n a n c i a l l y a b le t o w i t h s t a n d t h e
- e x p e n s e o f l i t i g a t i o n .
M ost p l a n s p r o v id e d t h a t u n c la im e d f u n d s o f i n v e s
t o r s w ould r e v e r t t o th e s t a t e i n w h ic h t h e c e r t i f i c a t e
I b i d . i p . 1 3 7 .
..
I b i d . . p . 1 4 0 .
17
h o l d e r v a s a r e s i d e n t * Some p l a n s , h o w e v e r, p r o v i d e d t h a t
u n c la im e d f u n d s , a f t e r a c e r t a i n l e n g t h o f t im e , w ould
r e v e r t t o t h e s p o n s o r co m p a n y .16
The g r e a t e r num ber o f p l a n s p l a c e d n o l i m i t a t i o n on
t h e l e n g t h o f tim e an i n d e n t u r e s h o u ld b e I n e f f e c t . The
I
t
t r u s t e e u s u a l l y m a i n t a i n e d t h e r i g h t o f t e r m i n a t i n g t h e |
i n d e n t u r e p u r s u a n t t o c e r t a i n c h a n g e s i n t h e s p o n s o r * s
s t a t u s . C han ges i n th e s t a t u s o f t h e s p o n s o r w h ic h m ig h t
b r i n g a b o u t t e r m i n a t i o n o f t h e i n d e n t u r e w e re d i s s o l u t i o n ,
l i q u i d a t i o n o r c e s s a t i o n o f b u s i n e s s and r e f u s a l o r
i
I
f a i l u r e t o c a r r y o u t s p e c i f i e d o b l i g a t i o n s an d d u t i e s * I n :
su ch s i t u a t i o n s , th e u n d e r l y i n g s e c u r i t i e s w e re l i q u i d a t e d
5
an d t h e p r o c e e d s p a s s e d on t o t h e c e r t i f i c a t e h o l d e r s . 1^ J
I I . ABUSES LEADING TO GOVERNMENT CONTROL OP PLANS
Due t o v a r i o u s a b u s e s c o n n e c te d w ith t h e c r e a t i o n
a n d o p e r a t i o n o f p e r i o d i c p ay m en t p l a n s , h e a r i n g s w ere
c o n d u c te d b y t h e S e c u r i t i e s a n d E xchange C om m ission i n
S e p te m b e r o f 1939, t o d e te r m in e t h e r e m e d ia l m e a s u re s
n e c e s s a r y t o c o r r e c t t h e p r a c t i c e s b e in g c a r r i e d on b y
p e r i o d i c paym ent p l a n s o f i n v e s tm e n t com panies* 1
I
__________________________________________________________________________________________ i
16 !
I b i d . , p . 140*
3.7
I b i d . . p . 1 4 1 .
18
S e r v i c e f e e s and s a l e s l o a d . The s e r v i c e f e e o r
p r im a r y s a l e s lo a d o f t h e s p o n s o r w as i n m o st i n s t a n c e s
c o l l e c t e d d u r i n g t h e f i r s t y e a r o f t h e i n v e s t o r s » p ay m en ts.
The s a l e s lo a d r e p r e s e n t e d a l a r g e p o r t i o n o f t h e incom e
c o l l e c t e d h y t h e sp o n so r* F o r a t o t a l i n v e s tm e n t o f # 1 200 j
o v e r a t e n y e a r p e r i o d , t h e s p o n s o r o f t e n r e c e i v e d fro m ■
§60 t o §144 o f t h e §120 0 i n t h e way o f a s a l e s lo a d o r
s e r v i c e fee.^-® T h is s e r v i c e f e e w a s , i n m o st i n s t a n c e s ,
d e d u c te d fro m t h e p a y m e n ts r e c e i v e d fro m t h e c e r t i f i c a t e
h o l d e r d u r i n g t h e f i r s t tw e lv e m o n th s o f t h e p l a n * s o p e r a -
S
t i o n . I n c a s e s w h e re t h e s p o n s o r c o l l e c t e d t h e p e r i o d i c
p a y m e n ts , t h e s e r v i c e f e e was d e d u c te d a n d t h e r e m a in d e r ,
I f a n y , was s e n t on t o t h e t r u s t e e f o r in v e s tm e n t* I n t h e
m a j o r i t y o f p l a n s , t h e s e r v i c e f e e w as d e d u c te d fro m t h e
p a y m e n ts b y t h e t r u s t e e , and f o r w a r d e d t o t h e sp o n so r*
The s e r v i c e f e e w as g e n e r a l l y d e te r m in e d b y a f i x e d p e r
c e n ta g e o f t h e t o t a l am ount w h ic h w as t o b e p a i d b y t h e
i n v e s t o r .
The g r e a t e r num ber o f s p o n s o r s o f f e r i n g t h e s e p l a n s
c o l l e c t e d t h e e n t i r e s a l e s lo a d i n l e s s th a n t h e f i r s t
y e a r o f o p e r a t io n * O fte n n o t h i n g w as i n v e s t e d f o r t h e
c e r t i f i c a t e h o l d e r i n t h e u n d e r l y i n g c e r t i f i c a t e s u n t i l
i
18
I b i d . , p . 3 5 .
19
t h e se c o n d a n d so m e tim es t h e t h i r d y e a r o f t h e p l a n . T h is
f a c t o r l i m i t e d t h e p o t e n t i a l d i v id e n d y i e l d s m a r k e d ly .
The num ber o f d e f a u l t s a n d w ith d r a w a ls was r e l a
t i v e l y h ig h d u r i n g t h e f i r s t y e a r o f a n i n v e s t o r ' s p l a n .
Upon w i t h d r a w a l , t h e i n v e s t o r was e n t i t l e d t o r e c e i v e i n
paym ent t h e v a l u e , d e te r m in e d a t t h e d a t e o f w i t h d r a w a l , i
o f t h e u n d e r l y i n g s e c u r i t i e s c r e d i t e d t o h i s a c c o u n t . j
i
T h e r e f o r e t h e am ount r e c e i v e d b y t h e i n v e s t o r c o u ld be
g r e a t e r , e q u a l t o o r l e s s t h a n t h e t o t a l am ount p a i d i n t o
t h e s p o n s o r o r t r u s t e e . I n c a s e s o f d e f a u l t o r w ith d r a w a li
I
d u r i n g t h e f i r s t y e a r , t h e c e r t i f i c a t e h o l d e r o f t e n I
r e c e i v e d n o t h i n g i n r e t u r n . An ex am p le o f t h i s s i t u a t i o n i-
w ou ld be an i n v e s t o r t a k i n g p a r t i n a $1200 t e n y e a r p a y - j
m ent p l a n w ith p e r i o d i c p a y m e n ts o f $10 p e r m o n th . P r e
sume t h e s p o n s o r e x a c te d h i s s e r v i c e f e e b e f o r e a n y p a y
m e n ts w e re i n v e s t e d i n t h e u n d e r l y i n g s e c u r i t i e s a s was
o f t e n t h e p r o c e d u r e . I f t h e s e r v i c e f e e w as $70 and t h e
c e r t i f i c a t e h o l d e r w ith d re w a f t e r m ak in g a t o t a l o f se v e n
e q u a l m o n th ly p a y m e n ts , n o t h i n g w ould b e r e t u r n e d t o t h e
s u b s c r i b e r .
I n i t i a l f e e s . A p p ro x im a te ly tw e n ty p l a n s , up t o
t h e tim e o f 1 9 5 9 , c h a r g e d a c r e a t i o n o r i n i t i a l f e e w h ich
w as i n p l a c e o f o r a d d i t i o n a l t o t h e s e r v i c e f e e . T h is
20
i n i t i a l f e e was d u e w i t h t h e f i r s t p e r i o d i c paym ent a n d ,
i n a few c a s e s , r a n a s h i g h a s $ 9 0 . The I n i t i a l f e e was
I n te n d e d t o l i m i t some p e r i o d i c paym ent p l a n s t o su b
s c r i b e r s i n a h i g h e r incom e b r a c k e t a n d d i s c o u r a g e t h o s e
p e r s o n s fro m p u r c h a s i n g t h e p l a n s who w ere n o t f i n a n c i a l l y
a b l e t o r i s k in v e s tm e n t i n f l u c t u a t i n g common s t o c k s . |
I
W ith d ra w a l f e e s a n d r e v o l v i n g f u n d s # W ith d ra w a l
f e e s w e re o f tw o t y p e s . The f i r s t ty p e was a f i x e d am ount
w h ic h was d e l e t e d fro m t h e t o t a l p a i d - i n am ount i f t h e
p l a n was d i s c o n t i n u e d b e f o r e t h e a g r e e d d a t e o f c o m p le tio n .
The f e e was g e n e r a l l y s m a ll a n d was i n te n d e d t o c o v e r t h e
e x p e n s e i n c u r r e d th r o u g h t h e l i q u i d a t i o n o f t h e u n d e r l y i n g j
s e c u r i t i e s and w ith d r a w a l fro m t h e p l a n . The o t h e r ty p e +
w as u s e d by t h o s e c o m p a n ie s t h a t e x a c t e d t h e i r s e r v i c e f e e
o v e r t h e e n t i r e l i f e o f an i n d i v i d u a l ’ s p l a n . T hus t h e
f e e was p r o r a t e d o v e r t h e e n t i r e p e r i o d an d t h e t o t a l
am ount was d e d u c te d fro m t h e t o t a l a s s e t v a l u e o f t h e
i n d i v i d u a l ’ s a c c o u n t a t tim e o f w i t h d r a w a l . 20 I n c l u d e d in "
t h e w ith d r a w a l d e d u c t i o n s w ere b r o k e r a g e f e e s an d e x p e n s e s
, p e r t i n e n t t o t h e s e c u r i t i e s and t a x e s .
T S r
2 0
I b i d . ,
P*
3 6 . !
i
2 1
I b i d . ,
P*
3 7 . |
1
I b i d . ,
P*
8 5 . j
21
The s p o n s o r m a i n t a i n e d a c c o u n ts f o r t h e s p e c i f i c
p u r p o s e o f f u r n i s h i n g t h e u n d e r l y i n g s e c u r i t i e s t o t h e
p l a n and t h u s s i m p l i f y i n g t h e l i q u i d a t i o n o f t h e n e t amount
d u e upon w it h d r a w a l . The t r u s t e e c a r r i e d o u t i t s d u t y o f
l i q u i d a t i o n by u s in g t h e u n d e r l y i n g s e c u r i t i e s o r c a s h
i
d e p o s i t e d i n th e s p o n s o r * s a c c o u n t . The a c c o u n t w as c a l l e d
I
a " r e v o l v i n g fu n d " o r " e s c ro w a c c o u n t . T h e u s e o f t h e
r e v o l v i n g fu n d b y t h e s p o n s o r r e s u l t e d i n t h e r e a l i z a t i o n
o f a p r o f i t a t t h e e x p e n s e o f t h e i n v e s t o r . A c t u a l w i t h
d r a w a l f e e s w ere r a r e l y e n c o u n te r e d by t h e t r u s t e e s i n c e
t h e su p p o se d l i q u i d a t e d s h a r e s o f a w ith d r a w in g p l a n h o l d e r
re m a in e d i n t h e " r e v o l v i n g f u n d ." T h ese su p p o s e d l i q u i
d a t e d s h a r e s w ere i n t u r n c r e d i t e d t o t h e a c c o u n ts o f
a c t i v e p l a n h o l d e r s and c h a r g e s w ere l e v i e d a g a i n s t t h e i r
a c c o u n ts f o r e x p e n s e s a n d c o m m issio n s. I n r e a l i t y t h e r e
i
; w ere n o e x p e n s e s and c o m m issio n s e n c o u n t e r e d . P r o f i t
r e a l i z e d fro m t h i s o p e r a t i o n a c c r u e d t o t h e s p o n s o r and
w as n o t p a s s e d on t o t h e p l a n h o l d e r #23 The e x c u s e g iv e n
b y o n e s p o n s o r f o r t h i s p r a c t i c e was t h a t i t a f f o r d e d a
m eans o f l i q u i d a t i n g a p l a n h o l d e r 's a c c o u n t e x p e d i e n t l y
I
w i t h o u t u n d e rg o in g t h e d e l a y o f p e r h a p s a w eek t o
i
22 „ i
I b i d . , p . 8 5 .
25
I b i d >, p . 35.
l i q u i d a t e u n d e r l y i n g s e c u r i t i e s . 24
22
M anagem ent f e e s . C e r t a i n m anagem ent f e e s w ere
c h a rg e d w h ic h u s u a l l y w ere d e d u c te d fro m t h e e a r n i n g s
r e a l i z e d fro m t h e u n d e r l y i n g s e c u r i t i e s . I n a few i n
s t a n c e s , t h e m an ag em en t f e e was d e d u c te d d i r e c t l y from
t h e s u b s c r i b e r ^ p e r i o d i c p a y m e n ts . In d e p e n d e n c e Fund
D e c l a r a t i o n o f T r u s t c h a r g e d i t s s u b s c r i b e r s a s o - c a l l e d
"m anagem ent f e e " w h ic h w as p a i d from incom e o f t h e u n d e r
l y i n g s e c u r i t i e s . T h is m anagem ent f e e , h o w e v e r, upon
i n v e s t i g a t i o n was fo u n d t o b e u s e d p a r t l y f o r t h e c o s t o f !
i
s e l l i n g t h e p l a n t o t h e p u b l i c and p a r t l y f o r m anagem ent
c o s t s . 2 ®
S e c o n d a ry s a l e s l o a d . The s e c o n d a r y s a l e s lo a d was
c o n s i d e r e d t h e am ount w h ich w as p a i d b y t h e s u b s c r i b e r t o
t h e t r u s t e e f o r t h e p u r c h a s e o f t h e s e c u r i t i e s u n d e r l y i n g
t h e p e r i o d i c paym ent p l a n , p a r t i c i p a t i o n o f t h e s p o n s o r
i n t h e s e c o n d a ry s a l e s lo a d w as a r r a n g e d w i t h t h e I s s u e r
o
o f t h e s e c u r i t i e s . The s p o n s o r s f j u s t i f i c a t i o n f o r t h e i r
p a r t i c i p a t i o n i n t h e s e c o n d a r y s a l e s lo a d was t h a t t h e i r
s h a r e am ou nted t o t h e same a s t h e r e g u l a r d i s c o u n t o r
24
I b i d . , p . 8 6.
25
I b i d . , p . 3 8 .
23
co m m issio n c o l l e c t e d by d i s t r i b u t o r s and d e a l e r s . The
s p o n s o r o f t e n r e c e i v e d up t o 90 p e r e e n t o f t h e s e c o n d a r y
s a l e s l o a d . 2 ® When t h e s p o n s o r and i s s u e r o r d e p o s i t o r
o f t h e u n d e r l y i n g s e c u r i t i e s w ere one i n t h e sam e, t h e
r e g u l a r s e c o n d a ry s a l e s l o a d w as c h a rg e d by t h e s p o n s o r , i
i
T r u s t e e s 1 f e e s . The t r u s t e e f e e w as g e n e r a l l y -i
!
u n if o r m t h r o u g h o u t t h e v a r i o u s p l a n s ; i t b e in g a b o u t tw o
and one h a l f p e r e e n t o f t h e e n t i r e am ount p a y a b l e b y t h e
s u b s c r i b e r . P o u r p l a n s p r o v i d e d f o r t h e paym en t o f t h e
I
t r u s t e e ' s f e e fro m incom e o f t h e u n d e r l y i n g s e c u r i t i e s ,
t h r e e p r o v i d e d f o r paym ent fro m t h e a c t u a l p e r i o d i c p a y
m en t r e c e i v e d fro m t h e s u b s c r i b e r and s i x t e e n p l a n s j
p r o v i d e d f o r paym ent o f t h e f e e by t h e s p o n s o r . 2* 7 i
i
L i f e i n s u r a n c e p re m iu m s. L i f e i n s u r a n c e prem ium s
i
( w e re n o t i n c l u d e d i n t h e a c t u a l c o s t s o f t h e p e r i o d i c |
pay m en t p l a n s . A s e p a r a t e i n s u r a n c e company h a n d le d t h e
i n s u r a n c e p r o t e c t i o n d e s i r e d b y some i n v e s t o r s . I n t h e
e v e n t o f d e a t h o f a s u b s c r i b e r b e f o r e c o m p le tio n o f t h e
p l a n , t h e i n s u r a n c e company c o v e re d t h e u n p a id b a la n c e o f J
I j
J t h e i n s u r e d due t o t h e p e r i o d i c paym ent p l a n . The s p o n s o r J
I _ _ _ _ _ _ _ _ _ _ _ _ |
26
I b i d . , p . 4 2 .
27
I b i d . , p . 43.
24
r e c e i v e d no f e e fro m t h e i n s u r a n c e com pany, b u t t h e am ount
d e d u c te d f o r i n s u r a n c e p a y m e n ts fro m t h e p e r i o d i c p a y m e n ts
e a c h m onth r e d u c e d t h e s u b s c r i b e r ' s e q u i t y i n h i s p l a n and
te n d e d t o m a g n ify t h e l o a d i n g c h a r g e p e r c e n t a g e . An
a v e r a g e prem ium r a t e w as e s t a b l i s h e d f o r t h e p a r t i c i p a n t s j
i n m o st o f t h e p l a n s . T h is s i n g l e m o n th ly r a t e g a v e t h e j
p l a n h o l d e r s , y o u n g e r th a n t h e a v e r a g e a g e , t h e d i s a d v a n
t a g e o f an u n f a v o r a b l e r a t e com pared t o t h e b e n e f i t o f a
f a v o r a b l e r a t e a c c o rd e d t h o s e p e r s o n s o l d e r th a n t h e
a v e r a g e a g e . 28
The i n s u r a n c e p o l i c y , g e n e r a l l y d e s c r i b e d a s a
' c r e d i t o r ' s g ro u p l i f e p o l i c y , o n e - y e a r re n e w a b le
te r m , n o n p a r t i c i p a t i n g , ' w as i s s u e d b y t h e i n s u r a n c e
company t o t h e s p o n s o r company a s ' c r e d i t o r ' p a y a b le j
t o t h e t r u s t e e i n t h e e v e n t o f t h e a s s u r e d 's I
d e a t h . 29 !
D i v i d e n d s . M ost p l a n s o p e r a t e d on t h e p r i n c i p l e
o f a u to m a tic r e i n v e s t m e n t o f d i v i d e n d s . T h is r e i n v e s t m e n t
b r o u g h t a b o u t a s e c o n d a r y s a l e s lo a d d e d u c t io n fro m t h e
t o t a l d i v i d e n d s r e i n v e s t e d . A ls o c e r t a i n c h a r g e s f o r
m a in te n a n c e o r s u p e r v i s i o n w ere d e d u c te d fro m t h e d iv id e n d s
One h a l f o f one p e r c e n t o f t h e d i v i d e n d r e c e i v e d a n n u a l l y
was o f t e n c h a r g e d a s t h e s u p e r v i s o r y f e e . Thus i f a
I
l
28 I
I b i d . , p . 4 4 .
29
I b i d .
25
d i v i d e n d o f 5 p e r c e n t w as p a i d , t h e f e e f o r s u p e r v i s i o n
w o u ld b e 10 p e r c e n t o f th e d i v i d e n d . 30 —
R e lo a d in g , c a p i t a l r e t u r n r e i n v e s t m e n t and t r a d i n g
p r o f i t s . R e lo a d in g w as t h e p r a c t i c e o f in d u c i n g a c e r t i f i
c a t e h o l d e r o f o n e t y p e o f p l a n t o s w itc h t o a n o t h e r t y p e
i
i
o f p l a n o f f e r e d by t h e same s p o n s o r . T h is p r a c t i c e o f :
r e s e l l i n g a n i n v e s t o r , r e s u l t e d i n a g r e a t e r p r o f i t f o r
t h e s p o n s o r due t o t h e c r e a t i o n f e e and p r im a r y s a l e s lo a d
c o n n e c te d w i t h e a e h p l a n . 3 1
I
The r e i n v e s t m e n t o f c a p i t a l r e t u r n s i n t h e u n d e r - j
l y i n g s e c u r i t i e s w ere s u b j e c t e d t o a s e c o n d a r y s a l e s lo a d
e q u i v a l e n t t o t h e c h a r g e s i n c u r r e d f o r th e r e i n v e s t m e n t o f
d i v i d e n d s .3 2
I n c a s e s w h ere a t r a d i n g p r o f i t was r e a l i z e d , t h e
s p o n s o r w as t h e s o l e b e n e f i c i a r y . O c c a s i o n a l l y t h e
s p o n s o r was a b l e t o p u r c h a s e I n v e s tm e n t t r u s t s h a r e s a t a
p r i c e lo w e r t h a n t h a t q u o te d th r o u g h t h e r e g u l a r s u p p ly
c h a n n e l . T h is t r a d i n g p r o f i t a c c r u e d t o t h e s p o n s o r and
w as n o t d i s t r i b u t e d t o th e c e r t i f i c a t e h o l d e r s . 33
30
I b i d . , p . 4 6 .
31
I b i d . , p . 9 0 .
32
I b i d * , p . 9 3 .
_________55 I b i d . , p . 9 6 ._____________________________________________
26
E x tr a n e o u s f e e s a n d e x p e n s e s « C e r t a i n e x tr a n e o u s
f e e s w ere u s u a l l y c h a rg e d f o r su c h t h i n g s a s t h e r e i n
s t a t e m e n t o f a d e f a u l t e d s u b s c r i b e r , f o r t h e s w it c h in g
b y a n i n v e s t o r fro m one p l a n t o a n o t h e r t y p e , f o r c e r t i f i
c a t e a s s ig n m e n t t o a n o t h e r p a r t y , and s e m i- w ith d r a w a l b y
an i n v e s t o r . I n a d d i t i o n t o t h e s e c h a r g e s , s u b s c r i b e r s ’
f u n d s w ere o f t e n c h a rg e d f o r su e h com pany e x p e n s e s a s
l e g a l f e e s , t a x e s a n d a c c o u n ti n g e x p e n s e s .
Review o f t o t a l c h a r g e s o f p e r i o d i c paym ent p l a n s .
I n c l u d e d i n t h e t o t a l c h a r g e s a r e t h e d i r e c t d e d u c t i o n s
fro m t h e p r i n c i p a l am ount p a i d - i n by s u b s c r i b e r s an d n o t
t h e v a r i o u s d e d u c t i o n s fro m t h e e a r n i n g s o f u n d e r l y i n g
i
s e c u r i t i e s * A lso t h e t o t a l am ount p a i d i n t o a p la n i s
c o n s i d e r e d t o re m a in c o n s t a n t i n r e s p e c t t o a p p r e c i a t i o n
o r d e p r e c i a t i o n f o r t h e p u r p o s e o f e s t a b l i s h i n g a p e r c e n t
a g e o f t o t a l c h a r g e s t o th e n e t i n v e s t e d a m o u n t. I f t h e
r e q u i r e d p a y m e n ts f o r a l l t h e p l a n s w ere m ade, t h e a v e r a g e
t o t a l l o a d i n g c h a r g e w as 1 5 .5 6 p e r c e n t f o r t h e a g g r e g a t e
o f a l l t h e p l a n s , 3 4 of th e 28 p l a n s o f f e r i n g i n s u r a n c e
p r o t e c t i o n , t h e a v e r a g e o f t h e n e t am ount i n v e s t e d t o t o t a l
l o a d i n g c h a rg e w it h o u t i n s u r a n c e e x p e n s e i n c l u d e d was
1 6 .5 8 p e r c e n t . W ith t h e c o s t o f I n s u r a n c e i n c l u d e d , t h e
34
I b i d . . p . 47 .
27
a v e r a g e t o t a l l o a d i n g c h a r g e o f t h e 28 p l a n s w as 2 3 .7 7 p e r
c e n t . 35
Of 51 p l a n s n o t o f f e r i n g i n s u r a n c e p r o t e c t i o n ,
tw e n ty had a t o t a l l o a d i p g c h a r g e below t h e a v e r a g e o f
1 5 .5 6 p e r c e n t . Of t h e 3 1 p l a n s ab o v e t h e a v e r a g e ,
a p p r o x i m a t e ly 14 p l a n s m a i n t a i n e d a t o t a l l o a d i n g c h a r g e
b e tw ee n 18 and 20 p e r c e n t .
The t o t a l lo a d o f t h e 28 p l a n s o f f e r i n g i n s u r a n c e
p r o t e c t i o n v a r i e d b e tw ee n 8 .3 6 p e r c e n t and 2 0 .4 5 p e r
c e n t , t o th e n e t i n v e s t e d a m o u n t. T h e se p e r c e n t a g e s a r e
e x c l u d in g t h e c o s t o f i n s u r a n c e . S e v e n te e n o f t h e 28
p l a n s h a d a t o t a l l o a d i n g c h a r g e i n e x c e s s o f 1 6 .5 8 p e r
c e n t . 36
T h e se f i g u r e s r e p r e s e n t t h e t h e o r e t i c a l lo a d a s
sum ing a p l a n i s c a r r i e d t o c o m p le tio n . I n c o n s i d e r i n g
t h e a v e r a g e lo a d on i n c o m p le te d p l a n s , t h e a v e r a g e w o u ld
te n d t o b e g r e a t e r s i n c e many lo a d f a c t o r s w ere e x a c te d
i n f u l l b y t h e s p o n s o r d u r i n g t h e f i r s t one o r two y e a r s
o f a p l a n ' s o p e r a t i o n . A lso t h e s e p e r c e n t a g e s a r e r e p r e
s e n t a t i v e o f t h e t o t a l lo a d t o t h e t o t a l n e t am ount i n
v e s t e d . T hus t h e d e d u c t i o n s fro m d i s t r i b u t i o n o f e a r n i n g s
35
I b i d . , p . 4 9 .
36
I b i d *, p . 52.
28
f o r su c h t h i n g s a s t h o m anagem ent f e e o r t h e b u y in g and
s e l l i n g o f t h e u n d e r l y i n g s e c u r i t i e s w e re n o t i n c l u d e d
i n t h e t o t a l l o a d i n g c h a r g e o f t h e p a i d - i n p r i n c i p a l *
T hose p l a n s m a i n t a i n i n g a c o m p a r a t i v e l y low t o t a l l o a d i n g
c h a r g e t o t h e p r i n c i p a l am ount i n v e s t e d , u s u a l l y c o u n t e r
a c t e d t h i s s h o r t a g e w i t h c o m p a r a t i v e l y h ig h d e d u c t i o n s
fro m e a r n i n g d i s t r i b u t i o n s . 3,7
A c o m p a ris o n o f $1200 i n v e s t e d i n a s a v i n g s bank
w i t h i n t e r e s t com pounded s e m i- a n n u a l l y a t two and one h a l f
p e r c e n t r e a d i l y shows t h e e x c e s s i v e n e s s o f l o a d i n g
c h a r g e s e n c o u n te r e d i n t h e s e p l a n s a s shown i n T a b le I .
L e t u s assum e $10 p a y m e n ts w e re made e a c h m onth o v e r a
t e n y e a r p e r i o d i n t o t h e two t y p e s o f p ro g r a m s . The
a v e r a g e c h a r g e f o r t h e paym ent p l a n s i s o b t a i n e d b y d e t e r
m in in g a n a v e r a g e o f 19 p l a n s n o t o f f e r i n g i n s u r a n c e
p r o t e c t i o n . A f t e r t h e f i r s t s i x m o n th s , t h e am ount w i t h
i n t e r e s t i n t h e s a v i n g s a c c o u n t w ould b e $ 6 0 .1 5 and t h e
am ount o f p r i n c i p a l i n v e s t e d i n t h e u n d e r l y i n g s e c u r i t i e s
o f t h e a v e r a g e p l a n w ould be $ 1 3 .1 9 . The d i f f e r e n c e o f
t h e two i s a b o u t 3 5 5 .9 p e r c e n t ; m e a n in g t h a t i n o r d e r t o
be t h e same i n v a lu e a s t h e s a v i n g s a c c o u n t w ith i n t e r e s t ,
' t h e m oney i n v e s t e d by t h e p l a n s f o r t h e c e r t i f i c a t e
37
I b i d . , p . 55.
C O M P A R IS O N
T A B L E I
O F N E T A M O U N T IN V E ST E D IN U N D E R L Y IN G SECURITIES IN IN S T A L L M E N T IN V E S T M E N T P L A N S W IT H
A C C U M U L A T E D A M O U N T O F #10 M O N T H L Y SA V IN G S P R O G R A M W IT H IN T E R E ST A T
P E R A N N U M C O M P O U N D E D S E M IA N N U A L L Y *
Number
of
years
payments
Total
amount of
payments by
c e r tific a te
holders®-
Net amount
invested
in
underlying
securities^
Accumulated
amount of #10
monthly deposits
at 2f$ in terest
compounded
semiannually
Excess amount ac
cumulated under
savings program
over net amount
invested in under
lying secu rities
Per cent
of
excess
to net
amount
invested
1/2 # 65.57 # 13.19 # 60.13 # 46.94 355.9
1 127.17 46.71 121.01 74.30 159.1
1 1/2 187.17 96.35 182.66 86.31 89.6
2 247.17 147.49 245.07 97.58 66.2
2 1/2 307.17 199.87 308.26 108.39 54. 2
3 367.17 253.01 372.23 119.22 47.1
3 l/2 427.17 306.47 436.99 130.52 42.6
4 487.17 360.31 502.59 142.28 39.5
4 1/2 547.17 414.38 569.02 154.64 37.3
5 607.17 468.92 636.24 167.32 35.7
6 727.17 579.32 773.21 193.89 33.5
7 847.17 691.96 913.66 221.70 32.0
8 967.17 805.62 1057.66 252.04 31.3
9 1087.17 920.88 1205.27 284.39 30.9
10 1207.17 1037.55 1356.60 319.05 30.8
* Investments Trusts and Investment Companies Letter from Chairman of S.E.C., Transmitting, pursuant
to Law, A Report on Companies Sponsoring Installment Plans,
a. Includes in it ia l fees in the oase of fiv e plans.
b. Includes contributions by sponsors in the case of fiv e plans, but omits secondary sales load, to
to
30
h o l d e r s w ould h a v e t o e a r n o r u n d e rg o a m a rk e t a p p r e c i a
t i o n o f 355*9 p e r c e n t . A f t e r t h e f i r s t y e a r t h i s p e r
c e n ta g e g r a d u a l l y d e c r e a s e s , h u t upon t h e e x p i r a t i o n o f
t h e tw o p ro g ra m s t h e r e i s s t i l l a 30*8 p e r c e n t d i f f e r e n c e
I n f a v o r o f t h e s a v i n g s program * The p r i n c i p a l am ount
w ith I n t e r e s t i n t h e s a v i n g s a c c o u n t upon e x p i r a t i o n i s
$ 1 ,3 5 6 .6 0 , w h i l e t h e n e t i n v e s t e d am ount i n t h e u n d e r l y i n g
s e c u r i t i e s o f t h e p e r i o d i c p l a n i s $ 1 , 037. 55.^8
A p p ro x im a te ly 33 p l a n s made up t h e g r e a t e r p o r t i o n
o f t o t a l b u s i n e s s d o n e b y t h e p e r i o d i c paym ent p l a n
i n d u s t r y . To t h e s e p l a n s i n v e s t o r s , d u r i n g t h e y e a r s
1930 t o 1 9 3 7 , p a i d i n a t o t a l o f a p p r o x i m a t e ly $ 5 2 ,5 5 3 ,0 0 0 .
Prom t h i s am ount a t o t a l o f a p p r o x i m a t e ly $ 8 ,9 8 8 ,0 0 0 was
r e t a i n e d by t h e v a r i o u s s p o n s o r s f o r s o - c a l l e d p r im a r y
l o a d i n g c h a r g e s and m i s c e l l a n e o u s f e e s . $ 4 5 ,5 4 0 ,0 0 0 was
t h e a c t u a l am ount i n v e s t e d i n t h e u n d e r l y i n g i s s u e s w h ic h
r e p r e s e n t e d I n v e s t o r ’ s p a y m e n ts and t h e p o r t i o n o f d i v i
d e n d s u s e d f o r r e i n v e s t m e n t . D e d u c tio n s w ere made from
t h e $ 4 5 ,5 4 0 ,0 0 0 f o r s e c o n d a ry l o a d i n g c h a r g e s . A t o t a l
l o a d i n g c h a r g e i n e x c e s s o f 30 p e r c e n t t o n e t i n v e s t e d
c a p i t a l i s o b t a i n e d when t h e s e c o n d a ry lo a d a n d t r u s t e e ’ s
f e e s a r e i n c l u d e d i n t h e t o t a l .
•S Q ” .... ' ' *
I b i d . , p . 6 0 .
39
I b i d . , p . 6 1 .
31
I I I . THE DISTRIBUTION OP PERIODIC PAYMENT PLAN CERTIFICATES
S a l e s o r g a n i z a t i o n . The s a l e s o r g a n i z a t i o n s o f
s p o n s o r c o m p a n ie s p la y e d an i m p o r t a n t p a r t i n f u r t h e r i n g
t h e a b u s e s c o n n e c te d w ith p e r i o d i c paym ent p l a n s . B etw een
1930 and 1 9 3 3 , in d e p e n d e n t s e c u r i t y d e a l e r s d i s t r i b u t e d
m o st o f t h e c e r t i f i c a t e s o f e x i s t i n g p l a n s . A f t e r t h i s
p e r i o d , t h e e s t a b l i s h m e n t o f l a r g e s a l e s o r g a n i z a t i o n s b y
s p o n s o r c o m p a n ie s becam e common. The g ro w th o f t h e p l a n s
b r o u g h t a b o u t e s t a b l i s h m e n t o f b r a n c h s e l l i n g o r g a n i z a
t i o n s an d t h e d e v e lo p m e n t o f v e r y a g g r e s s i v e s e l l i n g
m e th o d s . ^0
S e l l i n g m e th o d s . The e x p e n s e o f s a l e s m o u n te d
r a p i d l y a s s a l e s o r g a n i z a t i o n s i n c r e a s e d . T h ese e x p e n s e s
w e re m a in ly a t t r i b u t e d t o b r a n c h o f f i c e o v e rh e a d a n d t h e
c o m p e n s a tio n s d u e s a l e s m a n a g e rs , b r a n c h m a n a g e rs a n d
s a le s m e n . The " s e r v i c e f e e " o r p rim a ry s a l e s lo a d was
d e s i g n e d t o c o v e r t h e s e e x p e n s e s . ^ T y p ic a l o f t h e a l l o
c a t i o n o f a # 6 0 .0 0 " s e r v i e e f e e " f o r a #1200 p l a n i s
# 2 0 .0 0 t o t h e s p o n s o r , # 1 1 .0 0 t o t h e b r a n c h m a n a g e r, # 5 .0 0
t o t h e s a l e s m an ag er and # 2 4 .0 0 t o t h e s a le s m a n . O ut o f
I b i d . , p . 1 4 3 .
41
I b i d . . p . 144.
32
29 p l a n s , t h i r t e e n and one h a l f m o n th s was t h e a v e r a g e
42
tim e i n w h ich a sa le s m a n a c t u a l l y r e c e i v e d h i s co m m issio n .
T w en ty -tw o o f t h e l e a d i n g s p o n s o r o r g a n i z a t i o n s I n
D ecem ber o f 1 9 3 5 , em ployed a t o t a l o f 1 ,9 9 4 p e r s o n s o f
w h ic h num ber o n ly 312 w e re p a i d a s a l a r y . 43 j k e a v e r a g e
y e a r l y co m m issio n r e a l i z e d by sa le s m e n was s m a l l . I n 1935,
t h e a v e r a g e y e a r l y co m m issio n am ounted t o l e s s t h a n $360
p e r s a le s m a n .
The t u r n o v e r o f s a l e s p e r s o n n e l w$s a p p r o x im a te ly
25 p e r c e n t d u r i n g t h e l i f e o f t h e s e p e r i o d i c p l a n s .
S alesm en w e re o f t e n g iv e n v e r y p o o r t r a i n i n g by s p o n s o r
c o m p a n ie s an d i n s t r u c t e d p u r p o s e l y i n t h e p o i n t s t o m i n i
m iz e and t h e o n e s t o e m p h a s iz e . The u s e o f m i s l e a d i n g and
u n t r u e s t a t e m e n t s w as common. The i d e a o f t r u s t e e s h i p
a n d t h e I n t e g r i t y o f t h e t r u s t company w as a f o r c e f u l
s e l l i n g m e th o d . S a lesm e n a s s u r e d t h e $1200 t e n y e a r
c u s to m e r o f a t l e a s t a $2000 m a t u r i t y v a l u e . C o m p lete
l i q u i d i t y a t a n y tim e was s t r e s s e d . 45
Due t o i n c r e a s i n g c o m p la in ts fro m p l a n h o l d e r s , t h e
S e c u r i t i e s an d E xchange C om m ission I n 1 9 3 7 , c a r r i e d o u t
42
I b i d . .
P*
1 4 5 .
43
44
I b i d . ,
P*
1 4 3 .
I b i d . .
P«
1 4 6 .
45
I b i d . .
P-
1 4 9 .
33
i n v e s t i g a t i o n s o f s a l e s p r a c t i c e s em ployed i n p e r i o d i c
p ay m en t p l a n s . T h e f i n d i n g s a l l e g e d t h a t f r a u d u l e n t
p r a c t i c e s and g r o s s m i s r e p r e s e n t a t i o n s had b e e n com
m i t t e d . 47 T y p ic a l m i s r e p r e s e n t a t i o n s w e re t h a t t h e i n
v e s t o r ’ s p a y m e n ts w e re g u a r a n t e e d a g a i n s t l o s s , t h a t t h e
t r u s t company w as t h e a c t u a l s p o n s o r o f t h e p l a n and
d e l i b e r a t e o m is s io n o f t h e v a r i o u s f e e s , c o m m issio n s and
s e c o n d a ry l o a d i n g c h a r g e s . 48
S a l e s m a t e r i a l a n d d e v i c e s . The f r a u d u l e n t
p r a c t i c e s an d m i s r e p r e s e n t a t i o n s u s e d by s a le s m e n w ere
l i k e w i s e r e p r e s e n t e d i n t h e s a l e s m a t e r i a l a n d d e v i c e s .
N o m e n c la tu re o f t h e p l a n s was o f t e n w r i t t e n so a s t o b e
c o n s t r u e d by t h e i n v e s t o r a s a " l i v i n g t r u s t , ’* an "endow
m en t p ro g ra m ” o r a " s a v i n g s p l a n . ” F r e q u e n t l y i n v e s t o r s
w e re u n a b le t o a s c e r t a i n fro m s a l e s m a t e r i a l t h a t t h e
p l a n f u n c t i o n e d b y th e p e r i o d i c in v e s tm e n t i n common s t o c k
s h a r e s . The m i s l e a d i n g l i t e r a t u r e u s u a l l y en co m p assed
su c h d e v i c e s a s d r a m a tiz e d p a r a g r a p h s , s t a t e m e n t s o f a
vague n a t u r e an d p o i n t s w h ic h w ere o n ly p a r t l y t r u e .
A m b ig u ity a n d d e l e t i o n s w e re t h e p r i n c i p a l f a c t o r s
46
I b i d . .
P«
1 5 5 .
47
I b i d . .
P*
1 5 6 .
48
I b i d . .
P-
1 5 7 .
g o v e r n in g s a l e s l i t e r a t u r e . One common m eth o d o f m in i
m iz in g t h e f e e s w as t o f i g u r e t h e s a l e s lo a d a s a p e r c e n t
a g e o f t h e a s s u r e d am ount o f a p l a n upon r e a c h i n g m a t u r i t y
T hus t h e l o a d p e r c e n t a g e o f a $1200 p l a n w ould he f i g u r e d
from an a s s u r e d $2000 m a t u r i t y v a l u e . 4®
M ost o f t h e s a l e s l i t e r a t u r e p l a c e d g r e a t e m p h a sis
on t h e "sa v in g s'* a s p e c t o f t h e s e p l a n s . T h is e m p h a sis
te n d e d t o d e t r a c t t h e a v e r a g e i n v e s t o r ' s a t t e n t i o n from
t h e a c t u a l s p e c u l a t i v e in v e s tm e n t i n s e c u r i t i e s . Some
s p o n s o r s i s s u e d p ay m en t o r d e p o s i t h o o k s s i m i l a r t o th o s e
commonly a s s o c i a t e d w i t h s a v in g s a c c o u n ts o f h a n k s . 50
The c o v e r o f one s p o n s o r * s p aym ent o r d e p o s i t h o o k con
t a i n e d t h e f o l lo w in g s
You w ork e i g h t h o u r s a d a y f o r y o u r m oney;
h u t t h e money you sa v e w o rk s t h e w h o le tw e n ty -
f o u r h o u r s f o r y o u . 51
C o n s id e r a b le s t r e s s i n t h e s a l e s l i t e r a t u r e was
p l a c e d upon t h e c o r p o r a t i o n s r e p r e s e n t i n g t h e u n d e r l y i n g
s e c u r i t i e s . The r e s u l t w as a g e n e r a l c o n f u s i o n hy i n
v e s t o r s a s t o t h e s o u n d n e s s o f t h e p e r i o d i c paym ent p l a n s
and t h e c o r p o r a t i o n s . Some s u b s c r i b e r s w e re l e d t o b e lie v e
49
I b i d . , p . 1 6 2 .
50
I b i d . , p . 1 6 4 .
51
I b id .
35
t h e y w e re d i r e c t l y p u r c h a s i n g s h a r e s o f t h e c o r p o r a t i o n s
r e p r e s e n t i n g t h e u n d e r l y i n g s e c u r i t i e s . 5^
O th e r p o i n t s o f i n t e r e s t fo u n d i n m o st s a l e s l i t e r
a t u r e w ere t h e a s s u r a n c e o f d e p e n d a b i l i t y o f incom e and
s a f e t y o f p r i n c i p a l an d t h e l a c k o f s p e c u l a t i v e f a c t o r s . 53
P e rfo rm a n c e r e p r e s e n t a t i o n s an d p r o j e c t i o n s o f f u t u r e
p e rf o r m a n c e w e re i m p o r t a n t a s s a l e s d e v i c e s . O fte n s t a
t i s t i c a l r e c o r d s o f common s t o c k p r i o r t o 1929 w e re u s e d
t o im p r e s s upon c u s to m e rs t h e tre m e n d o u s a p p r e c i a t i o n
p o t e n t i a l . A lso p r o j e c t i o n s a s t o f u t u r e r e c o r d s w ere
p r e d i c t e d fro m t h e s e e s t a b l i s h e d s t a t i s t i c a l r e c o r d s . 54
P o s s i b l y t h e g r e a t e s t e m p h a sis i n t h e d i s t r i b u t i o n
o f p e r i o d i c p ay m en t p l a n s was p l a c e d upon t h e " t r u s t e e ” o r
" t r u s t e e s h i p " e o n c e p t . T h is l e d m o s t p l a n h o l d e r s t o
b e l i e v e t h e i r f u n d s w e re b e in g m anaged and p r o t e c t e d w i t h
t h e c a r e and c o n s e r v a t is m u s u a l l y a t t r i b u t e d a t r u s t e e .
A c t u a l l y t h e t r u s t e e o f t h e s e p l a n s w as c o m p le te ly e x o n e r
a t e d o f a n y r e s p o n s i b i l i t y an d had n o a u t h o r i t y i n m anage
m e n t, p o l i c y o r o p e r a t i o n . 55
52
I b i d . , p . 1 6 5 .
gg '
I b i d . , p . 1 6 7 .
54
I b i d . , p . 1 7 1 .
55
I b i d . , p . 177.
36
IV . EXPERIENCE OP PERIODIC PAYMENT PLAN SUBSCRIBERS
The e x p e r i e n c e o f t h e p e r i o d i c paym ent p l a n s u b
s c r i b e r w as one o f u n r e a l i z e d a n d r e a l i z e d l o s s e s . Out
o f 33 p l a n s , a c c o u n t i n g f o r m o st o f t h e b u s i n e s s do ne b y
t h e I n d u s t r y , t h e r e w e re t o t a l p a y m e n ts o f § 5 2 ,5 5 3 ,0 0 0
from 1930 th r o u g h 1 9 3 7 . Of t h i s am ount § 1 0 ,1 9 9 ,0 0 0 r e p r e
s e n t e d re p a y m e n ts t o w ith d r a w in g s u b s c r i b e r s a n d d i v i d e n d
d i s t r i b u t i o n s . A n e t c a p i t a l i n v e s tm e n t o f § 4 2 ,3 5 4 ,0 0 0 i s
o b t a i n e d . Of t h e n e t c a p i t a l I n v e s tm e n t by s u b s c r i b e r s ,
o n l y § 2 5 ,1 3 6 ,0 0 0 was i n v e s t e d i n t h e s e p l a n s . An u n r e a l
i z e d and r e a l i z e d n e t l o s s o f § 1 7 ,2 1 8 ,0 0 0 o r 33 p e r c e n t
o f t o t a l i n v e s t e d am ount w as e x p e r i e n c e d by s u b s c r i b e r s .
S p o n s o rs and t r u s t e e s f e e s t o t a l e d § 9 ,7 6 5 ,0 0 0 , I n s u r a n c e
e x p e n s e am o u n ted t o § 8 7 3 ,7 0 0 and u n r e a l i z e d a n d r e a l i z e d
d e p r e c i a t i o n , i n c l u d i n g s e c o n d a r y s a l e s f e e s and h id d e n
c h a r g e s , t o t a l e d § 9 ,5 9 3 ,0 0 0 . The t o t a l l o s s o f § 2 0 ,2 3 2 ,0 0 0
I s r e d u c e d b y § 3 ,0 1 5 ,0 0 0 , g i v i n g a n e t l o s s t o i n v e s t o r s
o f § 1 7 ,2 1 8 ,0 0 0 . The § 3 ,0 1 5 ,0 0 0 r e p r e s e n t s t h e r e i n v e s t
m ent o f t h e e a r n i n g s fro m t h e u n d e r l y i n g s e c u r i t i e s .® ®
More t h a n h a l f o f t h e n e t l o s s was r e f e r a b l e t o
l o a d s , f e e s a n d c h a r g e s ; t h e r e m a in d e r w as a c c o u n te d f o r
by m a rk e t d e p r e c i a t i o n o f u n d e r l y i n g s e c u r i t i e s . The h ig h
56
I b i d . , p . 185.
c o s t o f p e r i o d i c paym ent p l a n s t o s u b s c r i b e r s w as ev en to o
e x c e s s i v e t o be b a la n c e d i n p r o s p e r o u s y e a r s r e p r e s e n t e d
b y i n c r e a s e d e a r n i n g s and m a r k e t a p p r e c i a t i o n o f u n d e r l y
in g s e c u r i t i e s *® 7
57
I b i d * » p* 188.
CHAPTER I I I
HISTORY AND DEVELOPMENT OP PERIODIC PAYMENT PLANS
SINCE THE INVESTMENT COMPANY ACT OF 1940
The r e g u l a t i o n o f I n v e s tm e n t C om panies t h r o u g h t h e
I n v e s tm e n t Company A c t o f 1940 b r o u g h t s e v e r e r e s t r i c t i o n s
on c o m p a n ie s o f f e r i n g p e r i o d i c paym ent p l a n s . The a b u s e s
p e r p e t r a t e d p r i o r t o t h i s tim e c l e a r l y e v id e n c e d t h e n e e d
f o r p r o p e r l e g i s l a t i o n r e g u l a t i n g t h i s f i e l d o f f i n a n c e . 1
The p r i n c i p a l r e g u l a t o r y m e a s u r e s p e r t a i n i n g t o
p e r i o d i c p ay m en t p l a n s w e re s p e c i f i c a l l y aim ed a t r e g i s
t e r e d in v e s tm e n t c o m p a n ie s an d u n d e r w r i t e r s o r d e p o s i t o r s
o f t h e s e c o m p a n ie s o f f e r i n g o r d i s t r i b u t i n g c e r t i f i c a t e s
o f p e r i o d i c paym ent p l a n s . The a c t made i t u n la w f u l f o r
t h e s a l e s lo a d o f su c h p l a n s t o e x c e e d 9 p e r c e n t o f t h e
t o t a l am ount p a i d - i n o v e r t h e l i f e o f a p l a n an d n o t m ore
t h a n 50 p e r c e n t o f t h i s t o t a l s a l e s lo a d c o u ld b e e x a c te d
d u r i n g t h e f i r s t y e a r o f a p l a n . I t w as u n la w f u l t o h a v e
a p r o p o r t i o n a t e i n c r e a s e fro m t h e i n i t i a l am ount o f t h e
s a l e s lo a d e x a c te d d u r i n g s u b s e q u e n t p a y m e n ts a n d a l s o t h e
am ount o f t h e s a l e s lo a d c o l l e c t e d d u r i n g t h e i n i t i a l p a y
m e n ts c o u ld n o t b e p r o p o r t i o n a t e l y g r e a t e r th a n f u t u r e
The I n v e s tm e n t Company A ct o f 1940 ; P u b l i c —
N o. 7 6 8 - 7 6 th C o n g r e s s ; C h a p te r 6 8 6 -3 d S e s s io n ; H .R . 1 0 0 6 5 .
59
d e d u c t i o n s . The A c t l i m i t e d i n i t i a l p a y m e n ts t o a minimum
o f #20.00 and s u b s e q u e n t p a y m e n ts t o a minimum o f # 10. 0 0 .2
M anagem ent f e e s t o c o v e r t h e e x p e n s e o f in v e s tm e n t
a d v i s o r y s e r v i c e s o r s p o n s o r p o r t f o l i o m anagem ent w ere
l i m i t e d t o a r e a s o n a b l e am ount p r e s c r i b e d b y t h e S e c u r i t i e s
a n d E xchange C o m m issio n . The C om m ission i s e n t i t l e d t o
g r a n t q u a l i f i e d e x e m p tio n s on t h e maximum p e r c e n t o f
s a l e s l o a d , t h e l i m i t a t i o n s o f tim e p e r t a i n i n g t o s a l e s
lo a d d e d u c t i o n s , t h e p r o p o r t i o n a t e I n c r e a s e o f i n i t i a l
p a y m e n ts t o s u b s e q u e n t p a y m e n ts and p r o p o r t i o n a t e i n c r e a s e
o f f u t u r e p a y m e n ts t o i n i t i a l p a y m e n ts . T h e se e x e m p tio n s
a r e b a s e d upon t h e p r e m is e t h a t many o f t h e s m a l l e r
c o m p a n ie s w ould e n c o u n te r r e l a t i v e l y h i g h e r c o s t s o f
o p e r a t i o n th a n t h e l a r g e r a n d m ore i n t e g r a t e d c o m p a n ie s . 3
I t becam e u n l a w f u l f o r a n y u n d e r w r i t e r , d e p o s i t o r
o r in v e s tm e n t com pany t o s e l l a c e r t i f i c a t e t h a t i s n o t
r e d e e m a b le . A l l p a y m e n ts o f p l a n s , l e s s t h e n e c e s s a r y
s a l e s lo a d d e d u c t i o n s , m u s t b e d e p o s i t e d w i t h a c u s t o d i a n
o r t r u s t e e m e e tin g e e r t a i n s p e c i f i c a t i o n s s e t f o r t h b y t h e
S e c u r i t i e s and E x ch an g e C o m m issio n . The A c t s t i p u l a t e s
th e c o l l e c t i o n s a n d c h a r g e s a l l o w a b l e t o t h e t r u s t e e o r
" 2 1 ' *""" " -
SEC R e p o r t on C om panies S p o n s o rin g I n s t a l l m e n t
I n v e s tm e n t P l a n s , p . 4 5 .
5
I b i d .
40
c u s t o d i a n a n d t h e s p o n s o r . F u r th e r m o r e , c e r t a i n p ro v is io n s
g o v e r n in g t h e r e l a t i o n o f t h e s p o n s o r an d t h e t r u s t e e a r e
s e t f o r t h i n t h e i n d e n t u r e a s s p e c i f i e d by t h e I n v e s tm e n t
Company A c t . 4
The d e v e lo p m e n t o f t h i s ty p e o f f i n a n c i a l p l a n
s i n c e 1940 h a s b e e n q u i e s c e n t when com pared t o t h e b u s i
n e s s d o n e b y t h e i n d u s t r y i n t h e d e c a d e fro m 1930 t o 1 9 4 0 .
The o l d e s t p ro g ra m i s t h a t o f F i r s t I n v e s t o r s C o r p o r a t i o n
w h ic h was known a s F i r s t I n v e s t o r s S h a re s C o r p o r a t i o n
p r i o r t o A p r i l 2 3 , 1 9 4 8 .5 I t w as o r i g i n a l l y i n c o r p o r a t e d
i n New Y ork on Ju n e 7 , 1 9 3 9 .6 T h is p l a n a f f o r d s W ellin g to n
Fund S h a r e s t o b e p u r c h a s e d on an i n s t a l l m e n t p l a n b a s i s . 1 7
Commonwealth I n v e s tm e n t Company, I n c . , o f f e r s a " m u l t i p l e
p u r c h a s e p ro g ram " f o r s y s t e m a t i c i n v e s tm e n t i n s h a r e s o f
Commonwealth I n v e s tm e n t F u n d . 8 H a m ilto n F u n d s , I n c . ,
s t a r t e d t h e H-DA S e r i e s o r H a m ilto n Fund P e r i o d i c I n v e s t
m en t P la n I n 1 9 4 7 .9 Of r e c e n t d e v e lo p m e n t, May o f 1949,
4 I b i d . , p . 4 6 .
5
C h au n eey L . W a d d e ll, "O ur G r e a t e s t I n v e s tm e n t
P o t e n t i a l — And a Way t o D e v e lo p I t , " The I n v e s tm e n t
D e a l e r s D i g e s t , A u g u st 1 5 , 1 9 4 9 , p . l 7 T “
6
F i r s t I n v e s t o r s C o r p o r a t i o n P r o s p e c t u s , D ecem ber
1 , 1 9 4 8 .
7 I b i d .
8
Commonwealth I n v e s tm e n t C o ., P r o s p e c t u s , A p r i l
1 8 , 1 9 4 9 .
9 H a m ilto n Fund P e r i o d i c I n v e s tm e n t P la n
41
I s t h e p l a n o f C a lv in B u l lo c k , I n c . , o f f e r i n g a “d i v id e n d
t h r i f t p l a n 1 1 f o r t h e p e r i o d i c a c c u m u la tio n o f D iv id e n d
S h a r e s , I n c . 10 U n ite d F u n d s , I n c . , s e t up The U n ite d
A c c u m u la tiv e Fund i n 1940 f o r t h e p u r c h a s e o f t r u s t
s h a r e s on an i n s t a l l m e n t p l a n b a s i s . I n F e b r u a r y , 1 9 4 9 ,
t h e p l a n was r e r e g i s t e r e d a n d r e v i s e d , t a k i n g t h e name o f
a " p e r i o d i c I n v e s tm e n t p l a n . " H ow ever, t h e f u n c t i o n o f
t h e p l a n r e m a in s t h e sam e. 11 The p o r t f o l i o o f t h e u n d e r
l y i n g s e c u r i t i e s o f F i r s t I n v e s t o r s C o r p o r a t i o n and
Commonwealth I n v e s tm e n t Company i s r e p r e s e n t e d b y g o v e rn
m ent b o n d s , c o r p o r a t e b o n d s , p r e f e r r e d s t o c k s a n d common
s t o c k s i n p r o p o r t i o n a t e am o u n ts a s d e te r m in e d b y t h e
g ro u p h a n d l i n g t h e m anagem ent o f t h e r e s p e c t i v e p o r t
f o l i o s . The u n d e r l y i n g s e c u r i t i e s o f U n ite d A c c u m u la tiv e
Fund a r e c o r p o r a t e b o n d s and common s t o c k s . D iv id e n d
S h a r e ’ s , p o r t f o l i o i s com posed o f g o v e rn m e n t b o n d s ,
p r e f e r r e d s t o c k s an d common s t o c k s . The u n d e r l y i n g s e c u r i
t i e s o f H a m ilto n Fund P e r i o d i c I n v e s tm e n t P l a n a r e common
s t o c k s .
I n o r d e r t o g a i n an a p p ro x im a te t o t a l v a lu e f o r
P r o s p e c t u s , A p r i l , 1 9 4 9 , p . 1 2 .
1 0
D iv id e n d S h a r e s P r o s p e c t u s , A u g u st 1 7 , 1 9 4 9 .
11
U n ite d F u n d s , I n c . , P r o s p e c t u s , J a n u a r y 2 0 ,
1 9 49.
42
t h e s e p l a n s , t h e n e t a s s e t v a lu e o f t h e t r u s t s h a r e s o f
e a c h p l a n h a s b e e n g a t h e r e d fro m f i n a n c i a l r e p o r t s o r
e s t i m a t e d fro m p a s t y e a r l y a v e r a g e s * S in c e t h e n e t a s s e t
v a l u e s o f t h e t r u s t s h a r e s o f Commonwealth I n v e s tm e n t
Com pany’ s M u l t i p l e P u r c h a s e P la n an d t h e D iv id e n d T h r i f t
P la n o f D iv id e n d S h a r e s , I n c . , w e re n o t a v a i l a b l e , i t was
n e c e s s a r y t o e s t i m a t e from p a s t f i n a n c i a l d a t a t h e n e t
a s s e t v a l u e o f t h e s e p l a n s a s o f D ecem ber 3 1 , 19 5 0 ;
D iv id e n d S h a r e s , I n c . , a s o f A p r i l 3 0 , 1 94 9 , showed
n e t a s s e t s o f $ 6 0 ,4 2 8 ,5 3 5 .3 3 a p p l i c a b l e t o 4 5 ,2 0 7 ,7 5 3
s h a r e s * F o r t h e f i s c a l y e a r 1 9 4 7 , 4 ,3 4 6 ,7 0 5 s h a r e s w e re
s o l d ; f o r f i s c a l y e a r 1 9 4 8 , 4 ,6 5 9 ,0 6 2 s h a r e s w ere s o l d ;
a n d s i x m o n th s e n d ed A p r i l 3 0 , 1 9 4 9 , 3 ,3 3 4 ,1 5 8 s h a r e s w e re
s o ld * I n May o f 1 9 4 9 , t h e D iv id e n d T h r i f t P la n commenced
o p e r a t i o n . On D ecem ber 3 1 , 1 9 5 0 , t h e r e w e re 5 1 ,2 5 3 ,9 5 4
s h a r e s o u t s t a n d i n g w i t h a t o t a l n e t a s s e t v a lu e o f
$ 8 9 ,5 9 3 ,7 4 5 . By u t i l i z a t i o n o f t h e s h a r e s s o l d f o r 1947
a n d 1 9 4 8 , a y e a r l y s a l e s a v e r a g e o f 4 ,5 0 2 ,8 8 3 s h a r e s i s
o b t a i n e d . The num ber o f s h a r e s s o l d f o r t h e s i x m o n th s
e n d ed A p r i l 3 0 , 1 9 4 9 , was n o t u s e d s i n c e t h i s f i g u r e when
p r o j e c t e d o v e r t h e f i s c a l y e a r 1950 d o e s n o t seem r e p r e
s e n t a t i v e o f t h e s h a r e s o u t s t a n d i n g on D ecem ber 3 1 , 1950*
H ow ever, t h e num ber o f s h a r e s s o l d d u r i n g t h i s s i x m o n th s
p e r i o d w as u s e d t o com pute t h e t o t a l s h a r e s s o l d i n 1949
43
u s i n g t h e e s t a b l i s h e d y e a r l y a v e ra g e * T h is f i g u r e was
a d d e d t o t h e e s t i m a t e d A v e ra g e s a l e s o f 1950 a n d t h e t o t a l
s u b t r a c t e d fro m t h e i n c r e a s e o f o u t s t a n d i n g s h a r e s b e tw e e n
A p r i l 3 0 , 1 9 4 9 , a n d D ecem ber 3 1 , 1 9 5 0 . I t s h o u ld be n o t e d
( s e e T a b le I I ) t h a t t h e r e i s a d i s c r e p a n c y o f two m o n th s
i n th e 1949 a v e r a g e s a l e s . I n o r d e r t o o b t a i n a r e l a t i v e
n e t a s s e t v a l u e f o r t h i s p l a n , i t w as n e c e s s a r y t o assum e
t h a t 3 ,3 3 4 ,1 5 8 s h a r e s w ere s o l d f o r t h e s i x m o n th s en d ed
J u n e 3 0 , 1 9 4 9 , and n o t A p r i l 3 0 , 1 949.
By t h i s e s t i m a t e , a p p r o x i m a t e ly 3 7 7 ,5 9 3 s h a r e s
w e re s o l d th r o u g h t h e D iv id e n d T h r i f t P l a n . As o f December
3 1 , 1 9 5 0 , e a c h D iv id e n d S h a re h a d a n e t a s s e t v a l u e o f
$ 1 .7 5 . T h e r e f o r e t h e t o t a l n e t a s s e t v a l u e o f s h a r e s
s o l d t h r o u g h t h e D iv id e n d T h r i f t P la n w as e s t i m a t e d t o
b e a p p r o x i m a t e ly # 6 6 0 ,7 8 7 .7 5 * T h is f i g u r e s h o u ld n o t be
c o n s t r u e d a s an e x a c t r e p r e s e n t a t i o n a s t h e r e w e re s e v e r a l
v a r i a b l e s ta k e n i n t o a c c o u n t . H ow ever, f o r o u r p u r p o s e s ,
we c an assum e w i t h s a f e t y t h a t t h e n e t a s s e t v a lu e o f
s h a r e s s o l d t h r o u g h t h i s p l a n a s o f D ecem ber 3 1 , 1 9 5 0 ,
w as n o t i n e x c e s s o f # 1, 000, 000.
As o f D ecem ber 3 1 , 1 9 4 9 , a p p r o x i m a t e ly 28 p e r c e n t
o f Commonwealth I n v e s tm e n t Company s h a r e h o l d e r s u s e d t h e
M u l t i p l e P u r c h a s e P r o g r a m . ^2 j n o r d e r t o a r r i v e a t a n e t
i o ....................................... . *
A r t h u r W ie s e n b e r g e r , I n v e s tm e n t C o m p an ies, p . 132
44
TABLE I I
DIVIDEND SHARES, INC.
Estimate of number of shares sold through Dividend T hrift Plan
Shares outstanding as of December 31, 1950 . . . . . . 51,253,9541
Shares outstanding as of April 30, 1949. . . ................. 45,207,752^
Shares sold from A pril 30, 1949, to December 31, 1950. 6,049,201
Shares sold f is c a l year 1947 . . . . 4,346,705^
Shares sold f is c a l year 1948 . . . . 4,659,062^
2)9,005,767
Average yearly shares sold . . . . 4,502,883
Estimated shares sold from A pril 30, 1949 to
December 31, 1949 .................. 1,168,725*
Estimated shares sold fo r f is c a l year 1950 .................. 4,502,883
Total estim ate of shares sold from April 30, 1949 to
December 31, 1950 ..................... 5,671,608
Total Dividend Shares sold from A pril 30, 1949
to December 31, 1950 . 6,049,201
Total estim ate of Dividend Shares sold from
A pril 30, 1949 to December 31, 1950
other than Dividend T h rift Plan . . . . . 5,671,608
Estimated shares sold thru Dividend T h rift Plan. 377,593
Net a ss e t value per share as o f December 31, 1950 . . . . $1#755
Estimated n et a sse t value of shares sold through
Dividend T h rift Plan as o f December 31, 1950. .$ 660,787.75.
*
Based on assumption that 3,334,158 shares were sold for the s ix
months ended June 30, 1949.
* Moody1s Banks-Insurance-Real Estate-Investm ent Trusts.
John Moody 1951. Moody’ s Investors' Service.
2
Dividend Shares, I n c ., Prospectus, August 17, 1949, p. 12.
3 I b i d »» P« 6 -
4
Ib id.
g
Moody's Banks-Insurance-Real Estate-Investm ent Trusts.
45
a s s e t v a lu e o f s h a r e s p u r c h a s e d u n d e r t h e m u l t i p l e p u r
c h a s e p ro g ra m , l e t u s assum e e q u a l d i s t r i b u t i o n o f a l l
o u t s t a n d i n g s h a r e s and a l s o t h a t 28 p e r c e n t o f t h e s h a r e
h o l d e r s u s e d t h e m u l t i p l e p u r c h a s e p ro g ram a s o f D ecem ber
3 1 , 1 9 5 0 . The n e t a s s e t v a lu e o f Commonwealth I n v e s tm e n t
Company s h a r e s w as § 2 6 ,2 9 2 ,2 2 2 on D ecem b er, 1 9 5 0 .- ^
T w enty e i g h t p e r c e n t o f t h i s f i g u r e g i v e s u s an a p p r o x i
m a tio n o f § 7 ,3 6 1 ,8 2 2 .1 6 r e p r e s e n t a t i v e o f t h e n e t a s s e t
v a lu e o f a l l s h a r e s s o l d t h r o u g h t h e m u l t i p l e p u r c h a s e
p ro g ra m a s o f D ecem ber 3 1 , 1 9 5 0 .
F i n a n c i a l r e p o r t s r e v e a l e d t h e n e t a s s e t v a l u e s o f
t h e t r u s t s h a r e s o f t h e r e m a in in g t h r e e p l a n s t o b e a s
f o l l o w s : F i r s t I n v e s t o r s C o r p o r a t i o n on S e p te m b e r 3 0 ,
1 9 5 0 , § 1 6 ,0 1 8 ,6 3 3 j H a m ilto n Fund P e r i o d i c I n v e s tm e n t P la n
on A p r i l 3 0 , 1 9 5 0 , § 1 ,4 4 4 ,0 2 4 ; a n d U n ite d A c c u m u la tiv e
Fund on D ecem ber 3 1 , 1 9 5 0 , § 2 ,9 3 7 ,9 1 8 .
The t o t a l n e t a s s e t s o f t h e s e p l a n s o f f e r i n g
p e r i o d i c paym ent p ro g ra m s i n 1950 am o u n ted t o a p p r o x im a te
l y § 2 8 ,4 2 3 ,1 8 5 . T h is f i g u r e s h o u ld n o t b e c o n s t r u e d a s an
e x a c t a m o u n t, b u t m e r e ly a s an e s t i m a t e o f t h e r e l a t i v e
m o n e ta r y v a lu e o f t h e i n d u s t r y i n t h e y e a r 1 9 5 0 . I n
-----------------I g ---------------------
Jo h n M oody, Moody* s B anka- I n s u r a n c e - R e a l E s t a t e -
I n v e s tm e n t T r u s t s , M oody’ s I n v e s t o r s ’ S e r v i c e , p . 2 7 .
14
I b id .
46
c o m p a ris o n t o t h e p e r i o d fro m 1930 t o 1 9 3 7 , $ 4 5 ,5 4 0 ,0 0 0
was t h e a c t u a l am ount i n v e s t e d i n t h e u n d e r l y i n g I s s u e s
r e p r e s e n t i n g i n v e s t o r s p a y m e n ts a n d t h e p o r t i o n o f d i v i
d e n d s u s e d f o r r e in v e s t m e n t * T h is f i g u r e i s o b t a i n e d
from a p p r o x i m a t e ly 33 p l a n s , w h ich m ade up t h e g r e a t e r
p o r t i o n o f t h e t o t a l b u s i n e s s d o n e b y t h e i n d u s t r y from
1930 t o 1 9 3 7 .15
D ev elo p m en t o f p e r i o d i c p ay m en t p l a n s f o r t h e
a c c u m u la tio n o f s h a r e s o f an i n d i v i d u a l common s t o c k h a s
b e e n r e l a t i v e l y r e c e n t i n t h e in v e s tm e n t f i e l d . I n 1 9 3 8 ,
Q uinby an d Company, I n c . , w as fo rm ed f o r t h e p u r p o s e o f
a s s i s t i n g i n v e s t o r s i n a c c u m u la tin g s h a r e s o f E astm an
Kodak Company on a p e r i o d i c p ay m en t b a sis.* -® Q uinby a n d
Company i s r e g i s t e r e d u n d e r t h e S e c u r i t i e s a n d E xchange
A ct o f 1934 a s a b r o k e r a n d d e a l e r . The Company i s r e g i s
t e r e d u n d e r The I n v e s tm e n t Company A c t o f 1 9 4 0 . I n Ju n e
o f 1 9 5 0 , Q u in b y an d Company o f f e r e d a new p l a n f o r t h e
a c c u m u la tio n o f s h a r e s o f E . I . Du P o n t De N em ours a n d
Company. The s e l l i n g o f Q uinby a n d Company i s l i m i t e d t o
15 M oody, £ £ . c i t j . , p . 1 7 .
16
The Q uin by P la n f o r A c c u m u la tio n o f Common S to c k
o f E astm an K odak Company, S u p p le m e n ta l P r o s p e c t u s ,
Ju n e 2 2 , 1950•
4 7
t h e S t a t e s o f D e la w a re and New Y o rk .-* -7
I n O c to b e r o f 1 9 4 9 , A rm rey Company, I n c . , was
fo rm ed f o r t h e p u r p o s e o f s p o n s o r in g t h e A r m f ie ld P l a n ,
w h ic h commenced o p e r a t i o n i n J a n u a r y o f 1 9 5 0 , w i t h t h e
o b j e c t i v e o f a s s i s t i n g i n v e s t o r s i n a c c u m u la tin g s h a r e s
o f new C l a s s B common s t o c k o f R . J . R e y n o ld s T o b acco
Company on a p e r i o d i c paym ent b a s i s . A rm rey Company,
I n c . , i s r e g i s t e r e d u n d e r t h e S e c u r i t i e s a n d E x ch an g e A c t
o f 1934 a s a b r o k e r a n d d e a l e r a n d u n d e r t h e I n v e s tm e n t
Company A c t o f 1 9 4 0 . S e l l i n g i s l i m i t e d t o t h e S t a t e o f
N o r th C a r o lin a .^ ®
A lso a new com er t o t h i s f i e l d i s t h e C a p i t a l
R e s e rv e C o r p o r a t i o n w h ic h a s s i s t s i n v e s t o r s o f W a s h in g to n ,
D . C . , i n a c c u m u la tin g s h a r e s o f Potom ac E l e c t r i c Pow er
Company on a p e r i o d i c paym ent b a s i s .
As o f M arch 3 1 , 1 9 5 0 , t h e n e t a s s e t v a l u e o f t h e
t r u s t s h a r e s o f t h e Q uin by P la n f o r t h e A c c u m u la tio n o f
S h a r e s o f E astm an K odak Company w as $ 1 , 3 3 5 , 7 0 3 . 0 3 . ^
The Q uinby P la n f o r A c c u m u la tio n o f Common S to c k
o f E . I . Du P o n t De Nem ours an d Company, S u p p le m e n ta l
P r o s p e c t u s , J u l y 5 , 1 9 5 1 .
---------
The A r m f ie ld P la n f o r t h e A c c u m u la tio n o f gSiares
New C l a s s B Common S to c k o f R. J . R e y n o ld s T o bacco
Company P r o s p e c t u s , J u l y 2 7 , 195>1.
The Q uinb y P la n f o r A c c u m u la tio n o f Common S to c k
o f E astm an Kodak Com pany, S u p p le m e n ta l P r o s p e c t u s ,
J u n e 2 2 , 1 9 5 0 , p • 1 4 .
48
The n e t a s s e t v a lu e o f t h e t r u s t s h a r e s o f t h e Q uinby
P la n f o r t h e A c c u m u la tio n o f S h a re s o f E . I . Du P o n t De
N em ours a n d Company on A p r i l 3 0 , 1 9 5 1 , was f>1 9 8 , 6 0 5 , 6 0 . ^
On M arch 3 1 , 1 9 5 1 , t h e n e t a s s e t v a lu e o f t h e t r u s t s h a r e s
o f t h e A r m f ie ld P l a n f o r A c c u m u la tio n o f New C la s s B
Common S to c k o f R. J . R e y n o ld s T o b acco Company was
# 8 1 , 6 1 2 * 4 3 . The n e t a s s e t v a lu e o f t h e t r u s t s h a r e s o f
C a p i t a l R e s e rv e C o r p o r a t i o n was n o t a v a i l a b l e . I n o r d e r
to a r r i v e a t an a p p ro x im a te v a lu e o f p l a n s f o r t h e a c
c u m u la tio n o f i n d i v i d u a l s t o c k s , l e t u s assum e th e t r u s t
s h a r e s o f C a p i t a l R e s e rv e C o r p o r a t i o n h a v e a n e t a s s e t
v a lu e o f t h e a v e r a g e n e t a s s e t v a lu e o f t h e Q uinby P l a n
f o r th e A c c u m u la tio n o f Common S to c k o f E . I . Du P o n t De
Nem ours and Company and t h e A r m f ie ld P l a n , T h is w ould
g i v e u s an a r b i t r a r y v a lu e o f # 1 4 0 ,1 0 9 .0 2 f o r t h e t r u s t
s h a r e s o f C a p i t a l R e s e rv e C o r p o r a t i o n ,
By u t i l i z a t i o n o f t h i s a r b i t r a r y f i g u r e , i t i s
p o s s i b l e t o a p p ro x im a te t h e t o t a l v a lu e o f t h i s ty p e o f
f i n a n c i a l p ro g ra m . The t o t a l n e t a s s e t v a lu e o f t h e t r u s t
s h a r e s o f t h e s e f o u r p l a n s w ould be a b o u t # 1 ,7 5 6 ,0 3 0 .0 8 .
20
The Q uinby P la n f o r A c c u m u la tio n o f Common S to c k
o f E. I . Du P o n t De Nem ours a n d Com pany, S u p p le m e n ta l
P r o s p e c t u s , J u l y 5 , 1 9 5 1 , p . 1 5 .
21
The A r m f ie ld P la n f o r t h e A c c u m u la tio n o f S h a re s
49
I n c o m p a r is o n , t o t a l n e t a s s e t s o f p l a n s s e l l i n g i n v e s t
m en t com pany s t o c k s on a p e r i o d i c p ay m en t b a s i s i n 1950
w as e s t i m a t e d t o b e a p p r o x i m a t e ly |> 2 8 , 4 2 3 , 1 8 5 . ^
The l a s t tw o d e c a d e s h a v e w i t n e s s e d s h a r p c h a n g e s
i n t h e in v e s tm e n t i n d u s t r y * The r e d i s t r i b u t i o n o f w e a l t h
d u r i n g t h i s p e r i o d a n d ev en some y e a r s b e f o r e h a s b r o u g h t
a b o u t t h e g r a d u a l d e p l e t i o n o f t h e w e a lth y c u s to m e r i n t h e
I n v e s tm e n t f i e l d . D u rin g t h i s p e r i o d , h o w e v e r, t h e r e h a s
b e e n a s h a r p i n c r e a s e o f t o t a l w e a l t h i n t h e U n ite d
S t a t e s * The m a j o r i t y o f i n v e s t o r s t o d a y a r e n o t th e
w e a l t h y c u s to m e r s o f tw e n ty t o t h i r t y y e a r s a g o , b u t
p e r s o n s r e p r e s e n t a t i v e o f t h e a v e r a g e a n d h ig h - m id d le
Incom e g ro u p s* T h is m ean s t h a t t h e r e h a s b e e n a d e f i n i t e
t r e n d to w a rd a g r e a t e r num ber o f i n v e s t o r s w i t h a s m a l l e r
i n d i v i d u a l am ount t o i n v e s t i n c o m p a ris o n t o t h e r e l a
t i v e l y l a r g e am o u n ts o f c a p i t a l I n v e s t e d b y few w e a lth y
c u s to m e r s o f p r e v i o u s y e a r s . 23
From t h e t o t a l incom e r e t u r n s i n 1 9 4 6 , a s shown
i n T a b le I I I , i t w as fo u n d a p p r o x i m a t e ly 66 p e r c e n t o f
t h e t o t a l a d j u s t e d in c o m e s w e re a c c o u n te d f o r b y t h o s e
o f New G l a s s B Common S to c k o f R . J* R e y n o ld s T o b acco
Company P r o s p e c t u s , J u l y 3 fr,T 9 5 lL . p . 3 3 .
22
I b i d . , p . 2 7 .
23 W a d d e ll, o £ . c i t . , p . 1 6 .
TABLE I I I
TREASURY DEPARTMENT'S INCOME BREAK-DOWN - 1946*
I n d i v i d u a l G ross Income Number o f R e tu rn s T o ta l A d ju s te d G ross Incom es
Under $ 4 ,0 0 0 4 4 ,4 9 8 ,0 0 0 8 9 .4 # $ 7 9 ,6 8 5 ,0 0 0 ,0 0 0 66. 2#
$ 4 ,0 0 0 to $ 1 0 ,0 0 0 4 ,4 9 8 ,0 0 0 9 .1 # 2 5 ,8 1 5 ,0 0 0 ,0 0 0 1 9 .8 #
$ 10,000 t o $20,000 509,000 1.0% 6 ,9 3 6 ,0 0 0 ,0 0 0 5 .8 #
o v e r $20,000 2 4 6 ,0 0 0 0.5% 9 ,8 6 5 ,0 0 0 ,0 0 0 8 . 2#
T o ta l 4 9 ,7 5 1 ,0 0 0 100.0% $ 1 2 0 ,3 0 1 ,0 0 0 ,0 0 0 100. 0#
U. S. T re a s u ry D e p a rtm e n t, a s Quoted in W ad e ll, e g , c i t .
w
o
51
p e r s o n s e a r n i n g $ 4 ,0 0 0 and u n d e r p e r y e a r . The g ro u p
h a v in g a t o t a l a d j u s t e d Incom e o f fro m $ 4 ,0 0 0 t o $ 1 0 ,0 0 0
p e r y e a r a c c o u n te d f o r a b o u t 20 p e r c e n t o f t h e t o t a l
a d j u s t e d in c o m e s . The r e m a in d e r o f a b o u t 14 p e r c e n t w as
a t t r i b u t e d t o t h o s e p e r s o n s h a v in g a t o t a l a d j u s t e d incom e
i n e x c e s s o f $ 10, 000.
T h is s h i f t i n t h e d i s t r i b u t i o n o f t h e n a t i o n a l
w e a l t h h a s o p e n e d new h o r i z o n s f o r th e g ro w th o f consum er
s a l e s o f p e r i o d i c p ay m en t p l a n s . A lth o u g h t h e r e e x i s t b u t
a r e l a t i v e l y few p l a n s a t t h e p r e s e n t t i m e , p o s i t i v e
i n t e r e s t i s b e in g shown by many o f t h e d e a l e r s i n M u tu a l
F u n d s . T oday a b o u t t h r e e - f o u r t h s o f t h e t o t a l e a r n i n g
pow er i n t h e U n ite d S t a t e s i s r e p r e s e n t e d b y t h o s e p e r s o n s
e a r n i n g $ 5 ,0 0 0 o r l e s s p e r y e a r . The num ber o f p e o p le i n
t h i s g ro u p p o s s e s s i n g G overnm ent B o n d s, a s a v i n g s a c c o u n t ,
a n d l i f e i n s u r a n c e i s r e m a r k a b ly h i g h . Of t h o s e i n d i
v i d u a l s e a r n i n g an a n n u a l in com e o f b e tw e e n $ 5 ,0 0 0 an d
$ 4 ,0 0 0 , 56 p e r c e n t h a v e i n v e s t e d i n G overnm ent B o n d s,
55 p e r c e n t h av e s a v i n g s a c c o u n t s , 41 p e r c e n t h a v e c h e c k
i n g a c c o u n t s an d 90 p e r c e n t h a v e l i f e i n s u r a n c e . O nly
a b o u t 8 p e r c e n t o f t h i s gro up own s t o c k s a n d b o n d s
e x c l u s i v e o f g o v e rn m e n t s e c u r i t i e s . T a b le I ¥ g i v e s a
c o m p le te b re a k -d o w n o f t h e p e r c e n t a g e s o f G overnm ent Bonds,,
24 1
I b i d . , p . 1 6 .
52
s a v i n g s a c c o u n t s , c h e c k in g a c c o u n t s , l i f e i n s u r a n c e a n d
s t o c k s a n d b o n d s e x c l u s i v e o f g o v e rn m e n t s e c u r i t i e s
r e l a t i v e t o t h e v a r i o u s incom e g r o u p s . 25
Prom t h e s e s t a t i s t i c s i t c an b e assu m ed t h a t t h e
g e n e r a l p u b l i c f o r th e m o s t p a r t h a s g r a d u a l l y d e v e lo p e d
a d e s i r e f o r maximum s e c u r i t y c o u p le d w i t h a minimum
d e g r e e o f r i s k . T h is p e r h a p s a c c o u n t s f o r t h e com para
t i v e l y low p e r c e n t a g e s o f t h e incom e g r o u p s ow ning s t o c k s
an d b o n d s a s shown i n T a b le IV . The p e r i o d i c paym ent
p l a n i s a b l e t o f u l f i l l t h e d e s i r e o f t h e lo w e r- m id d le i n
come g ro u p f o r a f i e l d o f in v e s tm e n t i n s t o c k s and b o n d s
w h ich a f f o r d s t h e s e c u r i t y a n d m i n i m i z a t i o n o f r i s k w h ich
t h e s e g r o u p s dem and.
The g ro w th o f c o n su m er s a l e s o f t h e s e p l a n s h a s
s t e a d i l y i n c r e a s e d e a c h y e a r . S in c e a p p r o x i m a t e ly t h r e e -
f o u r t h s o f t h e n a t i o n a l incom e i s a c c o u n te d f o r by t h e
g ro u p e a r n i n g $ 5 ,0 0 0 o r l e s s p e r y e a r , t h e t r e n d h a s b e e n
t o im p r e s s upon t h e s e p e o p le t h e im p o r ta n c e o f i n v e s t i n g
s m a ll sums p e r i o d i c a l l y i n t h e s e p l a n s a s t h e in v e s tm e n t
m oney i s e a r n e d . The p o l i c y t o " i n v e s t a s y o u e a r n " i s
c e r t a i n l y an i m p o r t a n t s e l l i n g p o i n t . I f n o t d o n e i n t h i s
25
W a d d e ll, 0£ . c l t . , p . 1 7 .
53
TABLE IV
P E R C E N T A G E S O P PE R SO N S IN V A R IO U S IN C O M E G R O U P S
H A V IN G SECURITIES, INSURANCE, BA N E DEPOSITS*
Annual income
Government
bonds
Savings
account
Checking
account
L ife
insurance
Stocks
and bonds
#3,000 to #4,000 56 % > 55 % 41 % 90 % 8 %
#4,000 to #5,000 61# 5 8 % 50 % 89 % 10 %
#5,000 to #7,500 69% 67 % 69 % 93 % 21 %
#7,500 and over 86 % 76 % 86 % 91 % 49 %
A ll groups** 48 % > 46 % 39 % 78 % 9%
* Information for t h is ta b le from data compiled by the National
In d u strial Conference Board and quoted in Waddell, op, o i t .
**Includes those under #3,000.
54
m a n n e r, t h e a v e r a g e i n d i v i d u a l w i l l r a r e l y sa v e enough t o
i n v e s t i n s e c u r i t i e s a f t e r p r o v i d i n g f o r s a v i n g s a n d l i f e
i n s u r a n c e * The p l a n s s t r e s s t h e f a c t t o p o t e n t i a l
c u s to m e r s t h a t s a v i n g s , u s u a l l y e q u i v a l e n t t o s i x m o n th s
w a g e s , and a d e q u a te l i f e i n s u r a n c e s h o u ld be p r e r e q u i s i t e
b e f o r e c o n s i d e r i n g su c h a p la n * T h is a d v ic e h a s p r o b a b l y
d o n e m o re t o s t r e n g t h e n t h e g ro w th o f t h e s e p ro g ra m s t h a n
t o h i n d e r t h e i r d e v e lo p m e n t*
T h e s e p e o p le a r e im p r e s s e d w ith t h e c o n c e p t o f
b e co m in g " c a p i t a l i s t s " and p a r t i c i p a t i n g i n t h e p r o f i t s
a s s o c i a t e d w ith t h e o w n e rs h ip o f A m erican i n d u s t r y . T h ese
p l a n s o f f e r t h e c h a n c e f o r t h i s d e s i r e t o be r e a l i z e d *
The s e m i-c o m p u ls o ry n a t u r e o f p a y m e n ts i n s t i l l s i n i n d i
v i d u a l s a s e n s e o f p e r i o d i c a l l y s a v i n g a sum o f m oney
w h ic h w o u ld o r d i n a r i l y be w a s te d e a c h m onth b e c a u s e o f t h e
su p p o s e d i n c o n s e q u e n t i a l I n v e s tm e n t v a lu e o f su c h a s m a ll
sum*
Many p e r s o n s w ould l i k e t o own s t o c k s an d b o n d s ,
b u t t h e r e a l i t y o f s e t t i n g a s i d e a c e r t a i n sum a t r e g u l a r
i n t e r v a l s t o a c c u m u la te f o r a n i n d i v i d u a l p u r c h a s e i s
seld o m r e a l i z e d . T h e re i s u s u a l l y some i n t e r v e n i n g
e x p e n s e o r s u p p o s e d ly n e c e s s a r y e x p e n d i t u r e w h ic h d e p l e t e s
t h i s in v e s tm e n t r e s e r v e . I n c a s e s w h e re a s u f f i c i e n t
r e s e r v e h a s been a c c u m u la te d f o r an i n d i v i d u a l p u r c h a s e
55
i n t h e m a r k e t , t h e i n v e s t o r i s u s u a l l y i n a q u a n d a ry a s
t o w h a t s e c u r i t y t o b u y , t h e d e g r e e o f r i s k i n v o l v e d and
w h a t c a n be a c c o m p lis h e d i n a t t a i n i n g d i v e r s i f i c a t i o n *
U s u a l l y t h i s ty p e o f i n v e s t o r i s u n s e a s o n e d i n m ak in g t h e
p r o p e r d e c i s i o n an d f o r g o e s p r o p e r d i v e r s i f i c a t i o n an d
p r o t e c t i o n o f p r i n c i p a l *
T h e se f a c t o r s h a v e s t i m u l a t e d t h e g ro w th o f
p e r i o d i c p l a n s . The s m a ll i n v e s t o r i s r e l e a s e d fro m h i s
h a p h a z a r d d e c i s i o n s i n b u y in g a n d s e l l i n g s e c u r i t i e s *
Maximum d i v e r s i f i c a t i o n an d p r e s e r v a t i o n o f p r i n c i p a l a r e
a c c o m p lis h e d * The u n d e r l y i n g s e c u r i t i e s a r e m anaged by
c o m p e te n t in v e s tm e n t a d v i s o r s w hose aim i s t o s e c u r e
maximum s e c u r i t y f o r t h e p l a n h o l d e r s and y e t m a i n t a i n a
r e a s o n a b l e d i v id e n d r a t e and a f f o r d p o s s i b i l i t i e s f o r
a p p r e c i a t i o n o f u n d e r l y i n g s e c u r i t i e s *
The f a c t o r s d i s c o u r a g i n g t h e g ro w th o f t h e s e
p ro g ra m s h av e b e e n m u l t i p l e * P o s s i b l y t h e l e a d i n g d e t e r
r e n t f a c t o r s h a v e b e e n : t h e q u e s t i o n o f e x c e s s i v e c h a r g e s
and f e e s , u n p l e a s a n t m em o rie s o f s i m i l a r p l a n s p r i o r t o
1 9 4 0 , a f e e l i n g o f a p p r e h e n s i o n o v e r t h e s p e c u l a t i v e
a s p e c t a s s o c i a t e d w i t h s t o c k s an d b o n d s , a n d i n c r e a s e d
t a x e s c o u p le d w i t h t h e r i s i n g c o s t o f l i v i n g *
The l o a d i n g c h a r g e e n c o u n te r e d d i s c o u r a g e s many
p o t e n t i a l i n v e s t o r s who do n o t c l e a r l y u n d e r s t a n d t h e
56
f u n c t i o n o f t h e p l a n a n d t h e s u b s e q u e n t s e r v i c e s a f f o r d e d
t h r o u g h t h e l o a d i n g c h a r g e f e e . H ow ever, t h e p l a n s a r e
s t r a i g h t f o r w a r d i n p r e s e n t i n g t h e f a c t s r e l a t i v e t o
d e d u c t i o n s fro m c u s t o m e r ’ s p a y m e n ts an d t h e a p p r o p r i a t i o n
o f su c h d e d u c t i o n s . The p o l i c y t o d e d u c t o n e - h a l f o f th e
e n t i r e s a l e s l o a d d u r i n g t h e f i r s t y e a r o f a p l a n ’ s o p e r a
t i o n h a s d i s c o u r a g e d many w o u ld -b e p l a n h o l d e r s . I t i s
o f t e n o v e r l o o k e d , h o w e v e r, t h a t t h i s i s t h e same p o l i c y
f o llo w e d i n m any l i f e i n s u r a n c e c o m p a n ie s .
The p l e n a e m p h a siz e t h e im p o r ta n c e o f i n d i v i d u a l
i n v e s t o r s n o t o v e r - r e a c h i n g t h e i r r e s o u r c e s . The p r o
s p e c t u s o f e a c h company s p e c i f i e s t h a t a p l a n s h o u ld n o t
b e u n d e r ta k e n u n l e s s t h e p l a n h o l d e r d e f i n i t e l y i n t e n d s t o
c a r r y t h e p ro g ra m t o c o m p le tio n a n d t h e i n v e s t o r f e e l s
c e r t a i n t h e p a r t i c u l a r p l a n he c h o o s e s can be a d e q u a t e l y
m a i n t a i n e d th r o u g h h i s e a r n i n g c a p a c i t y . 26
M r. W illia m J o h n s to n o f t h e O hio D i v i s i o n o f
S e c u r i t i e s r e c e n t l y g a v e h i s v ie w on t h e i n e q u i t i e s
a s s o c i a t e d w i t h t h e l o a d i n g c h a r g e .
I t h i n k i t f a i r t o assum e t h a t t h e p e r i o d i c p a y
m ent p l a n i s p r i m a r i l y a s a l e s m ec h an ism . F o r t h e
d e a l e r s e l l i n g M u tu a l Fund s h a r e s i n i n d i v i d u a l
t r a n s a c t i o n s o r bn a v o l u n t a r y p e r i o d i c p u r c h a s e
p l a n , t h e r e g u l a r l o a d i n g c h a r g e m akes t h e s a l e
p r o f i t a b l e . T h e re i s n o n e e d f o r an e x t r a r e d e m p tio n
26
W a d d e ll, 2Ei* o l t « , p . I S .
57
I
p e n a l ty * B ut i n s a l e s t o p e r s o n s who w o u ld b u y i n
t h e s e $ 1 0 -# 2 0 -# 3 0 a m o u n ts , re m o v in g a l a r g e p a r t o f
a 10- y e a r l o a d i n g c h a r g e fro m t h e f i r s t y e a r s p a y
m e n ts d o e s tw o t h i n g s ( i n a d d i t i o n t o m a k in g t h i s
k in d o f s a l e p r o f i t a b l e ) : ( 1 ) l o c k s t h e i n v e s t o r
i n t o t h e Fund f o r f i v e t o s i x y e a r s ; a n d (2 ) p l a c e s
an e x t r a p e n a l t y on one o f t h e v e r y b e n e f i t s w h ic h
i s a s e l l i n g p o i n t , im m e d ia te r e d e e m a b i l i t y o f
s h a r e s a t n e t a s s e t v a lu e * To d e fe n d su c h a p e n a l t y
on t h e b a s i s t h a t i t c o e r c e s t h r i f t w ould a p p e a r t o
p l a c e m ore s o e i a l r e s p o n s i b i l i t y on t h e M u tu a l F u n d s
t h a n t h e y c o u ld b e e x p e c te d t o a s s u m e *27
The a b u s e s c o n n e c te d w i t h p e r i o d i c p ay m en t p l a n s
up t o t h e tim e o f t h e I n v e s tm e n t Company A c t u n d o u b te d ly
h a v e some b e a r i n g on t h e d is c o u r a g e m e n t o f t h e i r g ro w th
to d a y * I t i s u n f o r t u n a t e t h a t t h i s t y p e o f in v e s tm e n t
p ro g ra m had t o u n d e rg o su c h d e c e i t a n d c o r r u p t i o n i n i t s
e a r l y d a y s . The p e o p le w ronged b y o n e o f t h e s e s i m i l a r
p l a n s i n t h e t h i r t i e s , w o u ld p r o b a b l y n o t c o n s i d e r i n v e s t
m en t i n su c h a p ro g ra m to d a y e v ai u n d e r t h e m o s t a d v a n
ta g e o u s p r o s p e c t s . I t i s p e r f e c t l y u n d e r s t a n d a b l e and
c an b e com pared t o t h e g e n e r a l a p a t h y to d a y o f many
p e r s o n s to w a rd s e c u r i t i e s , who I n c u r r e d s e v e r e l o s s e s I n
t h e s t o c k m a rk e t i n 1 9 2 9 .
The d e b a c le o f 1929 b r o u g h t a b o u t much c o n t r o v e r s y
on th e s p e c u l a t i v e f e a t u r e s a s s o c i a t e d w i t h t h e o w n e rs h ip
o f s t o c k s an d bonds* T h e se c o n t r o v e r s i a l I s s u e s h a v e a
P7
W illia m I . J o h n s t o n , nO hio O f f i c i a l ’ s V iew s on
P e r i o d i c P aym ent P l a n s o f M u tu a l F u n d s ,” The C o m m ercial
a n d F i n a n c i a l C h r o n i c l e , 5 1 3 :
58
b e a r i n g on t h e g ro w th o f t h e s e p e r i o d i c p a y m e n t p l a n s o f
to d a y * P r o s p e c t i v e p l a n h o l d e r s a r e in fo r m e d o f t h e r e l a
t i o n o f t h e n e t a s s e t v a lu e o f t h e i r t r u s t s h a r e s t o t h e
d a i l y f l u c t u a t i o n s o f t h e s t o c k s and b o n d s r e p r e s e n t i n g
t h e u n d e r l y i n g s e c u r i t i e s . The f l u c t u a t i o n s a r e t h e o r e t i
c a l l y o f f - s e t b y d o l l a r - a v e r a g i n g a n d c a r e f u l d i v e r s i f i
c a t i o n , b u t t o many i n d i v i d u a l s t h e s e a t t r i b u t e s a r e n o t
s t r o n g enough in d u c e m e n ts f o r t h e p a r t i c i p a t i o n i n a p l a n
r e p r e s e n t a t i v e o f s e c u r i t i e s . 2®
The i n c r e a s e o f t a x e s c o u p le d w i t h t h e r i s i n g c o s t
o f l i v i n g h a s r e s u l t e d i n a s i t u a t i o n o f fe w e r d o l l a r s
b e in g c h a n n e le d i n t o t h e in v e s tm e n t f i e l d . The d e p l e t i o n
o f in v e s tm e n t d o l l a r s f o r i n d i v i d u a l t r a n s a c t i o n s i n
s t o c k s and b o n d s h a s b e e n q u i t e e v i d e n t j t h i s t r e n d h a s
l i k e w i s e had a b e a r i n g on t h e g ro w th o f p e r i o d i c paym ent
p l a n s . W ith t a x a t i o n a t i t s p r e s e n t l e v e l and t h e
c o m p a r a tiv e p r i c e i n c r e a s e o f b a s i c n e c e s s i t i e s , many an
i n d i v i d u a l who w o u ld n o r m a l ly b e a t t r a c t e d t o t h e s e p l a n s
r e a c h e s a b r e a k - e v e n p o i n t on Incom e and e x p e n s e s a f t e r
p r o v i d i n g f o r l i f e i n s u r a n c e e x p e n s e a n d p e r h a p s d e p o s i t
i n g a s m a ll am ount i n a s a v i n g s a c c o u n t . T h is i s a s i t
28
P a u l A. J o h n s t o n , " P e r i o d i c P la n P r o v i d e s Sound
S a v in g s P ro g ra m ," B a r r e n s N a t i o n a l B u s in e s s a n d F i n a n c i a l
W ee k ly , 3 0 : 1 9 - 2 0 , A p r i l 3 , "1950•
59
s h o u ld b e , h o w e v e r, s i n c e p l a n s s h o u ld n o t b e a tt e m p t e d
u n l e s s a d e q u a te U f a i n s u r a n c e a n d an e m erg en cy c a s h
r e s e r v e a re m a in ta in e d *
On t h e c o n t r a r y , p e r h a p s c o n su m er s a l e s o f p l a n s
a r e b e in g i n c r e a s e d by th e s h i f t o f some i n v e s t o r s who
n o r m a l ly u n d e r t a k e i n d i v i d u a l t r a n s a c t i o n s t o a p e r i o d i c
paym ent m ethod o f in v e s tm e n t* H ow ever, t h e r e a r e no
r e c o r d s t o s u b s t a n t i a t e t h i s p o s s i b i l i t y .
The l i m i t a t i o n s i n f l u e n c i n g g ro w th do n o t seem t o
c o u n t e r - b a l a n c e t h e f e a t u r e s e n c o u r a g in g t h e d e v e lo p m e n t
o f t h e s e p l a n s . The a t t r i b u t e s o f d i v e r s i f i c a t i o n ,
s k i l l e d m anagem ent a n d r e l a t i v e fre e d o m from in v e s tm e n t
\
w o r r i e s a r e h i g h l y com m endable q u a l i t i e s f o r w h ich t h e r e
a r e few a l t e r n a t i v e s .
CHAPTER IV
MECHANISM AND STRUCTURE OP PERIODIC PAYMENT PLANS
The s p o n s o r com pany o r d e p o s i t o r i s t h a t o r g a n i z a
t i o n w h ich i s p r i m a r i l y r e s p o n s i b l e f o r t h e f o u n d in g o f a
p l a n and h a s c o n t i n u i n g d u t i e s an d r e s p o n s i b i l i t i e s
p e r t i n e n t t o t h e o p e r a t i o n o f t h e p l a n a f t e r i t s i n c e p
t i o n . I t i s t h e d u t y o f t h e s p o n s o r t o f i l l o u t t h e
R e g i s t r a t i o n S ta te m e n t f o r U n it I n v e s tm e n t T r u s t s a n d s u b
m it su c h s t a t e m e n t f o r a p p r o v a l t o t h e S e c u r i t i e s an d
E x ch an g e C o m m issio n . C o n ta in e d i n t h e R e g i s t r a t i o n S t a t e
m en t i s i n f o r m a t i o n on t h e s e c u r i t i e s c o n s t i t u t i n g t h e
t r u s t , t h e l o a d s , c h a r g e s , f e e s an d e x p e n s e s , t h e f a c t o r s
g o v e r n in g t h e t r u s t ’ s o p e r a t i o n , t h e o r g a n i z a t i o n o f t h e
d e p o s i t o r , a f f i l i a t e d p e r s o n s o r o f f i c i a l s o f t h e d e p o s i
t o r an d t h e c o m p e n s a tio n o f o f f i c e r s a n d d i r e c t o r s o f t h e
s p o n s o r com pany. A ls o c o n t a i n e d i n t h e R e g i s t r a t i o n S t a t e
m ent a r e t h e p r o v i s i o n s r e l a t i v e t o t h e r e d e m p tio n an d
d i s t r i b u t i o n o f s e c u r i t i e s .
The s p o n s o r i s r e s p o n s i b l e f o r d r a w in g up a s u i t a b l e
I n d e n t u r e f o r t h e p l a n , w h ich c l e a r l y d e l i n e a t e s t h e
r i g h t s and d u t i e s o f t h e t r u s t e e , t h e p l a n h o l d e r a n d t h e
s p o n s o r in g com pany. T h is i n d e n t u r e becom es b i n d i n g upon
a l l p a r t i e s c o n n e c te d w i t h su c h a p l a n .
Once a s p o n s o r company g a i n s I t s l e g a l e x i s t e n c e ,
i t f u n c t i o n s p r i m a r i l y a s a s a l e s o r g a n i z a t i o n . A l l p a y
m e n ts b y p l a n h o l d e r s a r e s u b m i tt e d t o t h e t r u s t e e , who
d e d u c t s t h e s p e c i f i e d s a l e s l o a d a n d f o r w a r d s t h e same
t o th e s p o n s o r . T h is s a l e s lo a d a c c r u i n g t o t h e s p o n s o r
m a i n t a i n s s a l e s o p e r a t i o n s , l e g a l a n d a u d i t i n g e x p e n s e s ,
o f f i c e e x p e n s e a n d t h e s a l a r i e s o f e m p lo y e e s , o f f i c e r s
an d d i r e c t o r s f e e s . T h is d i s t r i b u t i o n c h a r g e o r s a l e s
l o a d , a s i t i s m ore commonly c a l l e d , i n e s s e n c e r e p r e s e n t s
t h e co m m issio n f o r t h e d i s t r i b u t i o n and s a l e o f t h e
p e r i o d i c p ay m en t p l a n c e r t i f i c a t e s .
The s p o n s o r company i s an o r g a n i z a t i o n o f t h e
c o r p o r a t e fo rm a n d , t h e r e f o r e , m u s t com ply w i t h t h e la w s
o f t h e S t a t e u n d e r w h ic h i t i s fo rm e d . A u t h o r i z a t i o n t o
s e l l i n s t a t e s o t h e r th a n t h e one o f o r i g i n a l i n c o r p o r a
t i o n m u st b e o b t a i n e d fro m t h e a u t h o r i t i e s o f e a c h
s p e c i f i c s t a t e .
I n a d d i t i o n t o a c t i n g a s a s a l e s o r g a n i z a t i o n , t h e
company f u n c t i o n s a s a d e a l e r a n d i s a r e g i s t e r e d member
o f t h e N a t i o n a l A s s o c i a t i o n o f S e c u r i t y D e a l e r s . T h ro u g h
t h i s f u n c t i o n t h e com pany r e c e i v e s o r d e r s f o r I n v e s tm e n t
company s h a r e s fro m th e t r u s t e e . The s p o n s o r a c t i n g a s
a w h o l e s a l e r o r r e t a i l e r o f t h e s h a r e s s u p p l i e s t h e
t r u s t e e w i t h t h e n e c e s s a r y a m o u n t. I n su c h a t r a n s a c t i o n ,
t h e s p o n s o r com pany o f t e n r e a l i z e s a c o m m issio n t h r o u g h
62
w h o l e s a l e p u r c h a s e s .
The i n d e n t u r e a s draw n up b y t h e s p o n s o r com pany
i s t h a t i n s t r u m e n t w h ic h e n u m e r a te s t h e r i g h t s a n d d u t i e s
o f t h e p l a n h o l d e r , t h e t r u s t e e a n d t h e s p o n s o r . The p r o
v i s i o n s o f t h e i n d e n t u r e o r a g re e m e n t a r e c o n t a i n e d i n
t h e R e g i s t r a t i o n S ta te m e n t w h ic h i s s u b m itte d t o t h e
S e c u r i t i e s an d E x ch an g e C om m ission f o r a p p r o v a l .
The r i g h t s and d u t i e s o f t h e p l a n h o l d e r c o v e r su c h
p o i n t s a s p a r t i a l w i t h d r a w a l w i t h o u t t e r m i n a t i o n , c o m p le te
w ith d r a w a l an d t e r m i n a t i o n , r e i n v e s t m e n t o f d i v i d e n d s ,
r e p o r t s , s t o c k h o l d e r m e e t i n g s , d e f a u l t a n d r e i n s t a t e m e n t ,
p ay m en t a c c e l e r a t i o n , v o t i n g r i g h t s and a s s ig n m e n t o f
c e r t i f i c a t e s .
The r i g h t s a n d d u t i e s o f t h e t r u s t e e p e r t a i n
p r i n c i p a l l y t o i t s f u n c t i o n a s t h e c u s t o d i a n o f t h e p r o p
e r t y sind f u n d s o f t h e s p o n s o r an d p l a n h o l d e r . The d u t i e s
c o v e r t h e a c c e p t a n c e o f f u n d s and t h e a l l o c a t i o n o f su c h
f u n d s , r e p o r t s t o p l a n h o l d e r s , d i s t r i b u t i o n and l i q u i d a
t i o n o f s h a r e s . The p r o v i s i o n s c o v e r i n g p ay m en t o f t a x e s ,
p ay m en t o f a u d i t i n g an d l e g a l f e e s , r e s i g n a t i o n o f t h e
t r u s t e e , and r e s p o n s i b i l i t y o f t h e t r u s t e e r e g a r d i n g i n
v e s tm e n t p o l i c i e s a n d in v e s tm e n t m anagem ent a r e s e t f o r t h
i n t h e i n d e n t u r e .
The t r u s t e e i s a p p o i n t e d b y t h e s p o n s o r com pany and
63
i s e i t h e r a l a r g e b a n k in g c o n c e rn o r t r u s t i n s t i t u t i o n
h a v in g c a p i t a l , u n d iv id e d p r o f i t s a n d s u r p l u s o f a t l e a s t
$ 5 0 0 ,0 0 0 . The te rm ’’t r u s t e e 1 1 c o n n o te s t o m o st i n d i v i d u a l s
a r e s p o n s i b i l i t y e n c o m p a s s in g c h o ic e o f i n v e s t m e n t , i n
v e s tm e n t p o l i c y and in v e s tm e n t c o u n s e l ; t h e t r u s t e e o f a
t
p e r i o d i c paym ent p l a n s p e c i f i c a l l y a ssu m e s n o r e s p o n s i
b i l i t y f o r t h e s e f u n c t i o n s w h ic h a r e u s u a l l y assu m ed b y a
t r u s t e e . I t se e m s, t h e r e f o r e , i n v ie w o f t h e s e f a c t s t h a t
t h e te rm 1 1 c u s t o d i a n ” i s a m ore a p p r o p r i a t e a n d s t r a i g h t
f o r w a r d r e p r e s e n t a t i o n o f t h e b a n k in g c o n c e r n o r t r u s t
i n s t i t u t i o n . The t r u s t e e i s c o m p le te ly e x o n e r a t e d from
an y r e s p o n s i b i l i t y r e l a t i n g t o t h e s p o n s o r com pany’ s
c o m p lia n c e w ith F e d e r a l o r S t a t e Laws r e g a r d i n g r e g i s t r a
t i o n , q u a l i f i c a t i o n an d s a l e o f s e c u r i t i e s . T h is a l s o
a p p l i e s t o t h e s p o n s o r com pany’ s c o m p lia n c e w i t h a n y r u l e s ,
o r d e r s o r r e g u l a t i o n s o f a n y S t a t e o r F e d e r a l C o m m issio n s.
The s p e c i f i c d u t i e s o f t h e t r u s t e e a r e t o r e c e i v e
a l l r e m i t t a n c e s fro m t h e p l a n h o l d e r s , d i s t r i b u t e t h e
a u t h o r i z e d d e d u c t i o n s fro m su c h p a y m e n ts , r e c e i v e an d h o ld
a l l s h a r e s b e lo n g i n g t o t h e p l a n h o l d e r s , r e c e i v e an d r e
i n v e s t d i v i d e n d s fro m p l a n h o l d e r s s h a r e s u n l e s s d i r e c t e d
b y a p l a n h o l d e r t o do o t h e r w i s e , t o make a u t h o r i z e d
d e d u c t i o n s fro m su c h d i v i d e n d s , a n d t o d i s t r i b u t e o r
l i q u i d a t e e i t h e r c o m p le te ly o r p a r t i a l l y t h e s h a r e s
64
c r e d i t e d t o a p l a n h o l d e r ’ s a c c o u n t .
D i s t r i b u t i o n s a n d p a y m e n ts o f a p l a n h o l d e r a r e
a u t h o r i z e d t o be com m ingled by t h e t r u s t e e w i t h t h o s e o f
t h e o t h e r p l a n h o l d e r s . C om m ingling o f s h a r e s a r e l i k e w i s e
a u t h o r i z e d t o b e commingled w i t h t h o s e o f o t h e r p a r t i c i
p a n t s •
The t r u s t e e h a s a u t h o r i t y t o be r e im b u r s e d f o r a n y
and a l l t a x e s , p l u s t h e l e g a l a n d a u d i t o r ’ s f e e s , l e v i e d
a g a i n s t t h e t r u s t e e i n r e g a r d t o in c o m e , s a l e , t r a n s f e r ,
o r c u s to d y o f t h e s h a r e s h e l d f o r p l a n h o l d e r s . R e im b u rse
m e n t can b e p a i d e i t h e r fro m t h e d i v i d e n d s fro m s h a r e s ,
fro m p l a n h o l d e r s , o r d i r e c t l y o u t o f t h e s h a r e s th r o u g h
p a r t i a l l i q u i d a t i o n . P r o v i s i o n i s a l s o made f o r a t r u s t e e
t o w i t h h o l d f u n d s o r make d e d u c t i o n s fro m s h a r e s f o r a n y
p o s s i b l e t a x l i a b i l i t y .
The t r u s t e e may n o t r e s i g n u n l e s s n o t i c e h a s b een
g i v e n by t h e s p o n s o r t h a t t h e p l a n i s t o be t e r m i n a t e d o r
u n l e s s a new t r u s t e e h a s b e e n a p p o in t e d and h a s a c c e p t e d
t h e t r u s t a g re e m e n t a s s e t f o r t h i n t h e i n d e n t u r e .
F o r t h e v a r i o u s d u t i e s p e r f o r m e d , a m o n th ly
s e r v i c e f e e i s p a i d t o t h e t r u s t e e . The s e r v i c e f e e i s
d e d u c te d fro m t h e p l a n h o l d e r s p e r i o d i c p a y m e n ts , b u t c a n |
be r e a l i z e d fro m d i s t r i b u t i o n s on t h e s h a r e s . P r o v i s i o n
i s made f o r t h e paym ent o f t h i s s e r v i c e f e e fro m p l a n -
I 65
j h o l d e r ’ s s h a r e s i f a s u f f i c i e n t am ount i s n o t a v a i l a b l e
fro m d i v i d e n d s o r s u b s c r i b e r s p aym ent t o m e e t t h i s e x p en se.
Such a s i t u a t i o n w o u ld n o r m a l l y r e s u l t o n l y upon th e
t e r m i n a t i o n o f a p l a n b y t h e s p o n s o r com pany.
The common s t o c k fu n d i s r e p r e s e n t e d b y a p o r t f o l i o
o f s e c u r i t i e s c o n s i s t i n g s o l e l y o f s h a r e s o f common s t o c k
i n v a r y i n g p r o p o r t i o n s o f m any d i f f e r e n t i n d u s t r i e s .
E m p h asis h a s r e c e n t l y b e e n p l a c e d upon t h o s e s t o c k s r e p r e
s e n t i n g n a t u r a l r e s o u r c e s a n d p u b l i c u t i l i t i e s . H ow ever,
t h e e m p h a sis c h a n g e s fro m tim e t o tim e a c c o r d i n g t o t h e
d i s c r e t i o n u s e d by p r o f e s s i o n a l m an ag em en t. G e n e r a ll y
a p p r o x i m a t e ly 90 p e r c e n t o f t h e n e t a s s e t s o f su c h a fu n d
a r e i n v e s t e d i n t h e u n d e r l y i n g s e c u r i t i e s , t h e re m a in d e r
o f 10 p e r c e n t u s u a l l y c o n s i s t s o f c a s h o r g o v e rn m e n t —
b o n d s o r b o t h .
Of t h e p l a n s u t i l i z e d i n t h i s s t u d y , o n l y o n e co n
s t i t u t e d a common s t o c k f u n d . The g e n e r a l t h e o r y b e h in d
t h i s ty p e o f f u n d i s t h a t a v e r a g e y i e l d t o s t o c k h o l d e r s
i s g r e a t e r t h a n i n t h o s e f u n d s o f t h e l e v e r a g e ty p e * How-,
e v e r , i t s h o u ld b e s a i d t h e r i s k t o p r i n c i p a l i s p r o p o r
t i o n a t e l y g r e a t e r i n a c c o r d a n c e w ith t h e i n c r e a s e d y i e l d .
A lso when t h e b u s i n e s s c y c l e i s i n a r e l a t i v e l y p r o s p e r o u s
p e r i o d , t h e p o s s i b i l i t y o f m a rk e t a p p r e c i a t i o n I s g r e a t e r .
T h i s t y p e o f p l a n , t h e r e f o r e , i s d e s i g n e d f o r t h o s e
66
i n d i v i d u a l s who s e e k a p o s s i b l e a p p r e c i a t i o n o f p r i n c i p a l
c o u p le d w ith a r e l a t i v e l y u n s t a b l e y i e l d i n c o m p a ris o n t o
t h e s a f e t y o f p r i n c i p a l an d c o n t i n u i t y o f d i v i d e n d s o f t h e
b a l a n c e d f u n d s . • * •
The s a f e t y o f t h e I n v e s tm e n t fu n d s r e a l l y d e p e n d s
upon t h e s k i l l a c c o rd e d t h e i n v e s tm e n t m an ag em en t. I f
t h e e co n o m ic s i t u a t i o n w a r r a n t s l e v e r a g e , t h e m ak e-u p o f
t h e p o r t f o l i o c o u ld b e c h a n g e d so a s t o a f f o r d a c e r t a i n
d e g r e e o f l e v e r a g e .
The u n d e r l y i n g s e c u r i t i e s o f t h e on e p l a n o f f e r i n g
an i n v e s tm e n t com pany’ s s e c u r i t y on a p e r i o d i c paym ent
b a s i s a r e r e p r e s e n t a t i v e o f a p p r o x i m a t e ly f i f t y w e l l
e s t a b l i s h e d c o r p o r a t i o n s w ith v a r y i n g n u m b ers o f s h a r e s
o f common s t o c k o f e a c h c o r p o r a t i o n .
The b a la n c e d fu n d u s u a l l y c o n s i s t s o f b o n d s , p r e
f e r r e d s t o c k s a n d common s t o c k s i n p r o p o r t i o n a t e am o u n ts
d e te r m in e d b y in v e s tm e n t m an a g em en t. The p u r p o s e i s t o
g a in a p o s i t i o n o f l e v e r a g e w h ic h e n h a n c e s t h e d e g r e e o f
s a f e t y o f p r i n c i p a l a n d c o n t i n u i t y o f d iv id e n d p a y m e n ts .
The t r e n d i n r e c e n t y e a r s h a s b e e n t o i n v e s t t h e m a j o r i t y
o f a s s e t s i n common s t o c k s l e a v i n g t h e r e m a in d e r t o b e
L u e l l e T o m lin s o n , °L ong-T erm P e rfo rm a n c e G uide
f o r Fund I n v e s t o r , ” B a r r o n ’ s N a t i o n a l B u s in e s s and
F i n a n c i a l W e e k ly , J u l y 1 8 , 1 9 4 9 , p p . 56-3*7.
67
d i s t r i b u t e d among p r e f e r r e d s t o c k s a n d b o n d s . Prom 5 t o
10 p e r c e n t o f t h e t o t a l a s s e t s o f t e n re m a in i n g o v e rn m e n t
b o n d s o r c a s h o r b o t h .
Of t h e f o u r r e m a in in g M u tu a l F u n d s o f f e r i n g a
p e r i o d i c p ay m en t p l a n , o n ly two r e p r e s e n t a t r u e b a la n c e d
f u n d . One h a s d i s t r i b u t i o n o f a s s e t s a s o f D ecem ber 3 1 ,
1 9 4 8 , i n t h e f o l l o w i n g a m o u n ts: c o r p o r a t e b o n d s , 7 . 3 p e r
c e n t ; p r e f e r r e d s t o c k s , 2 6 .2 3 p e r c e n t ; common s t o c k s ,
5 3 .4 3 p e r c e n t ; U n ite d S t a t e s G overnm ent B o n d s, 1 1 .7 6 p e r
c e n t ; and c a s h a n d a c c r u a l s , 1 .2 3 p e r c e n t . The o t h e r
t r u e b a la n c e d fu n d h a d d i s t r i b u t i o n o f t o t a l a s s e t s a s o f
D ecem ber 3 1 , 1 9 4 8 , i n t h e f o l l o w i n g a m o u n ts : c o r p o r a t e
b o n d s , 8 .7 p e r c e n t ; p r e f e r r e d s t o c k s , 2 0 .6 p e r c e n t ;
common s t o c k s , 6 4 .9 p e r c e n t ; U n ite d S t a t e s G overnm ent
B o n d s, 2 .9 p e r c e n t ; a n d c a s h and a c c r u a l s , 3 .9 p e r c e n t .
The r e m a in in g tw o f u n d s c l o s e l y r e s e m b le t h e common
s t o c k fu n d e x c e p t f o r t h e e x i s t e n c e o f a s m a ll p e r c e n t a g e
o f o t h e r s e c u r i t i e s . One fu n d h a d d i s t r i b u t i o n s o f t o t a l
a s s e t s a s o f A p r i l 3 0 , 1 9 4 9 , i n th e f o l l o w i n g a m o u n ts:
U n ite d S t a t e s G overnm ent B on ds, 4 . 1 p e r c e n t ; p r e f e r r e d
s t o c k s , 1 .4 p e r c e n t ; common s t o c k s , 9 1 .1 p e r c e n t ; and
c a s h and a c c r u a l s , 3 . 4 p e r c e n t . The o t h e r fu n d had
d i s t r i b u t i o n s o f t o t a l a s s e t s a s o f O c to b e r 3 1 , 1 9 4 8 , i n
t h e f o l l o w i n g a m o u n ts : c o r p o r a t e b o n d s , 2 .6 p e r c e n t ;
68
common s t o c k s , 9 2 .7 p e r c e n t a n d c a s h an d a c c r u a l s , 4 .7
p e r c e n t .
Even fro m t h e s e f o u r b a la n c e d f u n d s , t h e I n v e s t o r
i n p e r i o d i c paym ent p l a n s i s o f f e r e d a v a r i e d s e l e c t i o n
o f p o r t f o l i o m ak e-u p w h ic h b e s t s u i t s h i s d e s i r e s . Some
o f t h e s e f u n d s o f f e r g r e a t e r l e v e r a g e w i t h an e m p h a s is
on s t a b i l i t y o f incom e and p r e s e r v a t i o n o f p r i n c i p a l ,
w h i l e o t h e r s o f f e r l a r g e r incom e y i e l d s a n d g r e a t e r
p o s s i b i l i t i e s f o r m a rk e t a p p r e c i a t i o n o f f s e t b y t h e i n
c r e a s e o f r i s k .
S h a r e s o f an i n d i v i d u a l common s t o c k r e p r e s e n t i n g
t h e u n d e r l y i n g s e c u r i t y o f a p e r i o d i c p ay m en t p l a n i s
s e l f - e x p l a n a t o r y i n t h a t t h e p l a n h o l d e r i n s t e a d o f b u y in g
i n t o s e c u r i t i e s r e p r e s e n t i n g a b a la n c e d fu n d o r common
s t o c k fu n d p u r c h a s e s p e r i o d i c a l l y s h a r e s o f s t o c k o f b u t
o n e c o r p o r a t i o n . The c o r p o r a t i o n i s c a r e f u l l y s e l e c t e d
b y t h e s p o n s o r o f su ch a p l a n w i t h p a r t i c u l a r e m p h a sis
on p a s t e a r n i n g s r e c o r d , d i v i d e n d p o l i c y , p a s t g r o w th ,
p o t e n t i a l f u t u r e g r o w th , t h e n a t u r e o f t h e b u s i n e s s e n
g a g e d i n , a n d t h e m a n a g e r i a l p o l i c i e s and o p e r a t i o n a l
f a c t o r s . A lso su c h e x t e r n a l f a c t o r s a s t a x a t i o n a n d
g o v e rn m e n t a c t i o n s and p o l i c i e s a r e c o n s i d e r e d .
T h e re i s no l e v e r a g e o r d i v e r s i f i c a t i o n . The p l a n
h o l d e r m e r e ly a c c u m u la te s on an i n s t a l l m e n t b a s i s s h a r e s
69
o f s t o c k o f on© c o r p o r a t i o n w h ic h a r e c r e d i t e d t o h i s
a c c o u n t by t h e a p p o i n t e d t r u s t e e .
The v a r i o u s c h a r g e s and f e e s o f t h e s e p l a n s f o r
t h e a c c u m u la tio n o f i n v e s tm e n t com pany s t o c k s f a l l i n t o
t h r e e m ain c a t e g o r i e s ; t h e d i s t r i b u t i o n c h a r g e o r s a l e s
l o a d , t h e m anagem ent f e e , an d t h e c u s t o d i a n f e e o r
s e r v i c i n g c h a r g e . T h e re i s g e n e r a l l y n o c h a r g e o r f e e
a s s o c i a t e d w i t h r e i n v e s t m e n t o f d i v i d e n d s o r l i q u i d a t i o n
o f a p l a n h o l d e r ’ s s h a r e s .
The d i s t r i b u t i o n c h a r g e o r s a l e s lo a d i s c o l l e c t e d ^
by one o f two m e th o d s ; e a c h p e r i o d i c p ay m en t e n c o u n t e r s
t h e same s a l e s l o a d th r o u g h o u t t h e l i f e o f a p l a n o r e a c h
p e r i o d i c paym ent e n c o u n t e r s a g r e a t e r s a l e s lo a d d u r i n g
t h e - f i r s t o n e o r tw o y e a r s o f t h e p l a n w i t h a s i z a b l e
r e d u c t i o n o f t h e lo a d i n t h e r e m a in in g y e a r s . ^ _
Of t h e f i v e p l a n s u s e d i n t h i s s t u d y , t h e a v e r a g e
t o t a l s a l e s lo a d was a p p r o x i m a t e ly 8 p e r c e n t o f t h e t o t a l
am ount i n v e s t e d o r a p p r o x i m a t e ly 9 p e r c e n t o f t h e n e t
am ount I n v e s t e d a f t e r a l l d e d u c t i o n s . E ach p l a n ' s l o a d i n g
c h a r g e v a r i e s by a f r a c t i o n o f one p e r c e n t ; t h u s , one
p l a n ' s d i s t r i b u t i o n c h a r g e i s 8 . 5 p e r c e n t o f t o t a l p a y
m e n ts o r 9 .4 p e r c e n t o f t h e n e t am ount I n v e s t e d , w h ile
2 ...
P a u l A. J o h n s t o n , " P e r i o d i c P la n P r o v i d e s Sound
S a v in g s P ro g ra m ," B a r ro n s N a t i o n a l B u s in e s s and F i n a n c i a l
W ee k ly , 3 0 : 1 9 - 2 0 , A p r i l 3 , i9 6 0 .
70
a c o m p a ra b le p l a n ’ s d i s t r i b u t i o n i s 8 p e r c e n t o f t o t a l
p a y m e n ts o r 8 . 7 p e r c e n t o f n e t a s s e t v a l u e .
I t i s i m p o r t a n t t o n o t e t h a t i n t r a n s a c t i o n s I n
v o l v i n g s i z a b l e t o t a l p a y m e n ts , t h e s a l e s lo a d I s p r o p o r
t i o n a t e l y r e d u c e d . A t y p i c a l exam ple o f t h i s f u n c t i o n i s
t h e e x a c t i o n o f a s a l e s l o a d o f 8 p e r c e n t o f t o t a l p a y
m e n ts on t r a n s a c t i o n s o f l e s s t h a n $ 1 0 ,0 0 0 , 7 p e r c e n t o f
t o t a l p a y m e n ts on t r a n s a c t i o n s o f l e s s t h a n $ 2 5 ,0 0 0 b u t
m ore th a n $ 1 0 ,0 0 0 , 5 p e r c e n t o f t o t a l p a y m e n ts on t r a n s
a c t i o n s b e tw e e n $ 2 5 ,0 0 0 and $ 5 0 ,0 0 0 , a n d 2 . 5 p e r e e n t o f
t o t a l p a y m e n ts on t r a n s a c t i o n s g r e a t e r th a n $ 5 0 ,0 0 0 .
The m anagem ent f e e i s p a i d t o a p r o f e s s i o n a l i n
v e s tm e n t f i r m w h ich r e n d e r s s e r v i c e s o f a m an a g em en t,
a d v i s o r y , s t a t i s t i c a l an d r e s e a r c h n a t u r e . F o u r o f t h e
f i v e p l a n s p r o v i d e f o r a m anagem ent f e e o f one h a l f o f
on e p e r c e n t p e r annum o f t h e n e t a s s e t v a lu e o f a l l
i s s u e d a n d o u t s t a n d i n g s h a r e s o f t h e com pany, t h e r e m a in
i n g p l a n p r o v i d e s a m anagem ent f e e o f o n e p e r c e n t p e r
annum o f t h e f i r s t $ 4 ,0 0 0 ,0 0 0 o f a v e r a g e n e t a s s e t i n
a d d i t i o n t o one h a l f o f o n e p e r c e n t p e r annum on t h e
a v e r a g e n e t a s s e t s e x c e e d in g $ 4 ,0 0 0 ,0 0 0 . The m anagem ent
f e e i n m o st p l a n s I s p a y a b l e q u a r t e r l y , t h u s an a n n u a l
m anagem ent f e e o f one h a l f o f one p e r c e n t w o u ld b e p a i d
a t t h e r a t e o f on e e i g h t h o f o n e p e r c e n t o f t h e n e t a s s e t
71
#
v a lu e o f a l l i s s u e d and o u t s t a n d i n g s h a r e s .
The c u s t o d i a n f e e i s u s u a l l y d e d u c t e d on a m o n th ly "
b a s i s fro m t h e r e m i t t a n c e s made b y p l a n h o l d e r s . I t i s
i n t e n d e d t o c o v e r t h e e x p e n s e i n v o lv e d i n r e c e i v i n g t h e
p a y m e n ts o f p l a n h o l d e r s , s e r v i c i n g t h e p a y m e n ts , and s a f e
g u a r d i n g t h e p r o p e r t y and f u n d s o f t h e b e n e f i c i a r i e s .
The a v e r a g e f e e c h a rg e d b y a c u s t o d i a n i s a b o u t one
e i g h t h o f o n e p e r c e n t p e r annum co m p u ted on d a i l y n e t
a s s e t v a lu e o f d e p o s i t e d p r o p e r t y . E ach p l a n ’ s c u s t o d i a n
f e e d i f f e r s . The h i g h e s t i s a b o u t two t e n t h s o f one p e r
c e n t p e r annum . The p e r i o d i c d e d u c t i o n s fro m p a y m e n ts f o r
t h i s f e e i n c r e a s e w i t h t h e s i z e o f a n i n d i v i d u a l s p la n *
E x tr a n e o u s f e e s an d e x p e n s e s w h ic h a r e e n c o u n te r e d
i n c l u d e s u c h ite m s a s d i r e c t o r s ’ f e e s , a u d i t an d l e g a l
f e e s , stam p t a x , F e d e r a l i s s u a n c e t a x an d t h e e x p e n s e o f
p r i n t i n g a n d o f f i c e s u p p l i e s . T h ese e x p e n s e s and f e e s a r e
u s u a l l y n o m in a l and a r e d e d u c te d a s e x p e n s e s fro m th e
g r o s s incom e r e a l i z e d fro m i n v e s t m e n t s b e f o r e a r r i v i n g a t
t h e n e t in c o m e . I n d i v i d u a l c h a r g e s c an b e made f o r t h e
r e i n s t a t e m e n t o f a p l a n h o l d e r o r s p e c i a l r e p o r t s dem anded
by a p l a n h o l d e r a s t o t h e s t a t u s o f h i s a c c o u n t . B ro k e r
a g e c o m m issio n s a r e d e d u c te d from t h e a g g r e g a t e am ount
u s e d f o r r e i n v e s t m e n t .
A v e ra g e t o t a l d e d u c t i o n s f o r t h e s e f i v e p l a n s i s
72
a p p r o x i m a t e ly 10 p e r c e n t o f t o t a l p a y m e n ts o r a p p r o x i
m a t e l y 1 1 .5 p e r c e n t o f n e t am ount i n v e s t e d . One p l a n
o f f e r s an o p t i o n t o c a r r y l i f e i n s u r a n c e p r o t e c t i o n . The
prem ium o v e r t h e l i f e o f t h e p l a n am o u n ts t o 3 .7 5 p e r c e n t
o f th e n e t am ount i n v e s t e d . W ith t h e i n s u r a n c e p r o t e c t i o n ,
t h e t o t a l c h a r g e i s 1 5 .3 4 p e r c e n t o f n e t am ount i n v e s t e d
f o r t h i s p l a n .
The c h a r g e s and f e e s o f p l a n s f o r t h e a c c u m u la tio n
o f s h a r e s o f an I n d i v i d u a l common s t o c k c o n s i s t p r i m a r i l y
o f t h e s p o n s o r o r c r e a t i o n f e e an d t h e c u s t o d i a n f e e .
The s p o n s o r f e e I s c o m p a ra b le t o t h e s a l e s l o a d , h o w e v e r,
t h e s p o n s o r f u l f i l l s c e r t a i n d u t i e s t o t h e p l a n h o l d e r
d u r i n g t h e l i f e o f t h e p l a n , w h ic h a r e p a i d f o r fro m t h i s
c r e a t i o n f e e . The c u s t o d i a n f e e I s i n t e n d e d t o c o v e r t h e
e x p e n s e o f m a i l i n g r e m i n d e r s o f d e p o s i t an d f o r w a r d in g
r e c e i p t s o f d e p o s i t , m a in te n a n c e o f i n d i v i d u a l l e d g e r
r e c o r d s , s e n d in g s e m i- a n n u a l s t a t e m e n t s an d h o l d i n g t h e
d e p o s i t o r s p r o p e r t y an d f u n d s .
Of t h e two p l a n s s t u d i e d , e a c h m a i n t a i n e d t o t a l
d e d u c t i o n s o f 1 0 .9 p e r c e n t o f t h e t o t a l p a y m e n ts . I n
e a c h c a s e , th e c r e a t i o n f e e w as 6 .8 p e r c e n t an d t h e
c u s to d y f e e w as 3 .0 p e r c e n t o f t h e in v e s tm e n t o b j e c t i v e .
One p l a n e x a c te d a p p r o x i m a t e ly 74 p e r c e n t o f t h e c r e a t i o n
f e e d u r i n g t h e f i r s t tw e lv e m o n th s o f o p e r a t i o n , w h i l e t h e
73
o t h e r e x a c te d o n ly 36 p e r c e n t o f t h e c r e a t i o n f e e o v e r
t h i s same p e r i o d . The r e m a in d e r o f t h e c r e a t i o n f e e was
d e d u c te d m o n th ly i n e q u a l am o u n ts o v e r t h e r e m a in in g n i n e
y e a r p e r i o d o f b o th p l a n s . The d e d u c t i o n s o f t h e l a t e r
p l a n , o v e r t h i s n i n e y e a r p e r i o d w ere p r o p o r t i o n a t e l y
l a r g e r t h a n t h o s e o f t h e p l a n d e d u c t i n g 74 p e r c e n t o f
t h e c r e a t i o n f e e d u r i n g t h e f i r s t tw e lv e m o n th s .
T h ese c r e a t i o n an d c u s to d y f e e s a r e b a s e d on a
p l a n h a v in g an in v e s tm e n t o b j e c t i v e o f $1200 o v e r a t e n
y e a r p e r i o d . A g r e a t e r in v e s tm e n t o b j e c t i v e s u b s t a n t i a l l y
r e d u c e s t h e s e f e e s . F o r i n s t a n c e , an in v e s tm e n t o b j e c t i v e
o f $ 9 ,0 0 0 o v e r a t e n y e a r p e r i o d w o u ld h a v e a c r e a t i o n
f e e and c u s t o d i a n f e e o f 5 .2 p e r c e n t a n d 1 .3 p e r c e n t o f
i n v e s tm e n t o b j e c t i v e r e s p e c t i v e l y , w h ile an in v e s tm e n t
o b j e c t i v e o f $ 6 0 ,0 0 0 o v e r a t e n y e a r p e r i o d w o u ld h a v e a
c r e a t i o n f e e a n d c u s t o d i a n f e e o f 3 .9 p e r c e n t a n d 1 p e r
c e n t o f in v e s tm e n t o b j e c t i v e r e s p e c t i v e l y . ^
T h e re i s n o c h a r g e f o r t h e r e i n v e s t m e n t o f d i v i
d e n d s . B ro k e ra g e c o m m is s io n s , t a x e s and p o s t a g e a r e p a id
fro m t h e r e v o l v i n g fu n d i n e ac h p l a n . T h is r e v o l v i n g
fu n d c o n s i s t s o f v a r y i n g am o u n ts o f s h a r e s o f s t o c k and
c a s h m anaged by t h e c u s t o d i a n . I t p e r m i t s ro u n d l o t
c o m m issio n s t o be o b t a i n e d and t h u s a c t s a s a s a v i n g o f
t h e b r o k e r a g e co m m issio n u l t i m a t e l y c h a rg e d t o t h e
74
I n v e s t o r .
The c u s t o d i a n f e e e l i m i n a t e s v a r i o u s c h a r g e s t o
t h e p l a n h o l d e r , w h ich becom e t h e d u ty o f t h e s p o n s o r .
T h e se d u t i e s en co m p ass a l l s e l l i n g , a d m i n i s t r a t i v e , l e g a l ,
a n d s t a t i s t i c a l c o s t s a p p l i c a b l e t o t h e d e v e lo p m e n t,
o r g a n i z a t i o n and o p e r a t i o n o f t h e p l a n . I n a d d i t i o n t h e
s p o n s o r f u r n i s h e s a l l fo rm s a n d s t a t i o n e r y deem ed n e c e s
s a r y by t h e c u s t o d i a n and p a y s f o r a n y a c t u a l e x p e n s e s
upon t h e a g re e m e n t o f b o th p a r t i e s .
P l a n h o l d e r s h a v e t h e r i g h t o f c o m p le te w ith d r a w a l
a t a n y t i m e . The p l a n h o l d e r can demand t h e s h a r e s
c r e d i t e d t o h i s a c c o u n t o r can d i r e c t t h a t t h e y b e l i q u i
d a t e d an d t h e p r o c e e d s r e m i t t e d t o h im . Some p l a n s p r o
v i d e f o r p a r t i a l w i t h d r a w a l , I n w h ic h c a s e a d e s i g n a t e d
nu m b er o f s h a r e s o r t h e i r l i q u i d a t i n g v a l u e w o u ld be
fo r w a r d e d t o th e I n d i v i d u a l . When a p l a n h o l d e r dem ands
t h a t h i s s h a r e s be l i q u i d a t e d , t h e n e t a s s e t v a lu e o f
s u c h s h a r e s i s d e te r m in e d b y t h e p r e s e n t m a r k e t v a lu e o f
t h e s h a r e s . The c a s h p r o c e e d s a r e r e m i t t e d t o him and
t h e c u s t o d i a n c a r r i e s o u t t h e n e c e s s a r y d e t a i l s o f c l o s i n g
h i s a c c o u n t . I n t h e m a j o r i t y o f p l a n s s t u d i e d , t h e r e ~ ~ ~
w as n o c h a r g e b y t h e c u s t o d i a n f o r e f f e c t i n g a w i t h d r a w a l .
H ow ever, some p l a n s p r o v i d e t h a t a n y n e c e s s a r y e x p e n s e s
i n c u r r e d b y t h e c u s t o d i a n i n e f f e c t i n g a w i t h d r a w a l be
75
d e d u c te d fro m t h e n e t a s s e t v a lu e r e a l i z e d fro m t h e s a l e
o f t h e s h a r e s .
I n a s i t u a t i o n w h ere f r a c t i o n a l s h a r e s a r e c r e d i t e d
t o an a c c o u n t t h a t i s b e i n g w ith d ra w n , t h e v a lu e o f t h e
f r a c t i o n a l s h a r e s i s com pu ted a t t h e p r e s e n t m a r k e t v a lu e
and r e m i t t e d i n c a s h .
A d e p o s i t o r o f a p l a n f o r th e a c c u m u la tio n o f sh a re s
o f an i n d i v i d u a l s t o c k c an e i t h e r d i r e c t t h a t t h e s h a r e s
b e l i q u i d a t e d an d t h e c a s h p r o c e e d s be r e m i t t e d t o him
o r t h a t t h e s h a r e s c r e d i t e d t o h i s a c c o u n t b e s e n t t o him
w i t h a c h e e k f o r a n y f r a c t i o n a l s h a r e s o u t s t a n d i n g . T h e re
i s n o c h a r g e by t h e e u s t o d i a n f o r w i t h d r a w a l from t h e s e
p l a n s .
The i n v e s t o r i s w a rn e d b y e a c h p l a n p r o s p e c t u s o f
t h e i n a d v i s a b i l i t y o f s t a r t i n g su c h a p ro g ra m u n l e s s i t
i s i n t e n d e d t o be c a r r i e d t o c o m p l e t i o n . In p l a n s w h ic h _
d e d u c t a l a r g e p e r c e n t a g e o f t h e . s a l e s lo a d d u r i n g t h e
f i r s t tw e lv e m o n th s , t h e l o s s w i l l b e g r e a t f o r t h e p l a n
h o l d e r t e r m i n a t i n g h i s p ro g ra m a t an e a r l y d a t e . S t a
t i s t i c s h a v e shown t h a t t h e c a u t i o n s p r e s e n t e d b y s p o n s o r
i n g c o m p a n ie s h a v e t e n d e d t o m in im iz e t e r m i n a t i o n s o f
p l a n s . I n m o st t e r m i n a t i o n s t h e l o s s h a s b e e n n o m in a l .
The t e r m i n a t i o n r e s u l t s o f o n e com pany fro m O c to b e r , 1940
t o D ecem ber 3 1 , 1 9 4 8 , e x p e c t i n g t o t a l p a y m e n ts o f
76
j $ 1 4 ,0 2 4 ,4 0 0 fro m 1 1 ,6 8 7 t e n - y e a r $1200 p e r i o d i c p l a n s a r e
shown I n T a b le V.®
Of th e f i v e p l a n s s e l l i n g in v e s tm e n t com pany s h a r e s
on a p e r i o d i c b a s i s , f o u r p r o v i d e t h a t f a i l u r e t o r e m i t
a d e p o s i t on tim e d o e s n o t c o n s t i t u t e a d e f a u l t * T h e se
p l a n s p r o v i d e t h a t a p l a n h o l d e r may p a s s a p a y m e n t,
s u s p e n d p a y m e n ts , p a y up a l l p a s s e d p a y m e n ts i n on e lump
sum o r p r e p a y r e m i t t a n c e s * The p l a n h o l d e r ’ s i n v e s tm e n t
r e m a in s i n t a c t d u r i n g a n o n -p a y m e n t p e r i o d a n d d i v i d e n d s
on h i s s h a r e s h e l d b y t h e t r u s t e e a c c u m u la te f o r r e i n v e s t
m ent* The r e m a in in g p l a n s p e c i f i e s t h a t d e f a u l t and
a u to m a t i c t e r m i n a t i o n w i l l o c c u r when t h r e e s u c c e s s i v e
p a y m e n ts h a v e la p s e d * A t su c h t i m e , t h e s h a r e s an d a n y
c a s h c r e d i t e d t o t h e d e f a u l t e d a c c o u n t w i l l be r e m i t t e d
t o t h e p l a n h o l d e r *
A d i s a d v a n t a g e o f t h e v o l u n t a r y t y p e o f p l a n
i s one n o t i n h e r e n t i n t h e p l a n i t s e l f b u t un
f o r t u n a t e l y i n h e r e n t i n human n a t u r e . 4
The two p l a n s s e l l i n g s h a r e s o f a n i n d i v i d u a l s t o c k
c o n s i d e r a c c o u n t s t o be i n d e f a u l t i f p a y m e n ts h a v e n o t
b e e n resum ed s i x t y d a y s a f t e r n o t i f i c a t i o n by t h e
® E dw ard E . M ath ew s, ’’D e fe n d s P e r i o d i c P aym ent
P l a n s o f M u tu a l F u n d s ,” T he C om m ercial and F i n a n c i a l
C h r o n i c l e , D ecem ber 7 , 1 9 5 0 . p , 1 5 .
1“
J o h n s t o n , o £ . c i t *, p . 2 0 .
77
T A B L E V
PLAN T E R M IN A T IO N O F O N E C O M P A N Y *
Number of #1200
p eriod ic u n its Face amount
Total sold 11,687 #14,024,400.00
Total te m in a tio n s 1,447 1,737,000.00
Percentage term ination 12.4# 12.4#
Total payments made prior to
term ination # 243,055.00
Paid to term inating planholders 235,389.56
Total lo s s resu ltin g from
term ination 7,665.44
Percentage o f t o ta l payments 3.15#
Average lo s s per #1200 u n it $ 5.30
Inform ation used in above ta b le from Mathevj^ op. c i t . , p. 15.
78
c u s t o d ia n * T e r m in a tio n u n d e r su c h a s i t u a t i o n i s a t t h e
d i s c r e t i o n o f t h e c u s t o d ia n * N o t i f i c a t i o n w i l l be s e n t
t o th e d e p o s i t o r , t h a t t h e c u s t o d i a n i s h o l d i n g f o r
d e l i v e r y c e r t i f i c a t e s f o r s h a r e s c r e d i t e d t o him an d a
c h e c k f o r t h e p a y m e n t o f a n y d e c im a l s h a re *
The o p e r a t i o n o f t h e s e p l a n s f u n c t i o n s on t h e
p r i n c i p a l o f a u t o m a t i c r e i n v e s t m e n t * C ash d i v i d e n d s a r e
a l l o c a t e d by t h e c u s t o d i a n on t h e e x - d i v i d e n d d a te * E ach
p l a n h o l d e r i s n o t i f i e d o f t h e d i v i d e n d p ay m en t an d t h e
d i s p o s i t i o n o f su c h p ay m en t to w a rd r e i n v e s t m e n t * The
*
n o t i f i c a t i o n c o n t a i n s t h e am ount d e d u c te d f o r b r o k e r a g e
c o m m issio n s a n d t h e n e t am ount i n v e s t e d i n s e c u r i t i e s .
M ost p l a n s p r o v i d e t h a t upon s p e c i a l w r i t t e n r e q u e s t from
a p l a n h o l d e r , t h e d i v i d e n d s may b e s u b m i tt e d t o him by
c h e c k a n d n o t b e u s e d f o r r e i n v e s t m e n t p u r p o s e s . The
c u s t o d i a n i n some p l a n s i s g iv e n t h e r i g h t t o d e d u c t a
n o m in a l f e e f o r t h e e x p e n s e i n v o lv e d i n s e r v i c i n g t h i s
s p e c i a l r e q u e s t .
S to c k d i v i d e n d s an d p u r c h a s e r i g h t s a r e c r e d i t e d
p r o p o r t i o n a t e l y t o e a c h p l a n h o l d e r 's a c c o u n t a s o f t h e
r e c o r d d a t e o f t h e s t o c k d i v i d e n d . I t i s t h e d u t y o f t h e
c u s t o d i a n t o n o t i f y p l a n h o l d e r s o f a n y p u r c h a s e r i g h t s f o r
s to c k } t h e s e p u r c h a s e r i g h t s w i l l be s o l d a n d t h e p r o c e e d s
c r e d i t e d t o e a c h r e s p e c t i v e a c c o u n t f o r r e i n v e s t m e n t
79
p u r p o s e s u n l e s s w r i t t e n r e q u e s t i s r e c e i v e d fro m t h e p l a n
h o l d e r t o d o o t h e r w i s e .
The m a rk e t v a l u e o f u n d e r l y i n g s e c u r i t i e s i s d e t e r
m in e d i n m o s t i n s t a n c e s b y t h e c l o s i n g s a l e p r i c e o r b i d
f o r t h o s e p o r t f o l i o s e c u r i t i e s l i s t e d on t h e New Y ork
C urb E xch an g e o r t h e New Y ork S to c k E x c h a n g e . The f a i r
m a r k e t v a lu e o f s e c u r i t i e s n o t l i s t e d on e i t h e r o f t h e
N a t i o n a l E x c h a n g e s i s d e te r m in e d b y t h e c u r r e n t q u o t a t i o n
o r b y m e th o d s u s e d by t h e s p o n s o r company t o a r r i v e a t a
f a i r m a r k e t v a l u e f o r s u c h s e c u r i t i e s . A c c ru e d i n t e r e s t
a n d d e c l a r e d d i v i d e n d s on t h e d a t e o f e x - d i v i d e n d a r e
t a k e n i n t o a c c o u n t . The t o t a l a s s e t s a r e c a l c u l a t e d and
a l l a c c r u e d o r i n c u r r e d l i a b i l i t i e s a r e d e d u c t e d . The
t o t a l n e t a s s e t s a r e th e n d i v i d e d b y t h e num ber o f s h a r e s
o f s t o c k o u t s t a n d i n g ; t h e q u o t i e n t r e p r e s e n t i n g t h e n e t
a s s e t v a lu e o r m a r k e t v a l u e o f e a c h s h a r e o u t s t a n d i n g .
O n ly on e p l a n i n t h i s s t u d y o f f e r s t h e o p t i o n f o r
p l a n h o l d e r s t o m a i n t a i n i n s u r a n c e p r o t e c t i o n . The p r o t e c
t i o n p r o v i d e s t h a t w h i l e t h e p l a n h o l d e r i s i n s u r e d o r t h e
I n s u r a n c e i s i n f o r c e , t h e i n s u r a n c e company w i l l p a y t h e
a g g r e g a t e am ount o f u n p a id p e r i o d i c p a y m e n ts up t o $ 1 0 ,0 0 0
on t h e d e a t h o f a p l a n h o l d e r . T h is am ount i s p a y a b l e t o
t h e e u s t o d i a n a c t i n g a s t h e s p o n s o r ’ s a g e n t . The p r o v i
s i o n s s t a t e t h a t a p l a n h o l d e r m u st b e i n good h e a l t h an d
80
b o a c c e p t a b l e by t h e I n s u r a n c e com pany a t t h e i n c e p t i o n -
I
o f a p l a n . I n s u r a n c e i s n o t p a y a b le i n s i t u a t i o n s o f
d e f a u l t f o r m ore th a n t h i r t y d a y s on a n y p a y m e n t a t t h e
d a t e o f d e a t h , c o m m itta l o f s u i c i d e w i t h i n o n e y e a r fro m
t h e i n c e p t i o n o f a p l a n , o r m i s r e p r e s e n t a t i o n o f an y
m a t e r i a l f a c t s p u r s u a n t t o t h e r i s k . The s p o n s o r i s i n
no way c o n n e c te d w i t h t h e a p p o i n t e d i n s u r a n c e com pany su c h
a s a e t i n g a s b r o k e r , r e p r e s e n t a t i v e o r a g e n t f o r su c h
com pany. I n c a s e t h e I n s u r a n c e f a l l s t o p a y a c la i m , t h e
c u s t o d i a n o r t h e s p o n s o r i s n o t r e q u i r e d t o b r i n g s u i t
a g a i n s t s u c h company o r i n c u r e x p e n s e s f o r c o l l e c t i n g on
a p o l i c y u n l e s s t h e c u s t o d i a n o r s p o n s o r i s in d e m n i f i e d
a g a i n s t l e g a l f e e s an d o t h e r e x p e n s e s I n c u r r e d i n su ch an
a c t i o n .
I n s u r a n c e prem ium s a r e d e d u c te d fro m t h e p e r i o d i c
p a y m e n ts by t h e c u s t o d i a n and f o r w a r d e d t o t h e i n s u r a n c e
com pany. The p rem iu m s a r e # .6 4 m o n th ly f o r e v e r y # 1 ,0 0 0
o f u n p a id p a y m e n ts f o r t h e S ta n d a r d C l a s s o f r i s k s and
# .9 6 m o n th ly f o r e v e r y # 1 ,0 0 0 o f u n p a id p a y m e n ts f o r t h e
S u b s ta n d a r d C l a s s o f r i s k s . The t o t a l p a y m e n ts on t h e
S ta n d a r d C l a s s and S u b s ta n d a r d C l a s s o f r i s k s f o r a # 1 2 0 0 ,
. t e n y e a r p e r i o d i c p l a n a r e # 4 4 .9 3 a n d # 6 7 .3 9 r e s p e c t i v e l y .
The r a t e s a r e s u b j e c t t o c h a n g e , b u t c a n n o t e x c e e d # 1 .0 0
p e r m onth o r # 1 .5 0 p e r m onth f o r t h e S ta n d a r d C l a s s an d
8 1
S u b s ta n d a r d G la s s r e s p e c t i v e l y .
The m o n th ly I n s u r a n c e p rem ium s a d d 3 .7 5 p e r c e n t
t o t h e t o t a l c h a r g e s , t h u s r e d u c i n g p r o p o r t i o n a t e l y t h e
n e t am ount I n v e s t e d . The t o t a l c h a r g e s o f t h i s p l a n w i t h
I n s u r a n c e p r o t e c t i o n a r e 1 5 .3 4 p e r c e n t a n d 1 1 .5 p e r c e n t
w i t h o u t i n s u r a n c e p r o t e c t i o n .
The m a t u r i t y o f a p l a n b r i n g s a b o u t s e v e r a l a l t e r
n a t i v e s . The p l a n h o l d e r may e s t a b l i s h a n o t h e r p l a n and
t r a n s f e r t h e s h a r e s o u t s t a n d i n g u n d e r t h e p l a n w i t h o u t
c h a r g e t o t h e new p l a n . The s h a r e s a c c u m u la te d t o t h e
c r e d i t o f a m a tu r e p l a n may re m a in w i t h t h e c u s t o d i a n and
t h e d i v i d e n d s can e i t h e r b e r e i n v e s t e d o r p a i d t o t h e
p l a n h o l d e r . The p l a n can be t e r m i n a t e d an d t h e s h a r e s
c r e d i t e d t o th e p l a n h o l d e r ’ s a c c o u n t w i l l be f o r w a r d e d
t o him p l u s a c h e c k f o r a n y f r a c t i o n a l s h a r e I n f o r c e a t
t h e tim e o f c o m p l e t i o n . _ _ _
Upon t h e d e a t h o f a p l a n h o l d e r b e f o r e a p l a n ’ s
c o m p l e t i o n , e i t h e r t h e s h a r e s c r e d i t e d t o t h e d e c e a s e d ’ s
a c c o u n t p l u s a c h e c k f o r a n y f r a c t i o n a l s h a r e s o r t h e
p r o c e e d s o f t h e n e t a s s e t v a l u e o f su c h s h a r e s a r e s e n t
t o t h e e x e c u t o r o f t h e d e c e a s e d ’ s e s t a t e o r t h e d e c e a s e d ’ s
n e x t o f k i n . The p l a n c an re m a in i n f o r c e upon b e in g d u l y
t r a n s f e r r e d t o a n o t h e r i n d i v i d u a l .
M e n tio n o f b o n d in g i s m ade i n b u t o n e o f t h e s e
82
p l a n s . I n t h i s i n s t a n c e , a b l a n k e t bond o f # 2 5 ,0 0 0 i s
c a r r i e d b y t h e s p o n s o r c o v e r i n g t h e a c t s o f s a l e s
p e r s o n n e l , o f f i c e r s and e m p lo y e e s . S in c e t h e c u s t o d i a n
r e c e i v e s a l l r e m i t t a n c e s fro m t h e p l a n h o l d e r , t h e b o n d in g
o f t h e s p o n s o r com pany d o e s n o t seem i m p o r t a n t . The
I n v e s tm e n t Company A c t p r o v i d e s t h a t t h e c u s t o d i a n o r
t r u s t e e m u st h a v e a n a g g r e g a t e c a p i t a l , u n d i v id e d p r o f i t s
a n d s u r p l u s o f a t l e a s t # 5 0 0 ,0 0 0 .
T a x a tio n
'The f i v e c o m p a n ie s o f f e r i n g i n v e s t m e n t company
s h a r e s f o r s a l e on an i n s t a l l m e n t b a s i s a r e a l l i n c o r p o r a t
ed a n d , t h e r e f o r e , t h e i r n e t incom e i s s u b j e c t t o t h e
F e d e r a l c o r p o r a t e incom e t a x . H ow ever, e a c h o n e , i n
a c c o r d a n c e w i t h th e I n t e r n a l R evenue C ode, h a s q u a l i f i e d
a s a r e g u l a t e d in v e s tm e n t com pany. T h is q u a l i f i c a t i o n
a s a r e g u l a t e d i n v e s tm e n t company i s i r r e v o c a b l e and
i n t e n d e d to r e d u c e m a t e r i a l l y o r e l i m i n a t e t h e s u b j e c t i o n
t o F e d e r a l incom e t a x .
The F e d e r a l T a x e s a r e b a s e d upon t h o s e r e q u i r e m e n t s
o f p r e s e n t law g o v e r n in g r e g u l a t e d in v e s tm e n t c o m p a n ie s .
E ach company m u st m e e t t h e f o l l o w i n g r e q u i r e m e n t s :
I t m u st d i s t r i b u t e t o i t s s h a r e h o l d e r s a s t a x a b l e
d i v i d e n d s d u r i n g t h e t a x a b l e y e a r an am ount n o t
l e s s th a n 9C$ o f i t s n e t incom e.-
8 3
N ot m o re t h a n 30$ o f i t s g r o s s incom e m u st b e
d e r i v e d fro m t h e s a l e o f s e c u r i t i e s h e l d f o r
l e s s t h a n s i x m onths*
H o t m o re th a n 5$ o f i t s g r o s s a s s e t s t a k e n a t
c o s t s h a l l , w ith c e r t a i n e x c e p t i o n s , b e i n v e s t e d
i n s e c u r i t i e s o f a n y o n e c o r p o r a t i o n j and
I t m u st n o t own m ore th a n 10$ o f t h e o u t s t a n d i n g
s e c u r i t i e s o f a n y one c o r p o r a t i o n . §
The d i s t r i b u t i o n s r e c e i v e d b y p l a n h o l d e r s o r n o t i c e
t h a t 3uch d i s t r i b u t i o n s h a v e b een m ade t o t h e i r a c c o u n t
and r e i n v e s t e d a r e s u b j e c t t o i n d i v i d u a l incom e t a x . The
c o r p o r a t i o n m u st in f o r m t h e p l a n h o l d e r a s t o t h e s o u r c e
o f a l l d i s t r i b u t i o n s a n d t h e am ount p e r s h a r e r e a l i z e d
fro m t h e s o u r c e .
I n v e s t o r s r e c e i v i n g d i v i d e n d s t h a t a r e n o t a
r e t u r n o f c a p i t a l m u st d e c l a r e them a s su c h on t h e i r
i n d i v i d u a l incom e t a x r e t u r n s . The r e t u r n o f c a p i t a l m u st
b e d e d u c t e d fro m t h e p u r c h a s e p r i c e o f t h e s h a r e s and t h e
c a p i t a l g a i n s t a x p a i d b y t h e i n v e s t o r when a p r o f i t i s
r e a l i z e d fro m t h e s a l e o f p o r t f o l i o s e c u r i t i e s .
M ost o f t h e p l a n s s e n d a q u a r t e r l y s t a t e m e n t t o
e a c h p l a n h o l d e r r e g a r d i n g d i v i d e n d d i s t r i b u t i o n a n d t h e
s o u r c e o f su c h d i v i d e n d s . The r e t u r n o f c a p i t a l i s c l e a r
l y i n d i c a t e d so t h a t e a c h i n d i v i d u a l may t a k e f u l l a d v a n
t a g e o f t h e c a p i t a l g a i n s t a x .
I n t e r n a l R evenue C ode, S u p p le m e n t Q.
84
The n e c e s s a r y s t a t e an d l o c a l t a x e s a r e p a i d b y
e a c h s p o n s o r company fro m t h e incom e d e r i v e d f o r s e l l i n g
t h e p e r i o d i c paym ent p la n s *
T he p l a n s s e l l i n g s h a r e s o f an i n d i v i d u a l common
s t o c k on an i n s t a l l m e n t b a s i s a r e n o t a t a x a b l e e n t i t y
u n d e r F e d e r a l and S t a t e incom e t a x law s* The incom e fro m
t h e s h a r e s h e l d b y t h e c u s t o d i a n f o r t h e d e p o s i t o r s i s
c o n s i d e r e d a s inco m e t o t h e p l a n h o l d e r a n d i s r e p o r t e d
a s d i v i d e n d s on e a c h i n d i v i d u a l ’ s incom e t a x r e t u r n *
The s p o n s o r company p a y s t h e n e c e s s a r y S t a t e and
F e d e r a l f r a n c h i s e t a x an d incom e t a x fro m t h e incom e
d e r i v e d f o r s e l l i n g t h e p e r i o d i c p ay m en t p l a n .
CHAPTER V
CRITICAL ANALYSIS OP THE MERITS AND DEFECTS OP
PERIODIC PABffENT PLANS FOR ACQUISITION OF
INVESTMENT COMPANY SHARES
The v a r i o u s i n t e r n a l f a c t o r s g o v e r n in g t h e s e p l a n s
em b race th e s a f e t y o f p r i n c i p a l , d i v e r s i f i c a t i o n , s t a b i l
i t y o f in c o m e , m a r k e t a b i l i t y , c o s t , a n d a p p r e c i a t i o n .
The d i v e r s i f i c a t i o n o f i n v e s t m e n t s a n d s a f e t y o f
p r i n c i p a l a f f o r d e d b y t h e s e p l a n s a r e p r o b a b l y t h e i r m o st
com m endable f a c t o r s t o I n v e s t o r s . The I n v e s t o r i n a p l a n
a s s m a ll a s # 1 ,2 0 0 i s a b l e t o r e a l i z e w id e d i v e r s i f i c a t i o n
n o t o n ly i n many d i f f e r e n t i n d u s t r i e s , b u t a l s o i n d i f f e r
e n t t y p e s o f s e c u r i t i e s .
The t r u e b a la n c e d f u n d , a s r e p r e s e n t e d b y two o f
t h e f i v e p l a n s , m in im iz e s t h e d e g r e e o f r i s k e n c o u n te r e d
In p r o t e c t i o n o f p r i n c i p a l . The t r u e common s t o c k fu n d
o r t h o s e f u n d s w hose t o t a l a s s e t s a r e r e p r e s e n t e d by
a p p r o x i m a t e ly 80 p e r c e n t o f e q u i t y s e c u r i t i e s , w o u ld n o t
o f f e r t h e d e g r e e o f p r o t e c t i o n o f p r i n c i p a l a f f o r d e d by
t h e b a l a n c e d f u n d . T h is r e a s o n i n g i s s o u n d , b u t t h e
e m p h a sis on t h e s k i l l o f in v e s tm e n t m anagem ent t o ch an g e
t h e p o r t f o l i o s e c u r i t i e s w i t h eco n o m ic v a r i a t i o n s h o u ld
86
n o t be m i n i m i z e d .1
Of p a r t i c u l a r im p o r ta n c e i s t h e p r o t e c t i o n g iv e n
by law l i m i t i n g c o n c e n t r a t i o n o f a l l M u tu a l Fund a s s e t s
i n a n y one com pany o r t h e a c q u i s i t i o n o f m ore th a n a
c e r t a i n p e r c e n t a g e o f t h e t o t a l o u t s t a n d i n g s e c u r i t i e s o f
o n e com pany. N o t m ore th a n 5 p e r c e n t o f t h e t o t a l g r o s s
a s s e t s o f an in v e s tm e n t com pany may be i n v e s t e d i n t h e
s e c u r i t i e s o f a n y on e com pany and n o t m o re th a n 10 p e r
c e n t o f t h e a g g r e g a t e f a c e am ount o f one com pany’ s s e c u r i
t i e s can b e a c q u i r e d .
The d e p e n d a b i l i t y o f c o n ti n u o u s incom e i s m a i n t a i n
ed th r o u g h p r o p e r d i v e r s i f i c a t i o n a n d t h e p r o t e c t i o n
a f f o r d e d t h e p r i n c i p a l am ount I n v e s t e d . The d e p e n d a b i l i t y
o f c o n ti n u o u s incom e i s u s u a l l y g r e a t e r i n t h e b a la n c e d
fu n d t h a n i n t h e common s t o c k f u n d . H ow ever, th e p o s s i
b i l i t y o f l a r g e r y i e l d s fro m t h e common s t o c k fu n d i s
g r e a t e r d u r i n g tim e s o f r i s i n g s t o c k p r i c e s .
The a s s u r a n c e o f r e a s o n a b l e a n d c o n ti n u o u s incom e
i s p r o v id e d by t h i s t h r e e - w a y d i v e r s i f i c a t i o n . I n
o t h e r w o rd s , you do n o t p u t ’a l l y o u r e g g s i n one
b a s k e t . * The n e t incom e w h ic h t h e s e B a la n c e d F unds
e a r n on a p p r o x i m a t e ly 150 c a r e f u l l y s e l e c t e d , w e l l
P a u l A. J o h n s t o n , "Fund I n v e s t m e n t P o l i c y
M ir r o r e d i n P o r t f o l i o , " B a r ro n s N a t i o n a l B u s in e s s a n d
F i n a n c i a l W e e k ly . M arch 1 7 , 1 9 5 2 , p . 2 3 .
8 7
d i v e r s i f i e d i n v e s t m e n t s i s p a i d o u t t o t h e i r s h a r e
h o l d e r s f o u r t im e s a y e a r * 2
The p o r t f o l i o s e c u r i t i e s u n d e r l y i n g a p e r i o d i c
p ay m en t p l a n a r e r e a d i l y m a r k e t a b l e . P r a c t i c a l l y a l l o f
t h e s e c u r i t i e s u n d e r l y i n g t h e s e p l a n s a r e l i s t e d a n d
t r a d e d d a i l y on e i t h e r t h e New Y ork S to c k E x ch an g e o r t h e
New Y ork C urb E xchange* The l i m i t i n g f a c t o r s p r e v e n t i n g
t h e a c c u m u la tio n o f l a r g e b l o c k s o f s t o c k b y a n i n v e s tm e n t
com pany u l t i m a t e l y e n h a n c e t h e m a r k e t a b i l i t y f e a t u r e s *
The a rg u m e n t h a s b e e n r a i s e d t h a t l i q u i d a t i n g a b l o c k o f
s t o c k fro m an in v e s tm e n t com pany p o r t f o l i o w ould s i g n i f i
c a n t l y d e p r e s s t h e p r i c e o f t h a t p a r t i c u l a r s t o c k and
b r i n g a r e d u c t i o n i n n e t a s s e t v a lu e o f t h e p o r t f o l i o
s t o c k b e in g s o ld * T h is i s r a r e l y t h e c a s e , s i n c e b r o a d
d i v e r s i f i c a t i o n l i m i t s t h e a c c u m u la tio n o f in n u m e r a b le
n u m b e rs o f s h a r e s i n o n e com pany an d t h e s a l e o f a l a r g e
am ou nt o f s i n g l e s t o c k w ould u s u a l l y b e i n s m a ll a m o u n ts
o v e r a g r a d u a l p e r i o d .
The c o s t e n c o u n te r e d b y t h e p l a n h o l d e r i s t h e
g r e a t e s t d e f e c t a s s o c i a t e d w i t h t h e s e p ro g ra m s* The sp o n
s o r f e e o f b e tw e e n 8 p e r c e n t a n d 9 p e r c e n t i s h i g h , b u t
i t i s t h e p r i c e t h a t m u st be p a i d b y t h e p l a n h o l d e r t o
2 A. J . W i l k i n s , M I f I W ere a R e t a i l S a le s m a n ,”
The C o m m ercial and F i n a n c i a l C h r o n i c l e , 1 6 8 , S e p te m b e r 2 ,
T ils.
88
g a i n t h e in v e s tm e n t a d v a n ta g e s o f su c h p l a n s . T h e re i s
t h e p o s s i b i l i t y t h a t t h i s f e e may be r e d u c e d a s t h e s e
p l a n s grow a n d th e s p o n s o r i s a b l e t o r e d u c e h i s lo a d
co m m en su rate w i t h i n c r e a s e d c o n su m e rs s a l e s .
I n d e f e n s e o f t h i s s a l e s c h a r g e , i t i s i n t e r e s t i n g
t o show t h e c o m p a r a tiv e c o s t s t o a n o t h e r f i n a n c i a l s e r v i c e
i n d u s t r y — n o t a b l y t h e i n s u r a n c e b u s i n e s s . The s e l l i n g
c o s t o f p e r i o d i c p ay m en t p l a n s i s p r e d o m in a n t a s a d e t e r
r e n t i n d i s c o u r a g i n g consum er s a l e s , b u t w h a t a r e t h e
c o m p a r a tiv e c o s t s o f b u y in g t h e s e r v i c e o f i n s u r a n c e ?
The L i f e I n s u r a n c e P a c t Book o f 1948 g i v e s an o v e r - a l l
p i c t u r e o f t h e a v e r a g e c o s t i n c u r r e d b y t h e p u b l i c i n
p u r c h a s i n g i n s u r a n c e . A gency e x p e n s e s o r s a l e s c h a r g e s
w ere a p p r o x i m a t e ly 1 2 .7 p e r c e n t o f prem ium s r e m i t t e d t o
a l l i n s u r a n c e c o m p a n ie s i n 1 9 4 7 . As shown i n T a b le V I,
t h e s a l e s e x p e n s e h a s b e e n I n c r e a s i n g s t e a d i l y s i n c e 1 943,
and o t h e r e x p e n s e s w ere a p p r o x i m a t e ly 36 p e r c e n t o f t h e
incom e fro m I n v e s tm e n ts .® ^
The c o s t o f c u s t o d i a n s h i p and in v e s tm e n t m anage
m en t seem s f a i r com pared t o t h e a d v a n t a g e s a f f o r d e d t h e
i n v e s t o r . The c u s t o d i a n I s c e r t a i n l y e n t i t l e d t o b e
H en ry H u n t, M The I n s u r a n c e Company ’ Load* v s .
M u tu a l F u n d s,n The C om m ercial a n d F i n a n c i a l C h r o n i c l e ,
1 6 9 :2 0 , Ju n e 2 3 , 1 9 4 9 .
89
TABLE V I
LIFE IN SU R A N C E IN C O M E D O L L A R —UNITED STATES C O M P A N IE S
1942 1943 1944 1945 1946 1947
Income
premiums 75.6 75.7 76.6 79.9 77.8 80.1
investment earnings 22.3 21.9 20.8 20.5 19.5 18.7
other income 2.1 2.4 2.6 2.6 2.7 1.2
100.0 100.0 100.0 100.0 100.0 100.0
How Useds
ad d ition s to p o licy
reserves and other funds*
b en efit payments 44.8 41.8 40.4 40.5 39.4 40.8
net add ition s to
p o licy reserves 31.8 37.2 39.6 41.2 39.1 35.8
add ition s to sp ecia l
reserves and surplus
funds 7.5 4.7 4.0 2.2 3.5 4.2
84.1 83.7 84.0 83.9 82.0 80.8
Operating Expenses*
Agency 8 .5 8.5 8.7 8.9 10.0 10.3
Home O ffice sa la r ie s 2.6 2.5 2.4 2.3 2.7 3.0
other 2.8 2.6 2.5 2.5 3.0 3.7
13.9 13.6 13.6 13.7 15.7 17.0
Taxes 1.7 2.0 2*0 2.0 1.8 1.8
Dividends to stockholders .3 .7 .4 .4 .5 .4
100.0 100.0 100.0 100.0 100.0 100.0
Sources* In stitu te of L ife Insurance and Spectator Year Book, Before
1947, Accident and Health business of l i f e companies was not included.
* Henry Hunt, op, c i t .
90
r e im b u r s e d f o r s e r v i c i n g t h e v a r i o u s p l a n h o l d e r s * a c c o u n t s .
i
: Can t h e p r i c e o f s k i l l e d m anagem ent b e m e a s u re d ? The
s u c c e s s o r f a i l u r e o f e a c h i n d i v i d u a l p l a n u l t i m a t e l y i s
b a s e d on t h e ju d g m e n t a n d r e s e a r c h c a r r i e d o u t i n fo rm u
l a t i n g t h e p o r t f o l i o . T h is f e e seem s j u s t i f i a b l e f o r t h e
a d v a n t a g e s a c c r u i n g fro m a d e q u a te p o r t f o l i o m anagem ent t o
t h e i n v e s t o r . 4
A p p r e c i a t i o n i s an u l t i m a t e f a c t o r i n t h e o p e r a t i o n
o f t h e s e p l a n s a f t e r p r o v i d i n g f o r a d e q u a te d i v e r s i f i c a t i o n ,
s a f e t y o f p r i n c i p a l , an d d e p e n d a b i l i t y o f in c o m e . I n
g e n e r a l , t h e b a l a n c e d fu n d d o e s n o t aim f o r s p e c t a c u l a r
p r o f i t s fro m t h e b u y in g a n d s e l l i n g o f s e c u r i t i e s n o r d o e s
t h e common s t o c k f u n d . The common s t o c k f u n d , h o w e v e r, i s
m ore l i k e l y t o show g r e a t e r a p p r e c i a t i o n i n a p e r i o d o f
econo m ic p r o s p e r i t y .
The c o m p a ris o n o f t h e r e t u r n on $ 1 20 0 i n v e s t e d o v e r
t h e l a s t t e n y e a r s i n v a r i o u s in v e s tm e n t m ed ia c o n s i s t i n g
o f a commerc i a l b a n k , a F e d e r a l Savings a n d Loan A s s o c ia
t i o n , a t e n y e a i^ e n d o w m e n t p o l i c y , a f a c e am ount c e r t i f i c a te
a p e r i o d i c p a y m e n t p l a n f o r t h e a c c u m u la tio n o f s h a r e s o f
an i n v e s tm e n t com pany s t o c k , and a p e r i o d i c p ay m en t p l a n
f o r t h e a c c u m u la tio n o f s h a r e s o f an i n d i v i d u a l common
s t o c k , i s shown i n t h e f o l l o w i n g T a b l e s .
4 H. G. F r a i n e , " P ro b le m s o f S m a ll - S c a l e I n v e s t o r , "
The C o m m ercial a n d F i n a n c i a l C h r o n i c l e . 1 7 8 :3 4 7 , J u l y 2%
T5F0.
91
T A B L E VII
R E T U R N O N #1200 IN V E ST M E N T IN A C O M M E R C IA L B A N E ?8
Principal In ter est Total
F ir st year # 120.00 # 1.20 # 121.20
Second year 241.20 2.41 243.61
Third year 363.61 3.64 367.25
Fourth year 487.25 4.87 492.12
F ifth year 612.12 6.12 618.24
Sixth year 738.24 7.38 745.62
Seventh year 865.62 8.66 874.28
Eighth year 994.28 9.94 1004.22
Ninth year 1124.22 11.24 1135.46
Tenth-year 1255.46 12.55 1268.01
* Tan d o lla rs deposited monthly over a ten year period drawing in te r e st
a t the rate of 1 per cent annually would amount to a to ta l o f #1,268.01
or #68.01 cumulative in te r e s t on the #1200 deposited.
T A B L E 7 IH 92
R E T U R N O N $1200 IN V E ST M E N T IN A F E D E R A L SAVINGS A N D L O A N ASSOCIATION*
Prineipal Dividend Total
F ir st year t 120.00 # 3.60 $ 123.60
Second year 243.60 7.31 250.91
Third year 370.91 11.13 382.04
Fourth year 502.04 15.06 517.10
F ifth year 637.10 19.11 656.21
Sixth year 776.21 23.29 799.50
Seventh year 919.50 27.58 947.08
Eighth year 1067.08 32.01 1099.09
Ninth year 1219.09 36.57 1255.66
Tenth year 1375.66 41,27 1416.93
*
Ten d o lla rs deposited monthly over a te n year period earning a
dividend a t the rate of 3 per cent annually in a Federal Savings and
Loan A ssociation would amount to a to ta l of $1416*93 a t maturity or
$216*93 in accrued dividends.
N 'v -___
93
T A B L E IX
R E T U R N O N A #1200 E N D O W M E N T PLA N *
Total
payments Cash value
Accumulated
dividends
F ir st year 1 120.00 # 73,69 # 4.67
Second year 240.00 177.71 10.01
Third year 360.00 284.56 16.04
Fourth year 480.00 396.68 22.82
F ifth year 600.00 511.84 30.36
Sixth year 720.00 630.69 38.76
Seventh year 840.00 754.91 48.08
Eighth year 960.00 882.74 58.39
Ninth year 1080.00 1015.01 69.70
Tenth year 1200.00 1200.00 82.14
A ten year #1200 endowment plan payable a t #10 per month would
encounter to ta l premiums o f #125.41 over th e ten year period; of which
approximately #46.31 would be deducted from the f i r s t year’ s payments.
The insurance premium would be reduced in proportion to the period ic
increase of the p lan 's cash v a lu e. At the end o f the ten year period,
the cash value of the plan would be #1200 and th e accumulated — .
dividends, paid in ad d ition to the #1200 insurance, would be/'#82.14.
94
TABLE X
R E T U R N O N $1300 IN V E ST M E N T IN F A C E A M O U N T CERTIFICATE PL A N *
Total payments Loan or cash value**
F ir st year $ 120.00 -
Second year 240.00 I 126.48
Third year 360.00 257.84
Fourth year 480.00 397.29
F ifth year 600.00 549.73
Sixth year 720.00 728.11
Seventh year 840.00 919.46
Eighth year 960.00 1120.54
Ninth year 1080.00 1337.84
Tenth year 1200.00 1622.62
♦
John Moody, Investors Syndicate, Moody* s Manuals Banks-Insurance-
Real Estate-Investm ent T rusts, 1941, p. 141Z t A ten year face amount
c e r tific a t e plan payable a t the rate of $10 per month or $1300 to ta l
payments-would have a cash value of approximately #1,633.63 or a net
gain o f'$ 4 2 2 .6 2 a t the date o f m aturity.
Figured from loan or cash value given in Moody* s Manual for $74.00
annual payments per $1,000 c e r tif ic a t e .
95
The a l l o c a t i o n o f p a y m e n ts u n d e r a p e r i o d i c p ay m en t
p l a n i s i l l u s t r a t e d i n T a b le X I, u s i n g a #1200 u l t i m a t e
i n v e s tm e n t a s a b a s i s f o r t h i s s t u d y . The s a l e s lo a d i s
50 p e r c e n t o f t h e f i r s t t w e lv e p a y m e n ts . A t o t a l s a l e s
lo a d o f 8 .9 p e r c e n t o r # 1 0 7 .8 0 i s d e d u c te d o v e r t h e l i f e
o f t h e p l a n ; o f w h ic h # 65 i s c o l l e c t e d d u r i n g t h e f i r s t
y e a r o f o p e r a t i o n . The r e m a in d e r o f t h e s a l e s lo a d i s
d e d u c te d e v e n ly o v e r t h e l i f e o f t h e p l a n a t t h e r a t e o f
# .4 0 p e r m o n th . The t o t a l c u s t o d i a n f e e o f 2 . 5 p e r c e n t
o f n e t am ount i n v e s t e d i s d e d u c te d e v e n ly o v e r t h e l i f e
o f t h e p l a n a t t h e r a t e o f # .2 5 p e r m o n th . The F e d e r a l
I s s u a n c e T ax am o u n ts t o .1 1 p e r c e n t o f t h e n e t am ount
i n v e s t e d . T o t a l c h a r g e s am ount t o 1 1 .5 9 p e r c e n t o f n e t
am ount i n v e s t e d . D iv id e n d s a t t h e r a t e o f a p p r o x i m a t e ly
6 p e r c e n t h a v e b e e n p a i d d u r i n g t h e p l a n ’ s e x i s t e n c e .
The i n i t i a l paym ent i n a l l p l a n s i s d o u b le t h e am ount o f
t h e s u b s e q u e n t p e r i o d i c p a y m e n ts ; t h e r e f o r e i n t h i s p l a n
#20 w ould be t h e i n i t i a l p ay m en t a n d t h e r e a f t e r #10 w ould
b e p a i d m o n t h l y .5
I n T a b le X II I s shown t h e r e t u r n on a #1200 i n v e s t
m ent In a p e r i o d i c p ay m en t p l a n f o r t h e a c c u m u la tio n o f
s h a r e s o f an in v e s tm e n t com pany s t o c k . The t o t a l am ount
i n v e s t e d u s i n g t h e d i v id e n d r e i n v e s t m e n t t h e o r y w ou ld b e '
5
F i r s t I n v e s t o r s C o r p o r a t i o n P r o s p e c t u s , p . 5 .
TABLE X I
T H E A L L O C A T IO N O F P A Y M E N T S U N D E R A PER IO D IC P A Y M E N T P L A N *
Payments
Federal
Issuance
Tax
Sales
load
Custodian
fee
Total
charges
Net
amount
invested
Total payments to be made $1200.00 $1.32 $107.80 $30.00 $139.12 $1060.88
Per cent of to ta l payments 100.00$ .11$ 8.98$ 2.50$ 11.59$ 88.41$
Payments 1-12 130.00 1.32 65.00 3.25 69.57 60.43
Per cent of payments 1-12 100.00$ 1.01$ 50.00$ 2.50$ 53.51$ 46.49$
Payments 1-24 250.00 1.32 69.50 6.25 77.37 172.63
Per cent of payments 1-24 100.00$ .53$ 27.92$ 2.50$ 30.95$ 69.05$
$
Data used in the above table from F irst Investors Corporation Prospectus, p. 5*
CD
97
TABLE XL I
R E T U R N O N #1200 IN V E ST M E N T IN A PERIODIC' P A Y M E N T PL A N F O R T H E
A C C U M U L A T IO N O F SH A R E S O F A N IN V E ST M E N T C O M P A N Y STO C K
Net amount
in vested
Amount Net w ith d iv i-
o f amount dend rein
payment Deductions in vested Dividends vestment
F ir st year $ 130,00 # 69.57 # 60.43 $ 3.63 # 64.06
Second year 120.00) 7.80 176.26 10.57 186.83
Third year 120.00 7.80 299.03 17.94 316.97
Fourth year 120.00 7.80 429.17 25.75 454.92
F ifth year 120.00 7.80 567.12 34.03 601•15
Sixth year 120.00 7.80 713.35 42.80 766.15
Seventh year 120.00 7.80 868.35 52.10 920.45
Eighth year 120.00 7.80 1032.65 61.96 1094.61
Ninth year 120.00 7.80 1206.81 72.41 1279.21
Tenth year
Total
110.00
#1200.00
7.15
#139.12
1382.06 82.92 1464.98
98
$ 1 4 6 4 .9 8 o r a n e t g a i n o f $ 2 6 4 .9 8 on t h e $1200 p a i d i n t o
t h e p l a n . T h is f i g u r e d o e s n o t i n c l u d e a n y m a rk e t a p p r e
c i a t i o n o r d e p r e c i a t i o n o f u n d e r l y i n g s e c u r i t i e s w h ic h may
h a v e a c c r u e d t o t h e p l a n h o l d e r i n t h e fo rm o f a c a p i t a l
g a i n o r l o s s .
The r e t u r n on a $1200 in v e s tm e n t i n a p e r i o d i c
p ay m en t p l a n f o r th e a c c u m u la tio n o f s h a r e s o f an i n d i
v i d u a l common s t o c k i s shown i n T a b le X I I I . The s a l e s
lo a d i s 50 p e r c e n t o f t h e f i r s t tw e lv e p a y m e n ts . A
t o t a l s a l e s lo a d o f 7 . 5 p e r c e n t o f n e t am ount i n v e s t e d
o r $ 8 1 .6 0 i s d e d u c te d o v e r t h e l i f e o f t h e p l a n ; o f w h ich
$ 6 0 i s d e d u c te d d u r i n g t h e f i r s t y e a r o f o p e r a t i o n . The
r e m a in d e r o f t h e s a l e s lo a d i s d e d u c te d e v e n ly o v e r t h e
l i f e o f t h e p l a n a t t h e r a t e o f $ .2 0 p e r m o n th . The t o t a l
c u s t o d i a n f e e i s 3 . 4 p e r c e n t o f t h e n e t am ount i n v e s t e d
o r $ 3 6 .0 0 , w h ic h i s d e d u c te d e v e n ly o v e r t h e l i f e o f t h e
p l a n a t t h e r a t e o f $ .3 0 p e r m o n th . T o t a l d e d u c t i o n s
am ount t o 1 0 .9 p e r c e n t o f t h e n e t am ount i n v e s t e d . The
a v e r a g e r a t e o f a n n u a l d i v i d e n d s w as n o t u s e d , s i n c e t h e
a c t u a l d i v i d e n d s p a i d by E astm an Kodak Company on t h e i r
common s t o c k d u r i n g t h i s t e n y e a r p e r i o d w e re o b t a i n a b l e .
The t o t a l am ount i n v e s t e d u s i n g t h e d i v i d e n d r e
in v e s tm e n t t h e o r y w ould b e $ 1 ,3 3 8 .2 6 o r a n e t g a i n o f
$ 1 3 8 .2 6 on t h e $1200 p a i d i n t o t h e p l a n . T h is f i g u r e
T A B L E XIII
H Y P O T H E T IC A L T R A N SC R IP T O P A Q U IN B Y P L A N B A SE D O H C O M M O N S T O C K O F E A S T M A N K O D A K C O M P A N Y *
Date
DEPO SITS
Numbers Amounts
Deductions
from
deposits
Balances
for
investment
Year Month Day Prom To
Monthly
f i r s t year,
annually
thereafter Cumulative
Creation Custody
fee fee
Monthly for
f ir s t year,
annually
thereafter Cumulative
1940 Aug, 1 1 6 $ 60 1 60 I 30,00 # 1.80 I 28.20
1
28.20
Sept, 1 7 10 70 5.00 .30 4.70 32.90
Oct, 1 Dividend .38 33.28
Oct, 1 8 10 80 5.00 .30 4.70 37.98
Nov, 1 9 10 90 5,00 ,30 4.70 42.68
Dec, 1 10 10 100 5.00 .30 4.70 47.38
1941 Jan, 2 Dividend .53 47.91
2 11 10 110 5.00 .30 4.70 52.61
Peb, 1 12 10 120 5.00 .30 4.70 57.31
Mar. 1 13 10 130 .20 .30 9.50 66.81
April 1 Dividend .74 67.55
1 14 10 140 .20 .30 9.50 77.05
M ay 1 15 10 150 .20 .30 9.50 86.55
June 1 16 10 160 .20 .30 9.50 96.05
July 1 Dividend 1.07 97.12
1 17 10 170 .20 .30 9.50 106.62
1941 Aug. 1 Dividends 8,40 115.02
1942 July 1 18 29 120 290 2.40 3,60 114.00 229.02
1942 Aug. 1 Dividends 10,35 239.37
1943 July 1 30 41 120 410 2.40 3.60 114.00 353.37
1943 Aug. 1 Dividends 14,25 367.62
1944 July 1 42 53 120 530 2.40 3.60 114.00 481.62
------------ a
*A Quinby Plan based on C om m on Stock of Eastman Kodak Company, Supplemental Prospectus, p. 2,
TABLE X C II (continued)
H Y P O T H E T IC A L T R A N SC R IP T O F A Q T J IN B Y P L A N B A S E D O N C O M M O N S T O C K O F E A S T M A N K O D A K C O M P A N Y
D EPO SITS Deductions Balances
from for
Date Numbers Amounts deposits investment
Year Month Day From To
Monthly
f ir s t year,
annually
thereafter Cumulative
Creation
fee
Custody
fee
Monthly for
f ir s t year,
annually
thereafter Cumulative
1944 Aug. 1 Dividends $ 22,38 # 504,00
1945 July 1 54 65 1 120. $ 650 # 2.40 # 3*60 114,00 618.00
1945 Aug, 1 Dividends 29.89 647.89
1946 July 1 66 77 120 770 2.40 3.60 114.00 761.89
1946 Aug. 1 Dividends 36,75 798.64
1947 July 1 78 89 120 890 2.40 3.60 114,00 912.64
1947
1947
M ay
Aug,
15
1
S p lit 5 f o r i
Dividends » 44.32 956.96
1948 July 1 90 101 120 1010 2.40 3.60 114.00 1070.96
1948 Aug. 1 Dividends 54.40 1125.36
1949 Jan. 22 Stock Div.
1949 July 1 102 113 120 1130 2.40 3.60 114,00 1239.63
1949 Aug.
Jan.
1
21
Dividends
Stock Div,
32.13 1271.76
1950 Feb. 1 114 120 70 1200 1.40 2.10 66.50 1338.26
Totals #1200 # 81.60 #36.00 #1338.26
100
101
d o e s n o t I n c l u d e a n y m a r k e t a p p r e c i a t i o n o r d e p r e c i a t i o n
o f t h e s t o c k o v e r t h i s p e r i o d . H ow ever, one o f t h e b a s i c
a im s o f t h i s p l a n I s t o g a i n m a r k e t a p p r e c i a t i o n i n t h e
i n d i v i d u a l common s t o c k b e in g m a r k e te d . I t i s i n t e r e s t i n g
t o n o t e t h a t t h e common s h a r e s o f E astm an K odak Company
a c c u m u la te d o v e r t h i s t e n y e a r p e r i o d w o u ld h a v e a l i q u i
d a t i n g v a l u e o f $ 1 8 1 8 .4 4 .
I t i s n o te w o r th y t h a t t h e s i z e o f a p e r i o d i c p a y
m en t p l a n h a s a d e f i n i t e b e a r i n g on t h e d e d u c t i o n s fro m
p e r i o d i c p a y m e n ts , p l a n s c a l l i n g f o r t o t a l p a y m e n ts i n
e x c e s s o f $ 1 0 ,0 0 0 g e n e r a l l y b r i n g a b o u t a r e d u c t i o n o f
a p p r o x i m a t e ly on e p e r c e n t I n t o t a l d e d u c t i o n s o f t h e n e t
am ount i n v e s t e d a n d t o t a l p a y m e n ts i n e x c e s s o f $ 2 5 ,0 0 0
b r i n g a b o u t a r e d u c t i o n o f a p p r o x i m a t e ly 3 p e r c e n t i n
t o t a l d e d u c t i o n s o f t h e n e t am ount i n v e s t e d . The t o t a l
d e d u c t i o n s o f p l a n s i n e x c e s s o f $ 5 0 ,0 0 0 g e n e r a l l y am ount
t o a b o u t 2 . 5 p e r c e n t o f t h e n e t am ount i n v e s t e d .
D o l l a r a v e r a g i n g i s an I n t e g r a l f a c t o r o f t h e s e ~~
p l a n s . The m e r i t s o f I t s u s e have b e e n shown b y t h e
a c t u a l r e s u l t s o b t a i n e d by p e r i o d i c p ay m en t p r o g r a m s .
D o l l a r a v e r a g i n g e s s e n t i a l l y i s I n v e s t i n g t h e same am ount
o f m oney a t d e f i n i t e p e r i o d i c i n t e r v a l s i n t h e same
s e c u r i t y o v e r a r e l a t i v e l y lo n g p e r i o d o f t i m e . T a b le XIV
i l l u s t r a t e s t h e m ech an ism o f d o l l a r c o s t a v e r a g i n g by
102
i n v e s t i n g #50 p e r m onth i n s h a r e s o f M a s s a c h u s e t t s I n
v e s t o r s T r u s t b e g in n i n g on S e p te m b e r 1 5 , 1 9 2 9 , J u l y 1 5 ,
1932 an d on M arch 1 5 , 1 9 3 7 . The a c c o m p a n y in g c h a r t
d e p i c t s t h e t r e n d o f s t o c k p r i c e s s i n c e 1 9 2 9 , sh o w in g
p ro g ra m s s t a r t e d S e p te m b e r, 1 9 2 9 , J u l y , 1932 a n d M arch ,
1 9 3 7 . The summary o f r e s u l t s o f t h e t h r e e p ro g ra m s i s
shown i n T a b le XV.
The p e rf o r m a n c e o f t h e s t o c k i n t h e a b o v e c h a r t
a n d t a b l e s i s a s t r o n g s e l l i n g p o i n t i n a t t r a c t i n g
c u s to m e r s t o p a r t a k e i n a p e r i o d i c p a y m e n t p l a n . The
p o t e n t i a l c u s to m e r a s k s t h e q u e s t i o n why h e c a n n o t buy
t h e i n v e s tm e n t company s h a r e s t h r o u g h a b r o k e r , p a y t h e
b r o k e r a g e f e e s , and e l i m i n a t e t h e v a r i o u s f e e s and c h a r g e s
e n c o u n te r e d i n a p e r i o d i c p ay m en t p ro g ra m . The s a v in g
on an i n d i v i d u a l p u r c h a s e fro m a b r o k e r w o u ld b e n o t i c e
a b l e , b u t how o f t e n a n d a t w h a t r e g u l a r i n t e r v a l s i s t h i s
p o t e n t i a l c u s to m e r g o in g t o make h i s n e x t i n v e s t m e n t .
The f a c t t h a t few i n d i v i d u a l s i n t h e low -m edium
incom e g ro u p a r e a b l e t o a c c u m u la te e n o u g h m oney t o
p u r c h a s e s h a r e s o f s t o c k on an i n d i v i d u a l p u r c h a s e b a s i s
i s 1 o f f u n d a m e n ta l i m p o r t a n c e . The few i n d i v i d u a l s o f t h i s
g ro u p a b l e t o m ake s u c h a p u r c h a s e u s u a l l y do so a t v e r y
i r r e g u l a r and i n o p p o r tu n e p e r i o d s . T r u e , some p e r s o n s
c o u ld p u r c h a s e a few s h a r e s p e r i o d i c a l l y t h r o u g h s t r i c t
1ST
dex
225
— Program Started
at This Level
S T A N D A R D & P O O R ’ S IN D E X 200
416 Combined Stocks
175
150
Program Started
at This Level
125
100
Program Started
at This Level
1929'30 '31 '32'33' 34 '55'36 '37 '38 59 '40 '4L '42 '43 < 4 4 45 '46 '47«48 '49 '50 '51
/
Chart 1. Dollar Cost Averaging.
As of August 15
103
104
TABLE X IV
Y EA R -EN D R ESU LTS O F #50 M O N T H L Y INVESTED IN
M A SSA C H U SE T T S INVESTO RS TR U ST*
Plan started 9/1929 Plan started 7/1932 Plan started 3/1937
Liq, value Liq, value Liq, value
Year Cost end of year Cost end of year Cost end of year
1929 200 178
i
1930 800 526
1931 1,400 646
1932 2,000 1,137 300 284
1933 2,600 2,018 900 938
1934 3,200 2,707 ' 1,500 1,560
1935 3,800 4,085 2,100 2,643
1936 4,400 5,716 2,700 3,926
1937 5,000 4,101 3,300 2,945 500 336
1938 5,600 5,563 3,900 4,161 1,100 986
1939 6,200 5,811 4,500 4,490 1,700 1,553
1940 6,800 5,557 5,100 4,416 2,300 1,882
1941 7,400 5,278 5,700 4,313 2,900 2,133
1942 8,000 6,351 6,300 5,287 3,500 2,922
1943 8,600 8,161 6,900 6,888 4,100 4,060
1944 9,200 10,058 7,500 8,584 4,700 5,310
1945 - 9,800 13,467 8,100 11,589 5,300 7,394
1946 10,400 12,802 8,700 11,084 5,900 7,260
1947 11,000 13,035 9,300 11,361 6,500 7,633
1948 11,600 13,009 9,900 11,407 7,100 7,839
1949 12,200 15,440 10,500 13,641 7,700 9,546
1950 12,800 19,197 11,100 17,001 8,300 12,110
1951 13,200 22,080 11,500 19,594 8,700 13,866
*
Edward. E. Hale, B revits, Issued by Vance, Sanders & Company,
Boston, M assachusetts, V ol, H - No, 17, September 10, 1951, p, 1,
TABLE XV
S U M M A R Y O F R E SU L T S O F D O L L A R - C O ST -A V E R A G IN O P R O G R A M S * |50 M O N T H L Y
IN V E S T M E N T IN S H A R E S O F M A S S A C H U S E T T S IN V E ST O R S T R U ST *
P R O G R A M
I
P R O G R A M
II
P R O G R A M
III
Date program commenced Sept. 15, 1929 July 15, 1932 March 15, 1937
Number of monthly investments 264 230 174
Amount of monthly investments #50 #50 #50
Total amount invested 113,200 #11,500 #8,700
Total number of shares acquired 586 520 368
Liquidating value of shares owned 8/15/51 #22,080 #19,594 #13,866
Cumulative averaging cost per share # 22.53 # 22.12 | 23.64
Investment income received # 7,581 # 6,229 # 3,601
* Hale, op. c i t . , p. 2.
H
0
01
106
s e l f - d i s c i p l i n e ; b u t e a c h i n d i v i d u a l p u r c h a s e w o u ld e n
t a i l b r o k e r a g e c o m m issio n s an d t a x e s . The p ro b le m i s how
many i n d i v i d u a l s o f t h e low -m edium incom e g ro u p a c t u a l l y
p r a c t i c e a p e r i o d i c i n v e s tm e n t o f a s e m i-c o m p u ls o ry
n a t u r e . U n le s s g i v e n a p r o p e r i n c e n t i v e a n d d e f i n i t e
com m itm ent p e r i o d s , t h e s e i n d i v i d u a l s w i l l u s u a l l y f o r e g o
a n y i n v e s tm e n t p ro g ra m o r e n g a g e i n on e o f a v e r y h a p
h a z a r d n a t u r e .®
N ot enough e m p h a sis can be p l a c e d upon th e s e m i-
c o m p u lso ry s a v i n g s t h e o r y a s s o c i a t e d w i t h t h e s e p l a n s .
P e r h a p s t h i s m e r i t o f i n f l i c t i n g a m eans o f p e r i o d i c
in v e s tm e n t j u s t i f i e s t h e f e e c o l l e c t e d b y t h e s p o n s o r
com pany. D o l l a r a v e r a g i n g becom es a v e r y i m p o r t a n t f a c t o r
o n ce t h i s m eth o d o f s e m i-c o m p u ls o r y s a v in g i s e s t a b l i s h e d .
H a p h a z a rd m e th o d s o f b u y in g an d s e l l i n g s e c u r i t i e s a t i r
r e g u l a r p e r i o d s a r e m in im iz e d and t h e i n v e s t o r i s r e a s o n
a b l y a s s u r e d t h a t he w i l l p a y a low a v e r a g e p r i c e on t h e
s e c u r i t y b e i n g a c c u m u la te d on a r e g u l a t e d p e r i o d i c b a s i s .
An i n v e s t o r p u r c h a s i n g s h a r e s u n d e r su c h a p ro g ra m
s h o u ld r e a l i z e t h a t h e i s i n v e s t i n g h i s f u n d s
p r i m a r i l y i n s e c u r i t i e s s u b j e c t t o m a r k e t f l u c t u a
t i o n s an d t h a t t h e p ro g ra m c o n te m p l a te s in v e s tm e n t
i n su c h s e c u r i t i e s a t r e g u l a r i n t e r v a l s r e g a r d l e s s
o f p r i c e l e v e l s , and t h a t he s h o u ld t a k e i n t o a c c o u n t
g
P a u l A. J o h n s t o n , " P e r i o d i c P la n P r o v i d e s Sound
S a v in g s P ro g ra m ," B a rro n s N a t i o n a l B u s in e s s and F i n a n c i a l
W e e k ly , 3 0 : 3 9 , A p r i l 3 , 1 9 5 0 .
107 1
h i s f i n a n c i a l a b i l i t y t o c o n t i n u e t h e p ro g ra m
t h r o u g h p e r i o d s o f low p r i c e l e v e l s * He s h o u ld
a l s o r e a l i z e t h a t t h e p ro g ra m w i l l n o t p r o t e c t
a g a i n s t l o s s i n v a l u e i n d e c l i n i n g m a r k e ts and
t h a t i f he d i s c o n t i n u e s t h e p ro g ra m when t h e
m a r k e t v a l u e o f h i s a c c u m u la te d s h a r e s i s l e s s th a n
h i s c o s t , he w i l l i n c u r a l o s s *7
7
Edw ard E . H a l e , B r e v l t s , I s s u e d by V ance, S a n d e rs
& Company, B o s to n , M a s s a c h u s e t t s , V o l. H - H o. 17,
S e p te m b e r 10, 1951.
CHAPTER VI
CRITICAL ANALYSIS OP THE MERITS AND DEFECTS OP PERIODIC
PAYMENT PLANS FOR ACCUMULATION OP AN
INDIVIDUAL COM M ON STOCK
The v a r i o u s i n t e r n a l f a c t o r s g o v e r n in g t h e s e p l a n s
e m b race s a f e t y o f p r i n c i p a l , d i v e r s i f i c a t i o n , s t a b i l i t y
o f in c o m e , m a r k e t a b i l i t y , c o s t a n d a p p r e c i a t i o n .
U l t i m a t e l y t h e s a f e t y o f p r i n c i p a l r e s t s i n t h e
e a r n i n g v a lu e and d i v e r s i f i c a t i o n o f f e r e d b y t h e i n v e s t
m en t p ro g ra m . U nder t h e t y p e o f p l a n f o r t h e a c c u m u la tio n
o f an i n d i v i d u a l common s t o c k , a b s o l u t e l y no d i v e r s i f i c a
t i o n i s o f f e r e d and t h e s a f e t y o f p r i n c i p a l i s e n t i r e l y
d e p e n d e n t upon t h e s u c c e s s o r f a i l u r e o f o n e c o r p o r a t i o n .
The c o r p o r a t i o n c h o se n a s t h e in v e s tm e n t medium f o r su c h
a p l a n i s u s u a l l y r e p r e s e n t e d by s t o c k w h ich i s o f a
" b lu e c h ip " n a t u r e . The te rm " b lu e c h ip " g e n e r a l l y i n
f e r r i n g t h a t t h e c o r p o r a t i o n i s ab o v e r e p r o a c h i n r e g a r d
t o e a r n i n g p o w e r, p ay m en t o f d i v i d e n d s o v e r a lo n g p e r i o d
o f y e a r s , e x c e l l e n t m a n a g e m e n t, c o n s e r v a t i v e p o l i c i e s ,
an d lo n g te rm a p p r e c i a t i o n o f t h e m a r k e t v a lu e o f s e c u r i
t i e s .
T h e se f a c t o r s c e r t a i n l y e n h a n c e t h e s a f e t y o f
p r i n c i p a l , b u t i t i s r e l a t i v e l y i m p o s s i b l e t o p r e d i c t
f u t u r e d e v e lo p m e n ts . I f su ch d e v e lo p m e n ts p r o v e a d v e r s e
109
t o t h i s one c o r p o r a t i o n , t h e n e t am ount I n v e s t e d In t h e
s t o c k i s c e r t a i n l y In j e o p a r d y . The s t o c k can toe s o l d
an d I n v e s t e d i n some o t h e r com pany, b u t t h i s s i t u a t i o n
w ould p r o b a b l y b r i n g a b o u t a l o s s a c c r u i n g t o th e p l a n
h o l d e r . I f t h e m oney h a d b een I n v e s t e d i n an I n v e s tm e n t
company s e c u r i t y and one c o r p o r a t i o n o f t h e p o r t f o l i o
seem ed i n j e o p a r d y , t h e s h a r e s o f t h i s s t o c k w ould h av e
been l i q u i d a t e d a n d r e p l a c e d b y some c o r p o r a t i o n i n a
b e t t e r f i n a n c i a l p o s i t i o n . T h a t i s s p e c i f i c a l l y why t h e
p l a n h o l d e r p a y s a q u a r t e r l y f e e f o r p o r t f o l i o m anagem ent
when p u r c h a s i n g i n v e s tm e n t com pany s h a r e s on a p e r i o d i c
b a s i s .
L ack o f d i v e r s i f i c a t i o n a n d s a f e t y o f p r i n c i p a l a r e
c e r t a i n l y o u t s t a n d i n g d e f e c t s a s s o c i a t e d w i t h t h e s e p l a n s .
P e r h a p s f o r I n v e s t o r s p o s s e s s i n g s i z a b l e r e s e r v e s and
d i v e r s i f i e d I n v e s t m e n ts t h e s e p l a n s w ould b e com m endable,
b u t f o r t h e i n v e s t o r o f t h e lo w -m id d le incom e g ro u p t h e s e
p l a n s o f f e r t o o g r e a t a r i s k co m m en su rate w i t h t h e d e g r e e
o f s a f e t y a f f o r d e d . __
The incom e fro m t h e p l a n d e p e n d s s o l e l y upon t h e
e a r n i n g c a p a c i t y and d i v i d e n d p o l i c y o f o n e c o r p o r a t i o n .
A d v e rse c i r c u m s t a n c e s , su c h a s a l a b o r s t r i k e o r r e d u c t i o n
i n c o n su m er demand o f p r o d u c t , c o u ld s e r i o u s l y a f f e c t t h e
r a t e o f incom e a c c r u i n g t o t h e p l a n h o l d e r . A g a in t h e ~
110
d e p e n d a b i l i t y o f incom e' i s d e p e n d e n t upon a d e q u a te d i v e r s i
f i c a t i o n . The d e c l i n e o f incom e o f one p a r t i c u l a r s t o c k
i n an i n v e s tm e n t com pany p o r t f o l i o w ould h a v e l i t t l e o r
n o e f f e c t on t h e d e p e n d a b i l i t y o f incom e a f f o r d e d by t h e
p l a n . The d e c l i n e w o u ld p o s s i b l y a v e r a g e o u t t o a few
c e n t s b e lo w t h e n o r m a l d i v i d e n d r a t e , i f t h i s d e c l i n e
w ere n o t c o m p e n sa te d b y t h e a d d i t i o n a l I n c r e a s e o f d i v i
d en d r a t e o f a n o t h e r s e c u r i t y i n t h e i n v e s tm e n t p o r t f o l i o .
T h e re i s h a r d l y a s t o c k so p r o m is in g b u t t h a t a
num ber o f o t h e r s e q u a l l y p r o m is in g can b e f o u n d .
T h u s, w h ile n o t r e d u c i n g t h e c h a n c e s f o r a good
r e t u r n , s p r e a d i n g t h e I n v e s tm e n t among s e v e r a l
e q u a l l y good s e l e c t i o n s d o e s , h o w e v e r, m o st
a s s u r e d l y r e d u c e t h e d e g r e e o f i n v e s tm e n t r i s k .
F o r i f t h e o n e s t o c k s h o u ld t u r n o u t b a d l y , t h e
e n t i r e in v e s tm e n t w o u ld b e l o s t . But i f t h e
in v e s tm e n t i s d i v e r s i f i e d o v e r a num ber o f i n d u s t r i e s
and c o m p a n ie s , th e c h a n c e s a r e i n f i n i t e l y h i g h l y
t h a t a l o s s i n a n y o n e s t o c k w i l l be m ore th a n
o f f s e t by g a i n s among t h e o t h e r s . ^
The s h a r e s a r e r e a d i l y m a r k e t a b l e . T h is c o n s t i t u t e s
a m e r i t o f t h e p l a n , s i n c e t h e s t o c k h e l d i n a p l a n
h o l d e r ’ s a c c o u n t can b e l i q u i d a t e d im m e d ia te ly upon n o t i c e
an d t h e c a s h r e a l i z e d fro m su c h s a l e r e m i t t e d t o t h e p l a n
h o l d e r . The i n d i v i d u a l common s t o c k s o l d t h r o u g h t h e s e
p l a n s i s l i s t e d on th e New Y ork S to c k E x c h a n g e .
H. G. F r a i n e , ‘’P ro b le m s o f S m a ll- S c a le I n v e s t o r , ”
The C o m m ercial and F i n a n c i a l C h r o n i c l e , 1 7 2 :3 4 7 , J u l y 2 7 ,
1 9 5 0 ',' p 7 3 1 .---------------------------------------------------
I l l
A c u r s o r y e s t i m a t e o f t h e s e p l a n s i n d i c a t e s t o t a l
d e d u c t i o n s t o b e e x c e s s i v e . H ow ever, upon c l o s e r a n a l y
s i s , t h e c r e a t i o n f e e o f 7 .5 p e r c e n t o f n e t am ount
i n v e s t e d a n d 5 .4 p e r c e n t f o r t h e c u s t o d i a n f e e d o e s n o t
seem to o much when on e c o n s i d e r s t h e s e r v i c e s u n d e r ta k e n
f o r t h e s e f e e s . I f a n y f e e i s e x c e s s i v e , i t i s t h a t o f
t h e s p o n s o r . I t s h o u ld be k e p t I n m in d , h o w e v e r, t h a t
a f t e r t h e e x p e n s e o f s e l l i n g t h e p l a n , t h e s p o n s o r u n d e r
t a k e s l e g a l , a d m i n i s t r a t i v e an d s t a t i s t i c a l c o s t s n e c e s
s a r y t o t h e d e v e lo p m e n t, o r g a n i z a t i o n a n d o p e r a t i o n o f
t h e p l a n . A lso th e c u s t o d i a n i s r e im b u r s e d b y t h e s p o n s o r
f o r a l l fo rm s an d s t a t i o n e r y u s e d p e r t a i n i n g t o t h e o p e r a
t i o n o f t h e p l a n . S a v in g s a c c r u e t o t h e p l a n h o l d e r ,
th r o u g h t h e a g g r e g a t e r e i n v e s t m e n t o f d i v i d e n d s ; t h u s
e l i m i n a t i n g m any i n d i v i d u a l b r o k e r a g e c o m m is s io n s .
Prom t h e s t a n d p o i n t o f t h e p l a n ’ s i n t e r n a l f a c t o r s
I n c o m p a ris o n t o t h o s e p l a n s s e l l i n g I n v e s tm e n t company
s e c u r i t i e s , t h e t o t a l c o s t s a r e h i g h . P r a c t i c a l l y t h e
same p e r c e n t o f f e e s , e x c e p t t h e f e e f o r p o r t f o l i o
m an ag em en t, a r e d e d u c te d w i t h o u t o f f e r i n g t h e c o m p a r a tiv e
a d v a n ta g e s o f s a f e t y o f p r i n c i p a l , d i v e r s i f i c a t i o n and
d e p e n d a b i l i t y o f incom e o f f e r e d t h r o u g h t h e p e r i o d i c
a c c u m u la tio n o f in v e s tm e n t company s e c u r i t i e s .
The m o st n o te w o r th y m e r i t o f t h e s e p l a n s i s t h e
1X2
p o t e n t i a l m a r k e t a p p r e c i a t i o n o v e r a p e r i o d o f y e a r s *
S to c k s p o s s e s s i n g a p o t e n t i a l g ro w th c h a r a c t e r i s t i c a r e
s e l e c t e d b y t h e s p o n s o r . The e m p h a sis i s aim ed a t c a p i t a l
g a i n , r a t h e r th a n t h e d e p e n d a b i l i t y o f incom e a n d m i n i
m i z a t i o n o f r i s k *
The p o s s i b i l i t y f o r m a rk e t a p p r e c i a t i o n i s some
w h at d e p e n d e n t upon th e eco n o m ic e y c l e . A p e r i o d o f
e co n o m ic p r o s p e r i t y b r i n g s a b o u t a g r e a t e r p o t e n t i a l f o r
a p p r e c i a t i o n , w h ile a d e p r e s s e d economy w ould l e s s e n t h i s
p o t e n t i a l . The s t o c k s s e l e c t e d f o r t h i s in v e s tm e n t m e d ia
a r e aim ed a t p r o v i d i n g a d e q u a te r e s e r v e s f o r p r o t e c t i o n
i n d e p r e s s e d econo m ic p e r i o d s an d o f f e r i n g e x c e l l e n t
g ro w th p o t e n t i a l s i n tim e s o f eco n o m ic p r o s p e r i t y .
W h e th e r t h e m e r i t o f a p p r e c i a t i o n c o m p e n s a te s f o r
t h e l a c k o f d i v e r s i f i c a t i o n , s a f e t y o f p r i n c i p a l , o r
d e p e n d a b i l i t y o f in c o m e , w h ic h a r e a l l a t t r i b u t e s o f p l a n s
f o r t h e a c q u i s i t i o n o f i n v e s tm e n t company s h a r e s , i s up
t o th e i n d i v i d u a l i n v e s t o r t o d e c i d e . H ow ever, t h e
f i n a n c i a l p o s i t i o n o f t h e i n v e s t o r i s t h e p re d o m in a n t
f a c t o r . C e r t a i n l y t h e i n d i v i d u a l fro m th e low -m edium
incom e g ro u p c o u ld l i t t l e a f f o r d t o u n d e r t a k e s u c h a
p ro g ra m u n l e s s a d e q u a te r e s e r v e s an d d i v e r s i f i e d i n t e r e s t s
w e re i n h i s p o s s e s s i o n .
I t i s i n t e r e s t i n g t o n o t e t h e m a r k e t a p p r e c i a t i o n
113
o f t h e common s t o c k s by tw o p l a n s u t i l i z e d i n t h i s stu d y *
A Q uinby P la n f o r th e A c c u m u la tio n o f S h a r e s o f t h e
Common S to c k o f E astm an Kodak Company o v e r a t e n y e a r
p e r i o d , w i t h p a y m e n ts o f t e n d o l l a r s ($ 1 0 ) p e r m onth f o r
a n in v e s tm e n t o b j e c t i v e o f $ 1 2 0 0 , com m encing on A u g u st 1 ,
1 9 4 0 , a n d m a t u r in g F e b r u a r y 1 , 1 9 5 0 , w o u ld h av e shown a
m a r k e t a p p r e c i a t i o n o f $ 6 1 8 .4 4 i n c l u d i n g t h e r e i n v e s t m e n t
o f d i v i d e n d s . 2 The A r m f ie ld P la n f o r t h e a c c u m u la tio n
o f t h e C l a s s B Common S to c k o f R. J . R e y n o ld s T obacco
Company u n d e r t h e same c ir c u m s ta n c e s b u t com m encing on
D ecem ber 1 , 1 9 4 0 , w o u ld h av e shown a m a rk e t a p p r e c i a t i o n
o f $ 3 3 3 .7 8 i n c l u d i n g t h e r e i n v e s t m e n t o f d i v i d e n d s . 5
As p r e v i o u s l y c i t e d , t h e s i z e o f a p e r i o d i c paym ent
p l a n h a s a d e f i n i t e b e a r i n g on t h e d e d u c t i o n s fro m
p e r i o d i c p a y m e n ts . T hus t h e i n v e s t o r , who can l e a s t
a f f o r d t h e s e d e d u c t i o n s i s s a d d le d w i t h a c o m p a r a t i v e l y
h i g h e r l o a d i n g c h a r g e t h a n t h e f e e s e x a c te d i n a p r o p o r
t i o n a t e l y l a r g e r p ro g ra m . T h is f a c t o r p l a c e s a r e s p o n s i
b i l i t y on t h e i n d i v i d u a l p a r t a k i n g i n a $1200 p l a n w h ich
2~}
The Q uinby P la n f o r A c c u m u la tio n o f Common S to c k
o f E astm an 'Kodak Company, S u p p le m e n ta l P r o s p e c t u s ,
J u n e 2 2 , i9 6 0 , p . £•
3
The A r m f ie ld P la n f o r A c c u m u la tio n o f s h a r e s o f
New C l a s s B Common S to c k o f U'l J . R e y n o ld s T obacco
Company P r o s p e c t u s , J u l y 2 7 , 1 9 5 1 , p . 1 3.
114
d o e s n o t seem e q u i t a b l e t o t h e r e d u c t i o n a f f o r d e d t h o s e
i n v e s t o r s a b l e t o u n d e r t a k e a l a r g e r p ro g ra m .
The same t h e o r y b e h in d d o l l a r a v e r a g i n g d i s c u s s e d
i n C h a p te r V a p p l i e s t o t h e s e p l a n s . H ow ever, t h e r i s k
a s s o c i a t e d w ith t h e p r a c t i c e o f d o l l a r a v e r a g i n g w ould
p r e s u m a b ly b e g r e a t e r i n a c c o r d a n c e w ith t h e l a c k o f
d i v e r s i f i c a t i o n and t h e r e l a t i v e d e c l i n e i n p r e s e r v a t i o n
o f p r i n c i p a l .
CHAPTER V II
FUTURE OUTLOOK FOR BOTH TYPES OF PLANS
The a v e r a g e i n v e s t o r o f t o d a y i s c o n c e rn e d o v e r
t h e p r e s e r v a t i o n o f t h e p u r c h a s i n g pow er o f e x i s t i n g
d o l l a r s . T h is c o n c e r n h a s b e e n g e n e r a t e d fro m a c t u a l
e x p e r i e n c e e n c o u n te r e d b y i n v e s t o r s o v e r t h e l a s t t e n y e a r
p e r i o d i n U n ite d S t a t e s S a v in g s Bonds a n d U n ite d S t a t e s
T r e a s u r y B onds. T h e se i n d i v i d u a l s h a v e l e a r n e d t h a t
m ark ed l o s s e s o f " r e a l ” v a lu e hav e t a k e n p l a c e i n t h e i r
f i x e d - i n v e s t m e n t s d u r i n g t h e i n f l a t i o n a r y c y c l e o f t h e
l a s t t e n y e a r s . F o r e x a m p le , # 7 ,5 0 0 I n v e s t e d i n S e r i e s E
S a v in g s Bonds i n 1940 w o u ld r e a c h m a t u r i t y i n 1950 and
h a v e a c a s h v a lu e o f # 1 0 ,0 0 0 o r #4 f o r e v e r y #5 i n v e s t e d
i n -1940. D u rin g t h i s t e n y e a r p e r i o d , h o w e v e r, t h e c o s t
o f l i v i n g h a s u n d e rg o n e an i n c r e a s e o f 7 2 $ . The p u rc h a s in g
pow er o f t h e # 1 0 ,0 0 0 i n 1950 w ould be e q u i v a l e n t t o t h e
p u r c h a s i n g o f # 5 ,8 1 0 i n 1 9 4 0 . The i n t e r e s t on t h e t e n
y e a r in v e s tm e n t was # 2 ,5 0 0 , b u t t h e p u r c h a s i n g p ow er r i s k
w ould h av e made t h e ’’r e a l ” v a lu e o f t h e i n t e r e s t o f no
v a lu e a n d a p p r o x i m a t e ly 22 p e r c e n t o f p r i n c i p a l w ould
h a v e b e e n l o s t .
T h is same am ount ( # 7 ,5 0 0 ) i n v e s t e d i n i n d u s t r i a l
s t o c k s o v e r t h e t e n y e a r p e r i o d , a s s u m in g t h e same p e r
fo rm a n c e a s t h e D ow -Jones I n d u s t r i a l A v e r a g e , w ould be
116
w o rth a p p r o x i m a t e ly $ 1 2 ,4 5 0 i n 1 9 5 0 . D iv id e n d s o v e r t h i s
p e r i o d w ould h av e b e e n a p p r o x i m a t e ly $ 5 ,1 5 0 a c c o r d i n g
t o th e same p e rfo r m a n c e a s t h o s e o f t h e D ow -Jo nes
I n d u s t r i a l A v e ra g e . The r e t u r n o f t o t a l d o l l a r s w ould
h a v e b een $ 1 7 ,6 0 0 . T h is t o t a l am ount i n 1950 w ould buy
t h e e q u i v a l e n t o f $ 1 0 ,2 3 0 i n 1940.-*-
I t i s o b v io u s fro m t h e s e r e s u l t s t h a t t h e l a s t
d e c a d e h a s w i t n e s s e d s e v e r e r e s u l t s i n t h e f i x e d - i n v e s t
m ent f i e l d . T h e se e x a m p le s do n o t m ean t h a t t h e a v e r a g e
i n d i v i d u a l s h o u ld h a v e no g o v e rn m e n t b o n d s o r i n v e s t m e n t s
o f a f i x e d n a t u r e ; b u t t h e y do show t h e d i s a d v a n t a g e s o f
a c c u m u la tin g a d i s p r o p o r t i o n a t e am ount o f f i x e d incom e
o b l i g a t i o n s i n c o m p a ris o n t o t h o s e i n v e s t m e n t s w h ic h v a r y
w ith t h e econom ic c y c l e an d b r i n g a b o u t a m eans o f
s t a b i l i z i n g t h e r i s k o f p u r c h a s i n g p o w e r.
The f u t u r e o u t l o o k fro m t h e i n v e s t o r s v ie w p o in t
f o r t h e s e p l a n s o f f e r i n g in v e s tm e n t company s h a r e s s h o u ld
b e one o f p r o t e c t i n g t h e " r e a l " v a lu e o f t h e d o l l a r
w h e th e r t h e u n d e r l y i n g s e c u r i t i e s be h i g h o r low i n r e l a
t i o n t o t h e econom ic c y c l e . L i f e i n s u r a n c e a n d a r e s e r v e
i n g o v e rn m e n t b o n d s o r a s a v i n g s a c c o u n t s h o u ld be p r e
r e q u i s i t e s , b u t t h e am ount o f l i f e i n s u r a n c e and c a s h
"What t o Do W ith S a v i n g s ," U n ite d S t a t e s N ew s,
2 9 : 3 6 , S e p tem b er 2 2 , 1 9 5 0 .
117
r e s e r v e s a r e s p e c i f i c p ro b le m s d e p e n d in g upon i n d i v i d u a l
s i t u a t i o n s . The ex am p le o f $ 7 ,5 0 0 p u t i n S e r i e s E S a v in g s
Bonds i n 1 9 4 0 , c l e a r l y e v id e n c e s t h e p i t f a l l s o f accum u
l a t i n g to o s i z a b l e a c a s h r e s e r v e .
T h e se p l a n s o f f e r an e x c e l l e n t m eth o d f o r t h e i n
v e s t o r t o p r o t e c t h i s p u r c h a s i n g pow er o v e r a l o n g r a n g e
p e r i o d . The i n v e s t o r i s a b l e t o s e c u r e t h e b e n e f i t s o f
i n v e s tm e n t s u p e r v i s i o n a n d th e p r o p e r c u s t o d i a n s h i p o f
p r o p e r t y an d f u n d s . The f u t u r e o f t h e p l a n s d e p e n d s upon
t h e s e r v i c e t h e p l a n s f u l f i l l . I n m o st i n s t a n c e s , t h e
s m a ll i n v e s t o r i s g iv e n t h e o p p o r t u n i t y t o u t i l i z e s m a ll
sums to w a rd a s a v i n g s p ro g ra m t h a t w o u ld n o r m a l l y b e
c o n s i d e r e d o f i n c o n s e q u e n t i a l I n v e s tm e n t v a l u e .
The f u t u r e o u t lo o k f o r t h e p l a n a o f f e r i n g s h a r e s
o f an i n d i v i d u a l common s t o c k d o e s n o t com pare f a v o r a b l y
w ith t h o s e p l a n s o f f e r i n g an i n v e s tm e n t company s e c u r i t y
r e p r e s e n t a t i v e o f w id e d i v e r s i f i c a t i o n a n d p r e s e r v a t i o n
o f c a p i t a l . I t i s t r u e , t h e " r e a l " v a lu e o f t h e m oney
I n v e s t e d w o u ld h a v e a r e l a t i v e te n d e n c y t o m a i n t a i n i t s
p u r c h a s i n g p o w e r, b u t t h e d e g r e e o f t h i s p u r c h a s i n g pow er
p r o t e c t i o n w ould be r e l a t e d t o t h e d i v e r s i f i e d i n t e r e s t s
and p r o t e c t i o n a f f o r d e d t h e am ount i n v e s t e d . T h e se p l a n s
m ig h t h a v e a v e r y f a v o r a b l e f u t u r e p o t e n t i a l g ro w th i f
t h e l o a d i n g c h a r g e s w ere n o t i c e a b l y lo w e r th a n t h o s e p l a n s
118
o f f e r i n g in v e s tm e n t company s h a r e s r e p r e s e n t a t i v e o f a
I c o m p le te p o r t f o l i o o f v a r i o u s s e c u r i t i e s . P e r h a p s t h e
i n v e s t o r w i t h a s u b s t a n t i a l c a s h r e s e r v e a n d a d e q u a te
l i f e i n s u r a n c e w ould c h o o se t h i s m e th o d t o p u r c h a s e an
i n d i v i d u a l common s t o c k on a p e r i o d i c b a s i s , b u t , f o r
t h e m o st p a r t , i n d i v i d u a l s i n t h i s c a t e g o r y c h o o se t h e
i n d i v i d u a l p u r c h a s e p r o c e d u r e t o a c q u i r e su c h s t o c k ,
w h ic h can b e b o u g h t a n d s o ld w i t h o u t p a y in g t h e n e c e s s a r y
l o a d i n g c h a r g e s . —
The f u t u r e o u t l o o k fro m t h e a t t i t u d e o f t h e s p o n s o r
i s o p t i m i s t i c d u e t o t h e f a c t t h a t t h e s e p l a n s a r e a
m edium f o r a t t r a c t i n g new c l i e n t e l e w h ic h have n e v e r b e e n
a b le o r f e l t s e c u r e en o u g h t o u n d e rg o i n v e s tm e n t i n t h e
s t o c k m a r k e t . The f u t u r e r e a l l y d e p e n d s upon t h e f u l f i l l
m ent o f an econom ic n e e d . The s p o n s o r c o m p a n ie s h a v e
d e v e lo p e d a m ethod o f e n a b l i n g p e r s o n s o f t h e low incom e
g r o u p s t o r e a l i z e a s e m i-c o m p u ls o ry s a v i n g s p ro g ram
t h r o u g h r e l a t i v e l y s m a ll am o u n ts o f p e r i o d i c p a y m e n ts .
The p l a n s a c t a s a b a l a n c e t o t h e p u r c h a s i n g pow er r i s k
w h ic h i s o f t e n l o s t th r o u g h f i x e d - i n v e s t m e n t s an d l i f e
i n s u r a n c e .
The f u t u r e a l s o d e p e n d s t o a g r e a t e x t e n t on th e
d e v e lo p m e n t o f p u b l i c a c c e p t a n c e t h r o u g h p r o p e r s a l e s
m e th o d s . The c h a r a c t e r i s t i c s p e c u l i a r t o t h i s form o f
119
I n v e s tm e n t s h o u ld b e c l e a r l y r e l a t e d t o p o t e n t i a l i n v e s
t o r s and t h e s e p l a n s c an an d s h o u ld be s o l d f o r w h a t t h e y
a re * The l i k e n i n g o f them by s a le s m e n an d s a l e s l i t e r a
t u r e t o g o v e rn m e n t b o n d s , a s a v in g s a c c o u n t o r l i f e
i n s u r a n c e i s m i s l e a d i n g a n d i f t h e p u r c h a s e r i s l e a d t o
b e l i e v e he i s o b t a i n i n g s o m e th in g t h a t he i s a c t u a l l y n o t
p u r c h a s i n g , t h e p l a n s w i l l be d e f e a t e d when t h e m i s t a k e
i s d i s c o v e r e d . ^
The s t a g e o f d e v e lo p m e n t o f M u tu a l F u n d s a t t h e
p r e s e n t tim e c a n be com pared t o t h e p o s i t i o n o f I n s u r a n c e
c o m p a n ie s a ro u n d 1 9 0 0 . The i n s u r a n c e c o m p a n ie s o f f e r e d a
r e a l i s t i c fo rm o f s e c u r i t y . The p e r i o d i c p ay m en t p l a n s ,
w h ic h a r e an o u tg ro w th o f t h e s e M u tu a l F u n d s m u st l i k e w i s e
e s t a b l i s h a r e a l i s t i c form o f s e c u r i t y i f t h e y a r e t o
s u c c e e d .
T h a t t h i s medium e x i s t s f o r c h a n n e li n g o f s a v i n g s
i n t o t h e s tr e a m o f e q u i t y c a p i t a l , w h ere t h e y a r e
b a d l y n e e d e d , and f o r t h e c o m b a ttin g o f t h e o v e r
d o n e p ro p a g a n d a and m i s i n f o r m a t i o n on w h a t r e a l l y
i s 1 1 s e c u r i t y ” o f i n v e s t m e n t , i s s u f f i c i e n t r e a s o n
f o r e n c o u r a g in g t h e g ro w th o f p e r i o d i c p ay m en t
p l a n s . T hey c an a n d s h o u ld f u l l y and f a i r l y c o m p le
m ent t h e o l d e r s a v i n g s m e d ia t o p r o v i d e t h e s a v i n g s
and i n v e s t i n g p u b l i c w i t h a t r u l y r e a l i s t i c
" s e c u r i t y ” s t r u c t u r e . 3
H on. H a rry A. M cD onald, ”The S .E .C . L ooks a t
M u tu a l F u n d s ,” The C o m m ercial a n d F i n a n c i a l C h r o n i c l e ,
1 6 8 :2 1 , A u g u st £ 5 , 1§49.
® P a u l A. J o h n s t o n , " P e r i o d i c P la n P r o v i d e s Sound
S a v in g s P r o g r a m ,” B a rro n s N a t i o n a l B u s in e s s a n d F i n a n c i a l
W e e k ly , 3 0 :3 9 , A p r i l 3 , I950Z '
I
I
CHAPTER V I I I
SUMMARY AND CONCLUSIONS
P e r i o d i c p ay m en t p l a n s had t h e i r b e g in n i n g s s h o r t l y
a f t e r t h e b r e a k o f t h e s t o c k m a r k e t i n 1 9 2 9 . T hey w i t
n e s s e d a r a p i d g ro w th c o n c o m ita n t t o many f r a u d u l e n t and
o b j e c t i o n a l p r a c t i c e s . W ith t h e I n v e s tm e n t Company A ct o f
1940 t h i s ty p e o f in v e s tm e n t p ro g ra m q u i c k l y d i s a p p e a r e d .
The p a s t d e c a d e h a s w i t n e s s e d t h e r e d e v e lo p m e n t o f
t h e s e p l a n s f o r t h e a c c u m u la tio n o f in v e s tm e n t company
s h a r e s on a p e r i o d i c b a s i s . A ls o o f r e c e n t o r i g i n h a s b e e n
t h e d e v e lo p m e n t o f p l a n s o f f e r i n g a m eth o d o f a c c u m u la tin g
s h a r e s o f an i n d i v i d u a l common s t o c k on an i n s t a l l m e n t
b a s i s . The r e g u l a t i o n o f su c h p l a n s h a s b r o u g h t a f a v o r
a b l e m e th o d o f a t t r a c t i n g i n v e s t o r s p r i n c i p a l l y fro m t h e
low -m edium incom e g r o u p . The d e g r e e o f g o v e rn m e n t s u p e r
v i s i o n h a s n o t b e e n so s e v e r e a s t o s e r i o u s l y t h w a r t t h e
p o t e n t i a l g r o w th o f t h e p l a n s . A t t h e p r e s e n t t i m e , t h e
p ro g ra m I s e m e rg in g fro m t h e i n f a n c y s t a g e o f d e v e lo p m e n t.
F u t u r e g ro w th d e p e n d s upon t h e u t i l i z a t i o n o f p r o p e r s e l l
i n g t e c h n i q u e s an d t h e f u l f i l l m e n t o f a r e a l econom ic n e e d
t o th e s m a ll I n v e s t o r .
The p e r i o d i c paym ent p l a n f o r t h e a c c u m u la tio n o f
s h a r e s o f an i n d i v i d u a l common s t o c k d o e s n o t f u l f i l l t h e
same eco n o m ic n e e d a s t h a t o f t h e p l a n s o f f e r i n g s h a r e s o f
121
a n I n v e s tm e n t com pany s e c u r i t y . The m a j o r i t y o f t h e c o s t
i s p l a c e d upon t h o s e i n d i v i d u a l s who can l e a s t a f f o r d i t .
The l a c k o f d i v e r s i f i c a t i o n i n c r e a s e s t h e r i s k o f p r e s e r v a
t i o n o f c a p i t a l a n d s t a b i l i t y o f in co m e; a p p r e c i a t i o n seem s
i n a d e q u a t e c o m p e n s a tio n f o r t h e s e d e f e c t s . The l o a d i n g
c h a r g e s a r e n o t n o t i e e a b l y lo w e r t h a n i n t h o s e p l a n s o f f e r
i n g d i v e r s i f i e d i n t e r e s t s a n d c o m p e te n t i n v e s tm e n t m anage
m e n t, The p l a n d o e s n o t m ee t an econom ic n e e d i n t h a t i t
a p p e a l s t o a c l a s s o f i n v e s t o r who i s t h e l e a s t a b l e t o
w i t h s t a n d t h e a p p a r e n t r i s k s a s s o c i a t e d w i t h t h e p r e s e r v a
t i o n o f c a p i t a l .
The p e r i o d i c paym ent p l a n f o r t h e a c c u m u la tio n o f an
in v e s tm e n t company s e c u r i t y i s h i g h l y f a v o r a b l e f o r
a t t r a c t i n g in v e s tm e n t fro m i n d i v i d u a l s a b l e t o p a y a
c e r t a i n sum o f m oney p e r i o d i c a l l y o v e r a nu m ber o f y e a r s .
The a d v a n t a g e s o f r e a l s e c u r i t y a r e m a i n t a i n e d th r o u g h
s a f e t y o f p r i n c i p a l , d i v e r s i f i c a t i o n , an d c o m p e te n t i n v e s t
m en t m anagem ent,. The im p o r ta n c e o f a s e m i-c o m p u ls o ry
s a v i n g s p ro g ra m c a n n o t b e u n d e r e s t i m a t e d a s f u l f i l l i n g a
d e f i n i t e e co n o m ic n e e d and b r i n g i n g a b o u t a m eth o d f o r t h e
i n v e s tm e n t o f s m a ll a m o u n ts o f c a p i t a l w h ich w ould o r d i n a r
i l y b e c o n s i d e r e d o f i n c o n s e q u e n t i a l in v e s tm e n t v a l u e .
T h e se p l a n s s h o u ld n o t b e l i k e n e d t o l i f e i n s u r a n c e o r a
c a s h r e s e r v e , b u t s h o u ld b e c o n s i d e r e d a s u p p le m e n ta l
122
s a v i n g s p ro g ra m a f t e r p r o v i d i n g f o r an a d e q u a te c a s h r e
s e r v e and l i f e i n s u r a n c e . The c o s t o f t h e p l a n s i s
p o s s i b l y j u s t i f i e d b y t h e e s t a b l i s h m e n t o f a m eans o f
b r i n g i n g a b o u t a fo rm o f s e m i-c o m p u ls o ry s a v i n g s a n d t h e
e x i s t e n c e o f p r o f e s s i o n a l m anagem ent o f t h e u n d e r l y i n g
s e c u r i t i e s * —

BIBLIOGRAPHY
. A. BOOKS
P ro ch n o w , H e r b e r t V ., A m erican F i n a n c i a l I n s t i t u t i o n s .
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I n v e s t o r . New Y o rk : H a rp e r and B r o t h e r s , 1 9 5 1 .
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New Y o rk : A r th u r W ie s e n b e r g e r and Company, 1 950.
B. PERIODICAL ARTICLES
F r a i n e , H. G ., " P ro b le m s o f S m a ll- S c a le I n v e s t o r , ” The
C o m m ercial a n d F i n a n c i a l C h r o n i c l e , 1 7 2 :3 4 7 , J u l y 2 7 ,
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W ee k ly , 3 0 : 1 0 - 2 0 ,' F e b r u a r y 2*7, l9 ’ 5 0 •
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2 d , A p r i l 3 , 1 9 5 0 .
, " R e a d e rs Q uery M e ets B a rra g e o f Q u e s t i o n s ,"
B a rro n s N a t i o n a l B u s in e s s and F i n a n c i a l W eek ly , 3 9 :2 5 ,
A u g u st 1'7" 1 9 4 9 ....
_________, "V a lu e o f Load W arn in g i s S e r i o u s l y Q u e s t i o n e d ,"
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M cD onald, Hon. H a rr y A ., "T he S .E .C . L ooks a t M u tu a l
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M oore, W illia m , and Jo h n S. C o o p e r, " S a le s m a n s h ip P u s h e s
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2 5 , 1 9 4 9 .
" R e g u la ti n g t h e S a le o f I n v e s tm e n t Company S h a r e s , SEC
S ta te m e n t o f P o l i c y ; E d i t o r i a l , " The C o m m ercial and
F i n a n c i a l C h r o n i c l e , 1 7 2 :7 1 1 , A u g u st 2 4 , 1 9 5 0 .
" S E C -Is s u e s Code G o v e rn in g A d v e r t i s i n g and S e l l i n g o f
I n v e s tm e n t T r u s t S h a r e s ; T e x t o f S ta te m e n t o f P o l i c y , "
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l u g u i r T r , 1950*;---------: ------------------------------
T o m lin s o n , L u e i l e , "L ong-T erm P e rfo rm a n c e G uide f o r Fund
I n v e s t o r , " B a r ro n s N a t i o n a l B u s in e s s an d F i n a n c i a l
W eek ly , 2 9 : 3 5 , J u l y 1 8 , 1 94 9.
W a d d e ll, C h auncey L . , "O ur G r e a t e s t I n v e s tm e n t P o t e n t i a l -
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D i g e s t , A u g u st 1 5 , 1 9 4 9 , pV 1 6 .
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C. SECURITIES AND EXCHANGE COMMISSION PUBLICATIONS
I n v e s tm e n t T r u s t s a n d I n v e s tm e n t C o m p an ies, " L e t t e r Prom
t h e C h airm an o f t h e SEC T r a n s m i t t i n g , P u r s u a n t t o Law,
a R e p o rt on C om panies S p o n s o r in g I n s t a l l m e n t I n v e s t
m ent P l a n s , " S e p te m b e r 2 8 , 1 9 3 9 , House D ocum ent 482
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C h airm an o f SEC T r a n s m i t t i n g , P u r s u a n t t o Law, a
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C e r t i f i c a t e s . " 1 9 3 8 . H ouse D ocum ent 6 5 9 , 7 6 t h C o n g r e s s
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D. MISCELLANEOUS
H a le , Edward E . , B r e v i t s , V o l. H-No. 1 7 , S e p te m b e r 1 0 ,
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I n v e s tm e n t t r u s t s . M oody’ s I n v e s t o r s S e r v i c e .
E . COMPANY PROSPECTUSES
Commonwealth I n v e s tm e n t Company P r o s p e c t u s , A p r i l 1 8 , 194a
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A p r i l 8 , 1 94 9,
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E astm an K odak Company, Su p p le m e n ta l P r o s p e c t u s , Ju n e
2 2 , 1 $ 5 0 .
The Q uinby P la n f o r A c c u m u la tio n o f Common S to c k o f
E . I* Du P o n t De N em ours a n d Com pany, S u p p le m e n ta l
P r o s p e c t u s , J u l y 5 , I 9 s l .
The Q u inb y P la n f o r A c c u m u la ti o n o f I n d i v i d u a l S to c k s
G e n e r a l P r o s p e c t u s , J u l y 5 ~ , 1 9 5 1 ,
The A r m f ie ld P la n f o r t h e A c c u m u la tio n o f S h a r e s o f New
C l a s s B Com m on~StocF"of R. J . ReynoTZs'TFobacco
Com pany, P r o s p e c t u s , J u l y 2 7 , 1 9 5 1 .
U n ite d F u n d s , I n c o r p o r a t e d , P r o s p e c t u s , J a n u a r y 2 0 , 1 9 4 9 .

Asset Metadata

Creator Jesberg, Robert (author)

Core Title An appraisal of the investment merits of periodic payment plans

Contributor Digitized by ProQuest (provenance)

Degree Master of Business Administration

Degree Program Business Administration

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Finance,OAI-PMH Harvest

Language English

Advisor Trefftzs, Kenneth L. (committee chair), Martin, G. Preston (committee member), Wait, William B. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-128569

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Document Type Thesis

Rights Jesberg, Robert

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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