Section 4.3: Mutual Fund Continuing

  • Class A Advantages

  • Breakpoints

  • LOIs

  • Rights of Accumulation

1. Advantages of Class A Shares:

  • Lower expense ratios compared to Class B or C shares.

  • Front-end load is paid at purchase, so:

    • No surprise sales charges at redemption.

    • More money from each later withdrawal goes directly to the investor.

  • Disadvantage:

    • Investor loses a portion of their capital up front due to the front-end load.

    • This reduces returns in the short term, though benefits long-term investors.

2. Breakpoints:

  • Definition: Quantity discounts on mutual fund sales charges.

    • The larger the investment, the lower the sales charge.

  • Example:

    • $25,000 → 5.75%

    • $50,000 → 4.5%

    • $100,000 → 3.5%

  • Combining Accounts:

    • Most funds allow related accounts (same household or family) to combine holdings to reach a breakpoint.

    • Example: Husband and wife’s joint account + individual retirement accounts + children’s custodial accounts all count toward the breakpoint.

  1. 📘 Key Rule:
    A sale just below a breakpoint is considered a breakpoint sale violation and is not allowed, because the customer would unfairly miss a discount they qualify for.

3. Letter of Intent (LOI):

  • Allows investors to qualify for a breakpoint discount immediately by committing to invest enough to reach the breakpoint within 13 months.

  • Benefits:

    • Investor pays a lower sales charge on the initial purchase even before all funds are invested.

  • Mechanics:

    • Investor signs LOI stating intent to invest enough within 13 months to reach next breakpoint.

    • Escrow shares equal to the difference in discount are held by the fund until the LOI is completed.

    • If the investor fulfills the LOI → escrowed shares are released.

    • If not completed → investor pays the difference in sales charge or forfeits escrowed shares.

  • Backdating:

    • An LOI may be backdated up to 90 days.

    • The 13-month period begins on the date of the letter (not the backdated date).

4. Rights of Accumulation (ROA):

  • Like breakpoints, but apply to future purchases after the initial investment.

  • No time limit — investors can accumulate purchases over any period.

  • Investors qualify for reduced sales charges when:

    • The total current value of their holdings, plus new purchases, reaches a breakpoint.

    • The fund uses the higher of:

      • Total dollars invested to date, or

      • Current market value of shares held.

  • ROA only applies to subsequent transactions (not the first purchase).

5. Fund Families and Exchange Privileges:

  • A fund family (mutual fund sponsor) is a group of mutual funds under one management company (e.g., Fidelity, Vanguard).

  • Investors may combine investments across multiple funds in the same family to reach breakpoints.

  • Exchange/Conversion Privileges:

    • Allow investors to move money from one fund to another within the same family without additional sales charges.

    • However: The exchange is still a taxable event, since it counts as selling one fund and buying another.

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Quick Summary Table:

Term / Key Point / Time Limit / Taxable?

  • Class A Shares / Front-end load, lower expenses / N/A / No

  • Breakpoint / Quantity discount for larger purchases / N/A / No

  • Letter of Intent (LOI) / Agreement to reach breakpoint within 13 months / 13 months (may backdate 90 days) / No

  • Rights of Accumulation (ROA) / Combines past + current investments to reach breakpoint / No time limit / No

  • Exchange Privilege / Switch between funds in same family (no sales charge) / N/A /  ✅ Yes (taxable event)

Next Section

✺ Review questions ✺

  • A. No front-end load
    B. Lower ongoing expenses and upfront sales charge transparency
    C. Back-end load only when redeemed
    D. No voting rights
    ✅ Answer: B

  • A. Avoid all sales charges
    B. Receive quantity discounts on sales charges for larger investments
    C. Avoid paying taxes on dividends
    D. Receive guaranteed returns
    ✅ Answer: B

  • A. 6 months
    B. 12 months
    C. 13 months
    D. 24 months
    ✅ Answer: C

  • A. 30 days
    B. 60 days
    C. 90 days
    D. 180 days
    ✅ Answer: C

  • A. They lose all their shares
    B. They pay the difference in sales charges or forfeit escrowed shares
    C. They are fined by FINRA
    D. Nothing — LOI is optional
    ✅ Answer: B

  • A. ROA has a 13-month time limit
    B. ROA only applies to the first purchase
    C. ROA allows investors to use current portfolio value and has no time limit
    D. ROA can only be used by institutional investors
    ✅ Answer: C

  • A. Non-taxable and non-reportable
    B. Non-taxable but reported
    C. Taxable because it’s considered a sale and purchase
    D. Always exempt from capital gains
    ✅ Answer: C