Mutual Fund Share Classes and Sales Charges

This set of flashcards covers mutual fund share classes (A, B, and C), sales loads, breakpoint rules, LOIs, and 12b-1 fees.

Class A shares

Mutual fund shares that assess a front-end load and are subject to breakpoint schedules that reward larger investments with lower sales charges.

Front-end load

A sales charge collected at the time an investor purchases shares, typical for Class A shares.

Breakpoint schedule

A tiered system that reduces the sales charge percentage as the total investment amount increases; required if a fund assesses the maximum sales charge of $8.5\%$.

Letter of Intent (LOI)

A pledge to invest a specific shortfall amount within a $13$ month period to immediately qualify for a lower sales charge breakpoint.

LOI Backdating

The provision allowing a Letter of Intent to include purchases made up to $3$ months prior, though it does not extend the total $13$ month period.

Escrow account

A legal holding account where a firm keeps a portion of shares (e.g., $5\%$) as collateral until a Letter of Intent (LOI) is fulfilled.

Rights of accumulation

A feature that allows an investor to use their existing holdings in a fund to reach breakpoint levels for new purchases.

Breakpoint sale

A regulatory violation where a financial professional fails to inform a customer they are close to a breakpoint, thus collecting a higher sales charge.

Householding

A policy allowing family members at the same address to combine their fund purchases to qualify for lower breakpoints.

Investment clubs

Groups of individuals who pool money for investment; they are ineligible for breakpoints and are assessed the highest possible sales charge.

Combination privilege

The ability to combine purchases across different funds within the same fund family to qualify for breakpoint discounts.

Class B shares

Shares that assess a back-end load (CDSC) when sold, typically suitable for long-term investors with smaller amounts of capital.

Contingent deferred sales charge (CDSC)

A back-end load that declines over time (e.g., from $8\%$ to $0\%$) the longer the investor holds the shares.

Class C shares

Shares characterized by a level load and high ongoing 12b-1 fees, generally most suitable for short-term investors.

12b-1 fees

Ongoing annual marketing and distribution fees; the maximum total fee is $1\%$, consisting of a $0.75\%$ distribution fee and a $0.25\%$ service fee.

Level load

A continuing cost associated with Class C shares, created primarily by ongoing 12b-1 marketing fees rather than a one-time sales charge.

Expense ratio

The ratio of a fund's annual operating expenses to its total assets under management; as assets grow, this ratio typically decreases.

No load fund

A designation for mutual funds that charge an annual 12b-1 fee of no more than $0.25\%$.

12b-1 impact on maximum load

If a fund assesses the maximum $1\%$ 12b-1 fee, the maximum allowable front or back-end load is reduced from $8.5\%$ to $7.25\%$.

Distribution fees

A component of 12b-1 fees (max $0.75\%$) used for marketing, advertisements, and payments to brokers.

Service fees

A component of 12b-1 fees (max $0.25\%$) used to pay representatives for providing information and support to investors.