When investors purchase shares of a mutual fund they may be required to pay a sales charge. Some mutual funds will reduce the sales charge for larger investments. For example, a fund may charge a 5% sales charge for investments up to $25,000, but reduce that to 4% for investments between $25,000 and $50,000 and 3% for investments exceeding $50,000. The purchase price required to receive the reduced sales charge is called a breakpoint; here, for example, the breakpoints are at $25,000 and $50,000. Breakpoints are provided in a breakpoint schedule found in the mutual fund’s prospectus.
Mutual funds offer additional ways for investors to receive breakpoints such as a letter of intent or rights of accumulation.
A breakpoint sales violation occurs when a registered rep sells mutual fund shares to a customer in an amount just below the level at which the investor would qualify for the reduced sales change. An example of a breakpoint sales violation might occur, if a registered rep suggested that a customer purchase $24,500 worth of shares – paying a 5% sales charge on the entire purchase ($1,225 in sales charges) – instead of investing an additional $500 to purchase $25,000 and paying only a 4% sales charge ($1,000 in sales charges).
KNOPMAN NOTES:
Registered reps must know the ways they can achieve lower costs for their clients, and the rules surrounding these features.
Relevant Exams:
Series 7, Series 24, Series 63, Series 65, Series 66
