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).
Registered reps must know the ways they can achieve lower costs for their clients, and the rules surrounding these features.
Series 7, Series 24, Series 63, Series 65, Series 66