Mutual funds grant volume discounts on sales commissions charged to customers. The levels at which the discounts become effective are called "breakpoints," and can be reached in three ways:
- (1) in a single purchase;
- (2) over a 13-month period pursuant to a letter of intent;
- (3) and from the time of the initial purchase under rights of accumulation.
However, these "breakpoints" are not available with respect to the purchase of Class B shares. Class B shares typically do not have a front-end sales load. Instead, they may impose a contingent deferred sales load, a 12b-1 fee (which are fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares), and other annual expenses.
Typically, Class "B" shares, where no "breakpoints" attach, 12b-1 fees can be as much as 1.25% per year, or up to 4 times the annual 12b-1 fees of .25% associated with the purchase and ownership of Class "A" investment company shares.
This practice, is contrary to just and equitable principles of trade, and a violation of FINRA Conduct Rule IM-2010, and cannot be justified by merely furnishing to customers a prospectus which describes the breakpoints and the 12b-1 fees associated with Class A and Class B purchases.
If you believe that you may have been the victim of fraud in connection with the sale of mutual funds or investment company shares by your broker, contact us for a free evaluation of your claim.
Sources / Additional Reading
In re: Advest, Inc., SEC Release No. 34-24072, 1987 SEC LEXIS 2624 (February 9, 1987).
Mason, Moran & Co., 35 S.E.C. 84, 90 (1953), quoted in, In re: Russel L. Irish, SEC Release No. 34-7687 (1987)(while registrant claimed it complied with disclosure requirements of the federal securities laws by furnishing the customer with a prospectus which included breakpoint information, the Commission held that while the prospectus requirements were intended to provide the investor with more information than had theretofore been generally available in the ordinary securities transaction, these requirements were not intended to abrogate the greater disclosure duties traditionally imposed on brokers and dealers in a fiduciary position);
See also, "SEC and NASD Action Plan on Mutual Fund Sales Load Charges," SEC Release 2003-07 (January 16, 2003);
NASD Notice to Members 95-80 (Sept. 1995); NASD Notice to Members 94-16 (Mar. 1994); Suitability Issues for Multi-Class Mutual Funds, NASD Regulatory And Compliance Alert (Summer 2000).