Mutual Fund Sales Breakpoint Violations

According to FINRA Rule (2340), mutual fund sales breakpoint violations occur when a mutual fund is sold to a customer and the sales commissions charged to the client are greater than would be charged had the brokerage firm and its financial advisor offered the available sales volume discounts. The mutual fund sales volume discounts are available when the recommended mutual fund purchases are concentrated with the same mutual fund family or the correct mutual fund class that is offered to the customer.

Mutual fund sales volume discounts are available when a client invests with a mutual fund family. The mutual fund sales breakpoints occur at specific investment levels that are aggregated across all mutual fund purchase with the same mutual fund family. The investor is given a “rights of accumulation” which provides an opportunity to meet the aggregate investment levels over a 13 month period to obtain the sales volume discounts. Mutual fund classes A, B, C are available to be purchased, each with different sales commissions and ongoing fees, known as a 11(b)1 fee which covers the costs associated with marketing the mutual funds to the investing public.

A Class A mutual fund share purchase has an upfront sales commission with sales volume discounts based on the amount invested, including any “rights of accumulation”. The sales volume discounts for Class A mutual fund shares usually occur at the following dollar amounts: $25,000, $50,000, $100,000, $250,000, $500,000 and $1,000,000 or above. In most instances, Class A mutual funds incur the lowest 11(b)1 fee of all mutual fund classes that pay sales commissions.

A Class B mutual fund share purchase has a contingent deferred sales charge (CDSC), also known as a back-end sales charge, which declines to zero over a 5-7 year holding period. This mutual fund pricing comes at the expense of between 0.75% -1.0% greater annual 11(b)1 fees during the required holding period and then lower to the Class A share fee amount. Class B mutual fund shares pays a level commission with no sales volume discounts.

A Class C mutual fund share purchase has no sales commission and no holding period requirements. However, the Class C mutual fund deducts an annual 11(b)1 fee that is 1.0% greater than the Class A mutual fund shares over the life of the investment.

Mutual fund sales breakpoint violations occur when investors who, for instance, have $250,000 to invest and instead of investing the entire sum with one mutual fund family in Class A shares they as split between different mutual fund families in mutual funds with similar investment objectives. Another example, an investor invests $250,000 with the same mutual fund family but, the funds are invested in Class B mutual fund shares, instead of Class A shares to obtain the sales volume discounts. If a brokerage firm and their financial advisor recommend that a customer purchase a mutual fund in an amount just below the sales commission breakpoints that are available they have committed a mutual fund sales breakpoint violation.

The Silver Law Group can help you determine whether an investment loss is the result of a brokerage firm and their financial advisor’s violation of mutual fund sales breakpoint rules in an investment account. If an investor suffers losses as a result of mutual fund sales breakpoint rules they may be able recover their losses in a FINRA arbitration claim.