Mutual Fund Sales Breakpoint Violations


“financial advisors must offer sales volume discounts to clients”

According to the Financial Industry Regulatory (FINRA), 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 have been if the financial advisor offered available sales volume discounts. Mutual fund sales volume discounts are available when the recommended mutual fund purchases reach a certain level with the same mutual fund family and a more beneficial mutual fund class is offered to the customer. The failure of the financial advisor to offer the most beneficial mutual fund class available to a customer represents a conflict of interest.

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 12(b)1 fee which covers the costs associated with marketing the mutual funds to the investing public.

Class A mutual fund share purchases have 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 12(b)1 fee of all mutual fund classes that pay sales commissions.

Class B mutual fund share purchases have 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 12(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.

Class C mutual fund share purchases have no sales commission and no holding period requirements. However, in most instances, Class C mutual fund deducts an annual 12(b)1 fee that is 1.0% greater than the Class A mutual fund shares over the life of the investment.

An example of a mutual fund sales breakpoint violation follows: Assume an investors who has $250,000; instead of investing the entire sum with one mutual fund family in Class A shares the financial advisor recommends an allocation 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. Brokerage firms fail to supervise their financial advisors who recommend that a customer purchase a mutual fund in an amount just below the sales commission breakpoints which is a mutual fund sales breakpoint violation.

The Klayman & Toskes, PA can help you determine whether an investment loss is the result of a brokerage firm’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 for damages.

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