Reducing Sales Charges

Investors can reduce the sales charges they pay on Class A shares through breakpoints, letters of intent, and rights of accumulation. Understanding these options is crucial for making suitable recommendations.

Breakpoints

Breakpoints are volume discounts on front-end sales charges. As investment amounts increase, the sales charge percentage decreases.

Sample Breakpoint Schedule

Key Point: Breakpoints only apply to Class A shares. Class B and C shares do not offer breakpoints.

Letter of Intent (LOI)

A Letter of Intent (LOI) allows investors to receive breakpoint discounts based on a commitment to invest a specific amount over a period of time.

How LOI Works

• Investor commits to invest a total amount (e.g., $50,000) over 13 months
• Receives the breakpoint discount on all purchases during that period
• Fund holds a portion of shares in escrow (typically 5%)

LOI Example

An investor signs an LOI to invest $50,000 over 13 months:

1. First purchase: $10,000 → Pays 4.50% (not 5.75%)
2. All subsequent purchases get the $50,000 breakpoint rate
3. If investor doesn't reach $50,000 in 13 months, they must pay the difference in sales charges

Important LOI Rules

• LOI period is 13 months (not 12)
• Can be backdated up to 90 days to include recent purchases
• LOI is non-binding — investor won't be forced to invest
• If commitment isn't met, escrowed shares are sold to cover the higher sales charge

Rights of Accumulation (ROA)

Rights of Accumulation (ROA) allow investors to combine existing holdings with new purchases to qualify for breakpoints.

How ROA Works

An investor with $40,000 already invested wants to buy $15,000 more:

• Without ROA: $15,000 purchase at 5.75% = $862.50 sales charge
• With ROA: Combined $55,000 qualifies for 4.50% on the new $15,000 = $675 sales charge
• Savings: $187.50

Who Can Be Combined for ROA?

Investors can aggregate holdings across:

• Multiple accounts at the same broker-dealer
• Accounts at different broker-dealers
• Different account types (IRA, 401(k), brokerage, 529)
• Immediate family members: Spouse, children under 21

Breakpoint Selling Violation

Breakpoint selling is a violation that occurs when a representative:

• Fails to inform customers about available breakpoint discounts
• Sells shares just below a breakpoint to earn a higher commission
• Splits purchases to avoid reaching breakpoints

Example of Breakpoint Selling

An investor wants to invest $50,000. The breakpoint schedule shows:

• $49,999 and below: 5.00% sales charge
• $50,000 and above: 4.50% sales charge

A rep who recommends investing $49,000 now and $1,000 later (to avoid the breakpoint) is committing a violation.

Exam Tip: Representatives must always inform customers about breakpoint opportunities. Failure to do so is a serious compliance violation.

NAV Transfers and Exchanges

NAV Transfers

When an investor transfers between funds in the same fund family, they may be able to do so at NAV (no sales charge) if they've already paid a front-end load.

Exchange Privileges

Most fund families allow exchanges between funds at NAV. However:

• Exchanges may be taxable events
• Some funds limit the number of exchanges per year
• Exchange policies are disclosed in the prospectus

Summary: Ways to Reduce Sales Charges