Share Classes and Sales Charges
Understanding share classes is essential for the Series 6 exam. The same mutual fund can offer multiple share classes, each with different fee structures. Choosing the right class depends on the investor's investment amount and time horizon.
Types of Sales Charges
Front-End Load (Sales Charge at Purchase)
A front-end load is deducted from your investment when you buy shares. If you invest $10,000 with a 5% front-end load:
- Sales charge: $500
- Amount actually invested: $9,500
Back-End Load (CDSC)
A back-end load or Contingent Deferred Sales Charge (CDSC) is charged when you sell shares. It typically:
- Starts high (e.g., 5-6%)
- Declines each year you hold the shares
- Eventually reaches 0% (typically after 5-7 years)
Level Load
A level load charges the same percentage each year, typically through higher 12b-1 fees (up to 1% annually).
Share Class Comparison
| Feature | Class A | Class B | Class C |
|---|---|---|---|
| Front-End Load | Yes (typically 3-5.75%) | No | No |
| Back-End Load (CDSC) | No | Yes (declining over 5-7 years) | Small (usually 1% if sold within 1 year) |
| 12b-1 Fees | Low (0-0.25%) | High (up to 1%) | High (up to 1%) |
| Breakpoints | Yes | No | No |
| Conversion | N/A | Converts to Class A after ~7 years | Does not convert |
| Best For | Large investments, long-term | Smaller investments, 5-7+ year horizon | Short-term (1-3 years) |
Understanding 12b-1 Fees
12b-1 fees are annual marketing and distribution fees charged by the fund. Named after SEC Rule 12b-1, they cover:
- Distribution fees: Advertising, marketing (max 0.75%)
- Service fees: Shareholder services (max 0.25%)
- Total maximum: 1.00% annually
Important: A fund charging more than 0.25% in 12b-1 fees cannot call itself a "no-load" fund.
Maximum Sales Charges
The Investment Company Act of 1940 and FINRA rules set maximum sales charges:
| Type | Maximum Charge |
|---|---|
| Front-end load | 8.5% of POP |
| Front-end with 12b-1 fee | 8.5% (combined) |
| No-load fund 12b-1 | 0.25% max to be called "no-load" |
Calculating Sales Charge Percentage
There are two ways to express sales charges:
As Percentage of POP (Public Offering Price)
Sales Charge % = Sales Charge ÷ POP
As Percentage of NAV
Sales Charge % = Sales Charge ÷ NAV
Example: NAV = $10.00, POP = $10.53, Sales Charge = $0.53
- % of POP: $0.53 ÷ $10.53 = 5.0%
- % of NAV: $0.53 ÷ $10.00 = 5.3%
Exam Tip: The same dollar amount expressed as % of NAV is always higher than % of POP.
Choosing the Right Share Class
| Investor Profile | Recommended Class |
|---|---|
| Large investment ($50,000+), long-term | Class A (breakpoint discounts) |
| Smaller investment, 7+ year horizon | Class B (if still offered) |
| Uncertain time horizon, 1-3 years | Class C (no front-end, low CDSC) |
| Very large investment ($1M+) | No-load/NAV purchase |
Note: Many fund companies have eliminated Class B shares due to regulatory concerns about suitability.
An investor purchases $10,000 of Class A shares with a 5% front-end load. How much is actually invested in the fund?
What is the maximum 12b-1 fee a fund can charge and still call itself a "no-load" fund?
Which share class typically converts to Class A shares after a holding period of approximately 5-7 years?
2.4 Reducing Sales Charges
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