FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeMedium
A registered representative is explaining the concept of breakpoints to a client interested in a mutual fund. Which of the following statements accurately describes how breakpoints apply to mutual fund purchases?
- ABreakpoints are a type of contingent deferred sales charge (CDSC) that decreases over the holding period of the investment.
- BBreakpoints are available to all mutual fund share classes, including Class C shares, for cumulative investments over time.
- CBreakpoints allow investors to receive a reduced sales charge on a single purchase of fund shares, regardless of total investment amount.
- DBreakpoints offer reduced sales charges at various levels of investment, allowing larger purchases to incur lower percentage sales loads.
Show answer & explanationAnswer & explanation
Correct answer: D. Breakpoints offer reduced sales charges at various levels of investment, allowing larger purchases to incur lower percentage sales loads.
Breakpoints are reduced sales charges available to investors who make larger purchases of mutual fund shares. As the dollar amount invested increases, the sales charge percentage decreases, offering an incentive for larger investments.
Why the other options are wrong
- A. Breakpoints are reductions in *front-end* sales charges, not a type of CDSC, which is a back-end charge.
- B. Breakpoints are typically associated with Class A shares, which have front-end loads, and generally not available for Class C shares (which have no front-end load).
- C. Breakpoints are based on *total* investment amount, not just a single purchase, and reduce the *percentage* sales charge.
Mutual Fund Breakpoints
Reduced sales charges offered by mutual funds for larger dollar amount purchases, providing an incentive for investors to commit more capital.
- Applies to Class A shares (front-end load funds).
- Sales charge percentage decreases as investment amount increases.
- Can be achieved through a single purchase or cumulative investments (Rights of Accumulation).
- Cannot be withheld from eligible investors (Breakpoint Sales violation).
Memory trick: Breakpoints: 'Big money, bigger breaks!'