FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeHard
A client expresses interest in a Class C mutual fund share. Which of the following statements about Class C shares is most accurate?
- AThey offer the lowest overall expense ratio due to the absence of sales charges.
- BThey generally have no front-end load but a relatively high 12b-1 fee and a short-term contingent deferred sales charge (CDSC).
- CThey typically have a low front-end sales charge and no 12b-1 fees.
- DThey are best suited for large investments with long-term holding periods.
Show answer & explanationAnswer & explanation
Correct answer: B. They generally have no front-end load but a relatively high 12b-1 fee and a short-term contingent deferred sales charge (CDSC).
Class C shares, often called 'level-load' shares, typically have no front-end sales charge, but impose a higher annual 12b-1 fee than Class A shares and a contingent deferred sales charge (CDSC) that usually disappears after one year. This structure makes them suitable for intermediate-term investors who do not qualify for breakpoint discounts.
Why the other options are wrong
- A. Class C shares typically have a higher overall expense ratio due to the higher 12b-1 fees.
- C. Class C shares typically have no front-end load and a *high* 12b-1 fee.
- D. Class A shares are generally better for large, long-term investments due to breakpoints and lower ongoing fees.
Class C Mutual Fund Shares
Mutual fund share class characterized by no front-end load, a higher annual 12b-1 fee, and a short-term contingent deferred sales charge (CDSC).
- No front-end sales charge.
- Higher annual 12b-1 fees compared to Class A.
- Short-term CDSC (typically 1 year).
- Suitable for intermediate-term investors (1-5 years).
Memory trick: A for up-front, B for back-end, C for continuous.