FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsMedium
A client wants to purchase shares of a mutual fund that imposes a contingent deferred sales charge (CDSC). This means the sales charge is incurred at which point?
- AWhen the shares are redeemed, typically decreasing over time.
- BOnly if the fund fails to meet its performance benchmarks.
- CWhen the shares are initially purchased.
- DAnnually as a percentage of the fund's assets.
Show answer & explanationAnswer & explanation
Correct answer: A. When the shares are redeemed, typically decreasing over time.
A contingent deferred sales charge (CDSC), also known as a back-end load or B share, is incurred when shares are redeemed. The percentage charged typically declines over a specified holding period, eventually reaching zero if held long enough.
Why the other options are wrong
- B. Sales charges are not tied to fund performance benchmarks.
- C. This describes a front-end load, not a CDSC.
- D. This describes a 12b-1 fee or an expense ratio component, not a CDSC.
Contingent Deferred Sales Charge (CDSC)
A sales charge deducted when mutual fund shares are redeemed, typically decreasing to zero the longer the shares are held.
- Also known as a 'back-end load'.
- Commonly associated with 'B' shares.
- Designed to discourage short-term trading and compensate for upfront expenses.
Memory trick: CDSC: Charge Deferred, Surrender's Cost.