Breakpoint discounts are volume discounts to the front-end sales load charged to investors who purchase Class A mutual fund shares. The extent of the discount depends on the amount invested in a particular family of funds. For example, a mutual fund might charge a front-end load of 5.75 percent for share purchases of less than $50,000, but reduce the load to 4.50 percent for investments between $50,000 and $99,999, and further reduce or eliminate the load for larger investments.
Investors can qualify for breakpoints through a single purchase of Class A mutual fund shares, with a letter of intent (LOI) or through rights of accumulation (ROA). An LOI allows investors to receive breakpoint discounts based on a commitment to buy a specified number of shares over a period of time, usually 13 months. For example, by signing an LOI to buy $25,000 worth of fund shares over the course of a year in $5,000 increments, an investor can obtain the $25,000 breakpoint discount on each $5,000 purchase.
An ROA allows an investor to aggregate his own fund shares with the holdings of certain related parties, such as spouses and children, toward achieving the investment thresholds at which breakpoint discounts become available. Investors also may be able to aggregate holdings they have in different accounts at the same broker-dealer, at different broker-dealers, or in different types of accounts, such as 401(k)s and 529 plans, as well as the holdings in the accounts of related parties toward achieving an investment threshold at which a breakpoint discount is available.
In the process of conducting routine firm examinations in 2002, NASD identified problems in mutual fund transactions, in which eligible customers did not always receive their entitled breakpoints. In 2003, at the request of the SEC, NASD, joined by the Securities Industry Association (SIA) and the Investment Company Institute (ICI), led a task force on breakpoints charged with recommending industry-wide changes to address errors and missed opportunities to provide breakpoint discounts.
As a result, FINRA has taken a number of steps to ensure that investors who did not receive appropriate discounts are able to obtain a refund and that in the future investors will receive all discounts to which they are entitled.
Breakpoint Disclosure Statement
To assist firms in fulfilling their obligation to provide all available breakpoint discounts on the sales of front-end load mutual funds, FINRA recommends that firms at the time of purchase or periodically thereafter provide investors with a Written Disclosure Statement explaining the availability of breakpoint discounts. FINRA provides this statement as an example of what it believes is appropriate. Firms may wish to tailor the statement to reflect the rules of the mutual funds they sell.
Assisting Your Clients
You can help your clients assess their opportunities to receive breakpoint discounts by taking the following steps:
- Become familiar with breakpoint discounts offered by the mutual funds that you sell. These are located in a fund’s prospectus and/or statement of additional information.
- Discuss with your clients whether breakpoint discounts are available before they buy mutual fund shares.
- Ask your clients for the information necessary to determine their eligibility for breakpoint discounts, such as their fund holdings and the holdings of their spouse or children, among other relatives.
- Record this information in each client’s file so it can be applied to future purchases of a particular fund, which might result in additional breakpoint discounts.
FINRA provides an outline for training associated persons involved in the sale of Class A shares of front-end load mutual funds. The purpose of the outline is to ensure that registered representatives understand the specific issues that govern breakpoint eligibility. The outline serves as a model of the critical breakpoint topics firms should address in training.
Since FINRA recognizes that every firm has a unique business model, firm element training methods and content may vary. However, every firm that sells or anticipates selling mutual funds, no matter its business model, should cover the topics listed in parts I and II of the outline. FINRA also has developed the Breakpoint Checklist and Breakpoint Worksheet to help firms and associated persons gather the information necessary to deliver available discounts on the sales of Class A shares.