Mutual Fund Breakpoints and Refunds

One of the most popular investment types available for investors of all ages are mutual funds. Yet, a continued area of abuse relates to the failure of your firm or account executive to determine whether or not you are entitled to pay a lower sales charge relating to the purchase the purchase of Class A shares of a mutual fund. An industry-wide survey indicated that investors did not receive discounts in approximately one out of every five transactions that were eligible for discounts.

Please keep in mind that this information is being provided for educational purposes only and therefore is generic in nature. Thus, this post should not be considered legal or investment advice. If you have any questions, relative to the below information, you should contact a qualified legal or financial professional.

Are you one of these investors? Ask yourself:

• Have I purchased a mutual fund with a front-end sales load?
• Have I purchased additional funds in the same fund family?
• Have close family members purchased shares of this fund or fund family?
• Is the total of all my purchases and my family’s purchases together greater than $25,000?

Discounts on front-end sales loads are offered for larger mutual fund investments and usually start at $50,000, but sometimes can be as low as $25,000. If you did not receive a discount to which you were entitled, the Financial Industry Regulatory Authority (FINRA) requires your securities firm to refund the money.

FINRA expects that securities firms will make prompt refunds to their customers where they are aware that their customers did not receive a discount to which they were entitled. A number of firms have already begun this refund process. Additionally, FINRA expects securities firms to make refunds to customers who come forward and show that they did not receive all applicable breakpoint discounts.

The following discussion, which has been slightly modified from a FINRA Investor Alert, explains how the discounts work and what steps you can take to find out if you are eligible for a refund.

A single mutual fund, with one portfolio, frequently offers more than one “class” of shares to investors. Each class represents the same interest in the mutual fund’s portfolio, but has different sales charges, fees and expenses. One share class usually requires investors to pay a front-end sales charge or “load” that is deducted from the purchase price. This share class is typically called “Class A.” For example, if you purchase Class A mutual fund shares with a 5.75 percent front-end sale load at a cost of $1,000, you’ll pay a sales load of $57.50, with the remaining $942.50 invested in the mutual fund.

Often Class A shares offer discounts that reduce the front-end sale charge you pay. The amount of the discount is based on the size of your investment, and the discount increases as the size of your investment increases. The investment levels at which the discounts become available are called breakpoints. Breakpoint discounts usually start at investment levels of $50,000, but may begin at $25,000.

Here’s what a breakpoint schedule may look like:

Sample Breakpoint Schedule
(Class A Shares)

You may qualify for a breakpoint discount in a number of ways:

1. Sale purchase. You may be entitled to a breakpoint discount based on a single mutual fund transaction if the dollar size of the transaction exceeds one or more breakpoints.
2. Letter of intent. You may be able to count future purchases toward achieving a breakpoint discount if you write a letter of intent (LOI) that you intend to invest an amount over a breakpoint level within a given period of time specified by the fund. Many fund companies permit you to include purchases completed within 90 days before the LOI is signed, and within 13 months after the LOI is signed in reaching the dollar amount of the breakpoint threshold.
3. Rights of accumulation. You may have rights of accumulation (ROA) that allow you a breakpoint discount on your current mutual fund purchases by combining your current fund purchases with:
   • Previous purchases that you made in the same mutual fund
   • Purchases of different funds from the same mutual fund family
   • Purchases of funds from the same fund family made in different accounts, such as your 401(k) plans, your IRAs, college savings plans (529 plans) or accounts at other securities firms or directly with the fund family
   • Purchases of funds from the same fund family made by related parties as defined by the fund, usually including close family members, such as your spouse or child

Each mutual fund family sets its own breakpoint discounts and sets the rules regarding which accounts can be counted toward eligibility for a breakpoint discount. You can get information about the breakpoint discounts offered by a mutual fund you own by reviewing the fund’s prospectus or statement of additional information, checking a mutual fund company’s website, or by contacting your broker.

To determine if you’re entitled to a breakpoint discount, you may want to ask yourself the following questions:

Have I purchased a mutual fund with a front-end sales load? Not all funds charge a front-end charge or load. The only investors who are eligible for breakpoint discounts are those who purchased Class A shares of mutual funds that charge this “load.” No-load mutual funds and other mutual fund share classes, such as Class B and C shares, don’t offer breakpoint discounts because they do not charge front-end sales loads. You should be able to determine if you purchased a fund with a front-end sales load by looking at an account statement or confirmation showing the purchase.

Have I purchased additional funds in the same fund family? Breakpoint discounts apply to your purchase of a specific fund or funds within a family of funds. It usually doesn’t matter if you made those purchases through more than one securities firm or in more than one account. To make sure you are not missing any fund investments that might count toward a breakpoint discount, you may want to review any account statements that show mutual fund holdings.

Have close family members purchased shares of this fund or fund family? In many cases, funds not only count fund purchases you made, but also purchases that others — typically close family members — made in determining the appropriate breakpoint. To find out which family member or other mutual fund purchases you can use in determining a breakpoint discount, read the fund’s prospectus or statement of additional information, check the mutual fund company’s website, or contact your broker.

Is the total of all my purchases and my family’s purchases together greater than $25,000? The lowest level at which a fund will offer a breakpoint is $25,000. But most fund families only offer a discount for purchases that total at least $50,000. To find the level at which breakpoint discounts start, read the fund’s prospectus or statement of additional information, check the mutual fund company’s website, or contact your broker.

Many securities firms have already begun a process to refund front-end sales load overcharges to their customers. FINRA is directing more than 450 securities firms to notify customers who purchased Class A mutual fund shares since January 1, 1999, that they may be due refunds as a result of the firms’ failure to provide breakpoint discounts. FINRA is also directing almost 175 of those firms with poor records of providing breakpoint discounts to complete a comprehensive review of transactions since the beginning of 2001 for possible missed discount opportunities, and a number of those firms may be the subject of enforcement actions by FINRA and the Securities and Exchange Commission.

If your securities firm has already contacted you, please follow their procedures for receiving a refund. If you have not been contacted and believe you should have received a breakpoint discount for a mutual fund purchase, contact your broker. You may want to use the Breakpoint Claim Form to make sure you provide your broker with the information they’ll need to review your claim.

Your securities firm has an obligation to check their records to determine whether you qualify for a refund. However, if their records do not reflect a connection between your accounts and the accounts of your family members or if your claim is based on mutual fund holdings held in an account outside of the firm, such as at a different securities firm or in a 401(k) plan, they may not be able to tell that you are entitled to a refund unless you give them information about those accounts. Although you need not provide them with any information about these other accounts, their analysis of your right to a refund will be limited to the information they have.

If you have a valid claim that you were overcharged, your securities firm must make a full refund to you. To ensure that you get the full refund, FINRA has developed the following guidelines that firms must follow when providing refunds:

• Refunds should be made in cash sent to you or through cash deposits into your account at the firm, with notice to you.
• Refunds should be equal to the amount of the sales load overcharge plus interest at a simple rate of at least 2.5 percent for overcharges that occurred between January 1, 2001, and the present. For transactions that took place before 2001, a comparable interest rate, such as the rate for six month CDs, must be used.
• Refunds should be made regardless of the performance of the mutual fund you purchased.

If your broker does not provide you with a refund or a satisfactory explanation of why you did not get a refund, you should file a written complaint with the firm’s compliance department and ask for a written response.

There are a number of steps you can take to make sure you are paying the lowest possible price for a fund that charges a front-end sales load:

• Understand how breakpoints work. Read the mutual fund prospectus or statement of additional information, check a mutual fund company’s website, or ask your financial professional for information on the terms and conditions of any available breakpoints. You can use our analyzer to calculate the impact of breakpoint discounts on your investment.
• Review your mutual fund holdings. Before making a mutual fund purchase, review your account statements and those of your family’s to find amounts of investments in a particular mutual fund or family of funds to see if these transactions can be combined to obtain a breakpoint discount. Don’t limit your review to accounts at a single securities firm. You may have related mutual fund holdings in accounts at other securities firms or with the mutual fund company itself that can help you reach a breakpoint discount.
• Keep your broker informed. To make sure you get the appropriate breakpoint discount, be sure that you tell your broker about your mutual fund holdings and those of your family, including holdings at other brokers or with the mutual fund itself. Also tell your broker about any plans you may have for making any additional purchases. With this information, your broker can make sure you get all available breakpoint discounts.
• Check your account statements. After you purchase a mutual fund with a front-end sales load, check your account statements to make sure you received the appropriate discount. If you didn’t get the right breakpoint discount, immediately contact your broker.

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