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Breakpoints in Mutual Fund Charges

Mutual funds may offer “breakpoints” in their front-end sales load. Thus, a fund that charges a fee of five percent for investments up to $25,000 may charge only four percent for investments from $25,000 to $50,000 and three percent for investments over $50,000. The fund has breakpoints at $25,000 and $50,000.

The Securities and Exchange Commission does not require that such breakpoints must be offered to investors. However, if a fund does offer breakpoints, the Commission requires that the availability of the breakpoints must be disclosed to investors. Also, National Association of Securities Dealers requirements for its member brokerage firms provide that breakpoints may not be used as a mechanism for generating greater commissions. For example, a customer may not be steered to an investment of just under $50,000 if that results in a four percent commission when an investment of just a few dollars more would result in a commission of three percent on the total investment.

It is up to each mutual fund to set its own breakpoints and its own formula for calculating the breakpoints. Possible variables may include whether all investments from a particular household are included in the calculation or the total amount of investments of an individual over a particular period of time. Some funds may consider aggregate totals of investments in a family of funds operated by the fund’s manager.

Breakpoints may also be established for total purchases agreed to in the future. In that instance, the investor would sign a letter of intent and would obtain the discount while maintaining an investment history that meets the conditions of the letter of intent. If those conditions are not met, the fund then could seek commissions that would have applied but for the agreement in the letter of intent.

If investors are unsuccessful in seeking relief directly from a broker or fund, the Securities and Exchange Commission receives and acts upon complaints that discount breakpoints have not been applied in the manner that they have been publicly described.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.