SIE Ready🧺 Packaged Products · Lesson 3 of 7 · 6 min
A, B, C Shares and the Breakpoint Rules
🎟️ Same fund, same managers, three price tags. Picking the wrong share class, or selling just under a discount, can cost a customer thousands and a rep their career.
💡 Key idea
A = load At the start, B = load on the Back end, C = Constant yearly charge. Breakpoints reduce A-share loads; never sell just under one.
🧠 Why it matters
CLASS A: front-end load, lower 12b-1 fee, and BREAKPOINTS (volume discounts on the load). CLASS B: no front load but a CONTINGENT DEFERRED SALES CHARGE that declines over the years (now rare). CLASS C: small or no front load, a short CDSC (often about 1 year) and a higher ongoing 12b-1 fee, so it can cost more if held long. FINRA caps 12b-1 fees at 0.75% (distribution) plus 0.25% (service). Breakpoints come from one large purchase, a LETTER OF INTENT (a pledge to invest a set amount, usually over 13 months) or RIGHTS OF ACCUMULATION (counting existing holdings). Selling just below a breakpoint to earn more is a prohibited BREAKPOINT SALE (FINRA Rule 2342).
📈 In the real world
📝 Lena wants $30,000 in a fund now and plans another $25,000 in six months. The breakpoint is $50,000. Her rep has her sign a letter of intent, so the first purchase gets the lower $50,000 rate. If Lena never adds the money, the fund can redeem escrowed shares to recover the discount.
📌 Takeaways
- A: front load + breakpoints; B: declining CDSC; C: level, higher 12b-1
- LOI (usually 13 months) and rights of accumulation help reach breakpoints
- Breakpoint sales are prohibited by FINRA Rule 2342
📖 Terms in this lesson
Class A shares: Fund shares with a front-end sales charge that falls at breakpoints, usually with lower ongoing fees.
Class B shares: Fund shares with no front-end charge but a contingent deferred sales charge that shrinks the longer the shares are held.
Class C shares: Fund shares with a level load: typically no front-end charge, a short deferred charge and higher ongoing 12b-1 fees.
12b-1 fee: An annual fee taken from fund assets to pay for distribution and shareholder services, named for an SEC rule.
Breakpoint: A purchase amount at which a fund's front-end sales charge is reduced.
Letter of intent (LOI): A promise to invest a stated amount in a fund family within 13 months in exchange for the reduced sales charge now.
Rights of accumulation: A feature counting existing fund-family holdings toward breakpoints on new purchases.
A = AHEAD, B = BACK, C = CONSTANT: Class A charges ahead (front-end load), Class B at the back (deferred charge), Class C a constant level load each year.
✅ Test yourself
Which share class usually suits a large, long-term purchase that qualifies for a breakpoint?
- Any class, since costs are identical
- Class C shares
- Class A shares
- Class B shares
Answer: C · Class A shares
Breakpoints reduce the front-end load, which only Class A shares carry, and A shares typically have lower 12b-1 fees for a long hold. C shares' higher yearly 12b-1 fee adds up over time, and B shares have no breakpoints on a front load.
A rep suggests a customer invest $24,500 when the fund's next breakpoint is $25,000, without mentioning it. This is:
- A breakpoint sale, which FINRA prohibits
- Acceptable if disclosed in the prospectus
- Permitted for Class A shares only
- A rights of accumulation violation
Answer: A · A breakpoint sale, which FINRA prohibits
Selling just below a breakpoint so the customer pays a higher sales charge is a breakpoint sale, prohibited under FINRA Rule 2342. Prospectus disclosure does not cure it, and rights of accumulation are a discount feature, not the violation.
What happens if an investor signs a letter of intent but does not invest the promised amount?
- The discount is lost, often paid from escrowed shares
- The fund must refund every sales charge
- The letter is automatically extended a year
- The investor is fined by FINRA
Answer: A · The discount is lost, often paid from escrowed shares
An LOI is not a binding obligation to buy. If the investor falls short, the fund recovers the discount, commonly by redeeming shares held in escrow. There is no FINRA fine on the customer and no automatic extension.
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