Investment Company Share Practices

The NASAA Statement of Policy on Dishonest or Unethical Business Practices in Connection with Investment Company Shares (1997) supplements the general dishonest practices rules with specific protections for mutual fund investors.

Scope

Supplements (does not replace) the general NASAA Dishonest Practices Statement
Addresses specific abuses in the sale of mutual fund shares
Violations constitute "dishonest or unethical practices" under USA Section 204

Sales Load Disclosure

All sales charges must be adequately disclosed to the customer, including:

Front-end loads (charged at purchase)
Asset-based charges (12b-1 fees)
Contingent deferred sales charges (CDSCs) (charged at redemption)

The "No-Load" Rule

A fund cannot be called "no load" or "no sales charge" if:

Condition	Disqualifies "No-Load" Label
Front-end load exists	Yes
CDSC exists	Yes
12b-1 fees + service fees exceed 0.25% of average net fund assets per year	Yes
Closed-end fund with underwriting fees, commissions, or offering expenses	Yes

A fund that charges 12b-1 fees above 0.25% annually is not a no-load fund, even if it has no front-end sales charge.

Exam Tip: Gotchas

A fund can charge 12b-1 fees up to 0.25% and still call itself "no-load." Once those fees exceed 0.25%, the "no-load" label is prohibited, even if there is no front-end sales charge.

Breakpoint Disclosure

Must disclose any relevant breakpoint discounts (reduced sales charges at higher investment amounts)
Must disclose the availability of a letter of intent (LOI) feature, if available, that would reduce sales charges
Failing to inform customers of breakpoints or LOIs when they would qualify is a dishonest practice, even if the customer does not ask about them

Exam Tip: Gotchas

If a customer invests $49,000 in a fund with a $50,000 breakpoint, the agent must proactively inform the customer about the breakpoint. Waiting to be asked is not acceptable; failure to disclose is itself a dishonest practice.

The LOI disclosure rule applies even if the customer has not asked about letters of intent.

Must have reasonable grounds to believe the recommended share class (A, B, C, etc.) is suitable based on the customer's objectives, financial situation, holdings, and associated fees
Recommending Class B shares (with higher ongoing expenses and CDSCs) when the customer qualifies for a Class A breakpoint may be unsuitable

Improper Switching

Recommending the liquidation and repurchase of fund shares in a different portfolio with similar objectives without reasonable grounds constitutes a dishonest practice
Switching targets moving customers between similar funds primarily to generate new sales charges
Must consider investment objectives, financial situation, other holdings, and transaction charges

Misleading Yield and Performance Claims

Prohibited Practice	Rule
Stating current yield without disclosing most recent average annual total return for 1, 5, and 10 years (per SEC Form N-1A)	Must explain difference between yield and total return
Implying fund performance is comparable to bank deposits	Must disclose shares are not FDIC insured or government guaranteed
Implying insurance or guarantees on portfolio securities	Must disclose all investment risks (interest rate, market, political, liquidity, currency)

Cannot imply that purchasing shares shortly before an ex-dividend date is advantageous (unless clearly described tax or other advantages exist)
- Buying before the ex-date means paying for the dividend with your own money, then owing tax on it
Cannot imply that a distribution of long-term capital gains is part of the income yield

Prospectus Delivery Is Not Sufficient

Delivering a prospectus, by itself, does not establish that the broker-dealer (BD) or agent provided full and fair disclosure
The BD and agent have independent disclosure obligations beyond prospectus delivery
Simply handing over the prospectus does not satisfy the duty to disclose breakpoints, share class suitability, or sales charges