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.

What Does This Statement of Policy Cover?

• 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 the USA, exposing the agent or firm to registration sanctions

What Sales Charges Must Be Disclosed?

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:

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.

When Must Breakpoints and Letters of Intent Be Disclosed?

• Must disclose any relevant breakpoint discount available at or above a dollar amount (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
• Rights of accumulation let a customer aggregate the value of prior purchases (and often household holdings) toward a breakpoint on a new purchase
• A purchase that simply falls below a breakpoint is not automatically a violation; it only becomes one when the facts show an available discount the customer wasn't told about (an available LOI, aggregation rights that would push the purchase over the threshold, or deliberate structuring to stay under the threshold, i.e., breakpoint selling)

Exam Tip: Gotchas

• A customer investing $49,000 in a fund with a $50,000 breakpoint is not, by itself, a violation. It becomes a disclosure violation if the customer's existing or aggregatable holdings, or an available LOI, would have qualified them for the breakpoint and the agent didn't disclose it.
• The LOI disclosure rule applies even if the customer has not asked about letters of intent.

What Makes a Share Class Recommendation Suitable?

• 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
• The customer's expected holding period is not a separate factor in the rule; it feeds into the fee comparison. A long holding period generally favors Class A's lower ongoing fees, while a short one generally favors Class C, which has no front-end load and no long-term CDSC exposure

What Is 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
• A purchase recommendation is also unethical when it leaves the customer holding two different funds with similar objectives and policies at the same time, without a reasonable basis for the duplication. The switching rule and this duplicative-holdings rule both police the same underlying harm: unnecessary sales charges from redundant funds

What Are Misleading Yield and Performance Claims?

Exam Tip: Gotchas

• A younger fund substitutes what it has, not what it lacks. If a fund's registration statement has not been effective for the full 1-, 5-, or 10-year period, it substitutes the period it has actually been effective for whichever period is unavailable. It does not get to omit the figure entirely.

What Dividend-Related Claims Are Misleading?

• Cannot imply that purchasing shares shortly before an ex-dividend date is advantageous (unless clearly described tax or other advantages exist)
• Cannot imply that a distribution of long-term capital gains is part of the income yield

What Counts as a "Recommendation" Under This Policy?

• "Recommend" is read broadly: it includes affirmative endorsements, solicitations, requests, or assistance, not just a formal buy recommendation
• "Solicitation" covers oral, written, or other offer-or-sale communications, but excludes documents the securities laws require to be filed, such as proxy statements, shareholder reports, and other required disclosure documents

Does Delivering a Prospectus Satisfy the Disclosure Duty?

• 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

What Should You Check on Exam Day?

• A below-breakpoint purchase is not automatically a violation. Look for an available letter of intent, aggregatable holdings under rights of accumulation, or deliberate structuring to dodge the breakpoint before calling it a violation.
• The "no-load" label survives up to 0.25% in combined 12b-1 and service fees; it fails once that combined figure exceeds 0.25%, even with zero front-end load.
• Switching and duplicative-holdings claims both turn on whether the recommendation had a reasonable suitability basis, not just on whether it generated a new sales charge.
• Handing over a prospectus never substitutes for the agent's own disclosure duties on breakpoints, share class, and sales charges.