Sales Practices

Understanding fees is one thing, but knowing the rules around how shares are sold (and how investors can reduce costs) is equally important. This section covers breakpoints, letters of intent, rights of accumulation, and dollar-cost averaging.

What Are Breakpoints and Why Is Breakpoint Selling Prohibited?

Breakpoints are volume discounts on the front-end sales charge for Class A shares only:

• Breakpoint levels are set by the fund (e.g., $25,000, $50,000, $100,000, $250,000, $500,000, $1,000,000)
• As the investment amount increases, the sales charge percentage decreases
• At $1,000,000, many funds charge no sales load at all

Key violations:

• Breakpoint selling: Soliciting a purchase just below a breakpoint to earn a higher commission. This is prohibited
• Selling dividends: Representing that buying fund shares shortly before an ex-dividend date is advantageous is prohibited unless a specific, clearly described tax or other advantage exists. A rep may also never represent that long-term capital-gain distributions are part of a fund's income yield
• Failure to inform a customer of available breakpoints is a FINRA violation

Exam Tip: Gotchas

• Only Class A shares offer breakpoint discounts. Class B and C shares do not have breakpoints.
• Breakpoint selling is a FINRA violation. If a client wants to invest $48,000 and the next breakpoint is $50,000, the rep must inform the client of the breakpoint opportunity.

How Does a Letter of Intent Work?

A letter of intent is a written commitment to invest a specified dollar amount over 13 months to qualify for a breakpoint discount:

• The reduced sales charge applies to all purchases during the 13-month period, including the first
• LOI can be backdated up to 90 days to include recent purchases
• The fund holds a portion of shares in escrow (~5% of the LOI amount) as collateral
• If the investor fails to meet the commitment, the escrowed shares are redeemed to cover the difference in sales charges
• LOI is not binding; the investor is not obligated to invest the full amount

Example: An investor signs an LOI for $100,000. They get the breakpoint discount on all purchases from day one. If after 13 months they've only invested $60,000, the fund redeems enough escrowed shares to cover the additional sales charge they should have paid at the $60,000 level.

Exam Tip: Gotchas

• LOI is not binding. The investor will not be forced to invest, but escrowed shares will be redeemed to cover the higher sales charge.
• LOI can be backdated up to 90 days to include recent purchases toward the commitment amount.

How Do Rights of Accumulation Differ From an LOI?

ROA allows investors to count the current market value of existing holdings (not original cost) plus new purchases to qualify for breakpoints:

• A fund family is the group of mutual funds offered by the same sponsor / investment adviser (e.g., all Vanguard funds, all Fidelity funds, all American Funds). Funds from different sponsors do NOT combine for ROA, even when held in the same brokerage account
• Applies across accounts in the same fund family (individual, joint, IRA, custodial)
• Some funds allow combining holdings of family members in the same household ("householding")
• Unlike LOI, ROA is an ongoing benefit that applies to every subsequent purchase

Key distinction: LOI looks forward (committing to future purchases), while ROA looks at current value of what you already own.

Exam Tip: Gotchas

• ROA uses current market value, not original purchase price. If you bought $40,000 worth of shares that are now worth $50,000, ROA counts the $50,000.

Try it: Stack a lump sum, an LOI, or an ROA credit against the next breakpoint with the Breakpoint Calculator.

What Does Dollar-Cost Averaging Actually Lower?

Dollar-cost averaging is an investment strategy (not technically a sales practice), but it is frequently tested alongside breakpoints:

• Investing a fixed dollar amount at regular intervals regardless of share price
• Results in purchasing more shares when prices are low and fewer shares when prices are high
• Lowers the average cost per share below the average price per share over time

Calculation: Average cost per share = Total amount invested / Total shares purchased

Example:

• Average price per share = ($25 + $20 + $50) / 3 = $31.67
• Average cost per share = $1,500 / 55 = $27.27
• Average cost ($27.27) < Average price ($31.67)

Important limitation: DCA does not guarantee a profit and does not protect against loss in declining markets.

Exam Tip: Gotchas

• Average COST per share and average PRICE per share are two different numbers. DCA lowers the average cost (total invested / total shares) below the average price (sum of all prices / number of periods). The exam may ask you to calculate both and compare them.
• DCA does NOT guarantee profits. It lowers your average cost, but it does not protect against losses in a sustained declining market.

What Other Deadlines Do FINRA Rules Impose on Dealers?

• If shares are tendered for redemption within 7 business days of the original sale, the selling dealer must return its full concession to the underwriter. The underwriter must notify the dealer within 10 days after receiving the certificate or written redemption request.
• For direct retail sales, the dealer must transmit customer payments no later than the end of one business day after the later of the purchase order or receipt of payment. An underwriter handling wholesale transactions has two business days after receiving payment.

Exam Tip: Gotchas

• The 7-business-day concession-refund rule is about the dealer's compensation, not the investor's redemption rights. A fast flip-and-redeem strips the dealer's commission; it doesn't change what the investor receives.

What Should You Check on Exam Day?

• Can you define breakpoint selling and explain why it violates FINRA rules?
• Can you walk through an LOI: 13-month window, 90-day backdating, ~5% escrow, and non-binding status?
• Do you know that ROA uses current market value (not original cost) and only combines holdings within the same fund family?
• Can you calculate both average cost per share and average price per share, and explain why they differ?
• Can you state the 7-business-day concession-refund rule and the 1-business-day (retail) / 2-business-day (wholesale) payment-transmittal deadlines?