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Breakpoint Discounts

July 28, 2010

Everyone knows that buying in bulk can save money. The same principle applies to buying mutual fund shares. Some mutual funds that charge front-end sales loads will reduce those fees for larger investments. For example, a fund might charge a 5% front-end sales load for investments up to $25,000, but reduce that to a 4% load for investments between $25,000 and $50,000 and 3% for investments exceeding $50,000. The investment levels required to obtain a reduced sales load – in this case, $25,000 and $50,000 – are commonly referred to as "breakpoints." Funds are not required to offer breakpoint discounts and those that do may set them at their discretion.

A fund that offers breakpoint discounts must not only disclose the breakpoints, but must also alert investors to the availability of breakpoint discounts, in its prospectus. In addition, a brokerage firm that is a member of the Financial Industry Regulatory Authority (FINRA) is prohibited from selling to investors shares of a fund in a dollar amount just below one of the fund's breakpoints, thus depriving investors of a discount, so as to earn a higher commission.

Each fund company has its own formula for how it will calculate whether an investor is entitled to receive a breakpoint discount. Some funds determine eligibility for a breakpoint discount by looking at total investments in the fund by household, which may include multiple accounts, such as retirement savings accounts and college savings accounts. Others look only at the total amount that an individual has invested personally. Fund investors may also be entitled to combine prior fund purchase amounts to obtain a breakpoint discount on additional investments in the fund. Some funds permit investors to obtain a breakpoint discount if the investors agree to make additional purchases in the future. In such cases, the investor signs a "letter of intent" to make additional purchases in the future, and the failure to honor that pledge may result in retroactive fees that rescind the discount.

Investors should always check to make sure that they get any breakpoint discounts they are entitled to receive. Investors who believe they have not received breakpoint discounts to which they are entitled should first contact their broker or the fund company that sold them the fund and request the discount. If the issue isn’t resolved to the investor’s satisfaction, he or she should ask for a written response from the broker or the fund company. If the investor is not satisfied with the response, he or she has the right to file a complaint with the SEC using our online complaint form.

We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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