Back-End Load

FINRA's investor page on mutual funds describes the back-end load as a charge an investor pays only if the investor sells shares during the period the charge applies. FINRA states that sales charges, called loads, are calculated as a percentage of the amount invested, and that like commissions on stock or bond transactions, these charges compensate the firm or investment professional.

How a Back-End Load Is Calculated

The SEC's bulletin and guide state that a mutual fund typically calculates the amount of a back-end sales load based on the lesser of the value of the initial investment or the value of the investment at redemption, and the bulletin tells investors to read the prospectus carefully to determine whether a fund calculates its fee in this manner.

The SEC's investor page states that the charge may start out at 5 percent or 6 percent for the first year, and get smaller each year after that until it reaches zero. That page adds that an investor can determine the deferred sales charge by looking at the fee and expense table in the prospectus or profile, and that if the fund has a decreasing deferred sales charge over time, the fund usually will include a table in the prospectus or profile.

The Contingent Deferred Sales Charge

The most common form of back-end load has its own name. Investor.gov states that the most common type of back-end sales load is a contingent deferred sales load, also called a contingent deferred sales charge. Its glossary adds that the amount of the fee depends on the length of time the investor holds the shares, and that it may gradually decline to zero if the investor holds the shares long enough.

The SEC's bulletin gives the same description. The rate at which the fee declines is disclosed in the mutual fund's prospectus, and a mutual fund with a contingent deferred sales load or charge typically also has an annual 12b-1 fee.

In the SEC's guide, the contingent deferred sales load is a type of back-end load whose amount depends on the length of time the investor held the mutual fund shares, until the load reaches zero and goes away completely. FINRA uses the abbreviation CDSC for the same charge and states that a contingent deferred sales charge normally declines the longer the investor holds the shares and eventually disappears.

Back-End Loads Compared With Front-End and Level Loads

The SEC's guide defines the front-end load as a sales charge a fund charges investors when they buy shares, typically paid to the broker that sells the mutual fund's shares. A front-end load reduces the amount of an investment, because the sales load comes off the top of the amount the investor invests, leaving the remainder to be invested in the mutual fund. FINRA describes a front-end load as a commission paid at the time of purchase, which can range between 2 percent and 5 percent.

A back-end load differs in timing and in source. The front-end load is paid out of the amount available to purchase shares, while the back-end load is paid out of the money the investor receives when exiting the fund.

FINRA describes a third type, the level load, as an amount the fund collects every year the investor holds the fund. FINRA also describes no-load funds as funds that do not impose sales charges but might have other fees. FINRA states that the rate at which an investor is charged varies from fund company to fund company, and that the expense ratio does not include loads, which are fees an investor may pay when buying or selling a fund.

The SEC's guide groups the front-end and back-end forms together. It defines a sales charge, or load, as the amount investors pay when they purchase, in the case of a front-end load, or redeem, in the case of a back-end load, shares in a mutual fund, similar to a brokerage commission.

Back-End Loads in Mutual Fund Share Classes

The SEC's guide states that although exchange-traded funds offer only one class of shares, many mutual funds offer more than one class. Each class invests in the same portfolio of securities and has the same investment objectives and policies, but each class has different shareholder services or distribution arrangements with different fees and expenses. Because of the different fees and expenses, each class will likely have different performance results.

The guide describes how the back-end load appears in the common classes. Class A shares typically charge a front-end sales load, but they tend to have a lower 12b-1 fee and lower annual expenses than other mutual fund share classes. Class B shares typically do not have a front-end sales load. Instead, they may charge a contingent deferred sales load and a 12b-1 fee along with other annual expenses, and the amount of the contingent deferred sales load typically decreases the longer an investor holds the shares. Class C shares might have a 12b-1 fee, other annual expenses, and either a front-end or back-end sales load, and the front-end or back-end load for Class C shares tends to be lower than for Class A or Class B shares, respectively.

Unlike Class B shares, Class C shares generally do not convert to another class, and as a result the back-end load will not decrease over time. Class C shares tend to have higher annual expenses than either Class A or Class B shares. Class B shares might convert automatically to a class with a lower 12b-1 fee and no contingent deferred sales load if the investor holds the shares long enough. A conversion is a feature some mutual funds offer that allows investors to automatically change from one class to another, typically with lower annual expenses, after a set period of time, and the fund's prospectus or summary prospectus states whether a class ever converts to another class.

FINRA's investor page describes the same classes. It states that Class B shares normally impose a contingent deferred sales charge, sometimes called a back-end load, and generally impose a higher 12b-1 fee than the fee an investor would incur on Class A shares. FINRA states that most mutual funds no longer offer Class B shares, so they might not be an option for an investor. It states that Class C shares do not impose a front-end sales charge on the purchase, that they often impose a small charge, often 1 percent, if the investor sells the shares within a short time, and that they typically impose higher annual operating expenses than Class A shares due primarily to higher 12b-1 fees.

FINRA also describes transaction shares, sometimes called clean shares, as a class of fund shares without any front-end load, deferred sales charge or 12b-1 fees. A brokerage firm may separately require the investor to pay a sales commission when the investor buys these shares.

Back-End Loads, Redemption Fees and 12b-1 Fees

A back-end load is a sales charge, and the SEC separates it from other charges that are also paid at redemption or while the investor holds the fund. The SEC's guide states that a redemption fee is a fee some mutual funds charge investors when they sell or redeem their shares within a certain time frame of purchasing the shares. Unlike a deferred sales load, a redemption fee is paid into fund assets, not to the broker, and is typically used to defray fund costs associated with an investor's redemption. The SEC limits redemption fees to 2 percent, and redemption fees, which must be paid to the fund, are not the same as, and may be in addition to, a back-end load.

The bulletin gives the same distinction. A redemption fee is used to defray fund costs associated with a shareholder's redemption, typically is a percentage of the sales amount and is paid out of the money received when shares are sold, and is paid directly to the mutual fund, not to a broker. The sales load and the redemption fee are listed separately in the shareholder fees section of the fee table, with the sales load compensating the selling broker, similar to a commission, and the redemption fee paid when the investor redeems shares.

The 12b-1 fee is a different category. The SEC's guide describes distribution and service fees, called 12b-1 fees, as fees paid out of mutual fund or exchange-traded fund assets to cover the costs of distribution, such as marketing and selling fund shares, and sometimes to cover the costs of providing shareholder services. Distribution fees include fees to compensate brokers and others who sell fund shares. The fees are often called 12b-1 fees after the SEC rule that authorizes them, and they typically apply to mutual funds but not to exchange-traded funds.

Back-End Loads and No-Load Funds

The SEC's guide states that some mutual funds call themselves no-load, which means that the mutual fund does not charge any type of sales load. It adds that not every type of shareholder fee is a sales load. A no-load fund may charge direct fees that are not sales loads, such as purchase fees, redemption fees, exchange fees and account fees, and no-load funds also have annual fund operating expenses that investors pay for indirectly through fund assets. The bulletin makes the same point in shorter form: no-load does not mean no fees.

Where a Back-End Load Is Disclosed

The SEC's bulletin states that mutual funds and exchange-traded funds are required to provide a standardized table of fees and expenses in their prospectuses. The table has a shareholder fees section, and the bulletin lists the sales load and the redemption fee there. An investor can obtain a fund's prospectus by visiting the fund's website or contacting the fund, among other ways.

Form N-1A sets out the fee table. Item 3 of the form, titled Risk/Return Summary: Fee Table, has a caption reading Shareholder Fees (fees paid directly from your investment), and the table includes a line for the Maximum Deferred Sales Charge (Load). The instructions to Item 3 state that the Maximum Deferred Sales Charge (Load) includes the maximum total deferred sales charge (load) payable upon redemption, in installments, or both.

FINRA's rules also require a legend on confirmations. FINRA Rule 2341, titled Investment Company Securities, has a paragraph (n) titled Disclosure of Deferred Sales Charges. In addition to the requirements for disclosure on written confirmations in Rule 2232, if the transaction involves the purchase of shares of an investment company that imposes a deferred sales charge on redemption, the written confirmation shall also include a legend reading: On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus. The legend shall appear on the front of a confirmation and in, at least, 8-point type.

FINRA Rule 2341 and Deferred Sales Charges

FINRA Rule 2341 applies exclusively to the activities of members in connection with the securities of companies registered under the Investment Company Act, except that Rule 2320 applies in lieu of Rule 2341 to members' activities in connection with variable contracts as defined in Rule 2320. Paragraph (b)(8)(B) defines a deferred sales charge as any amount properly chargeable to sales or promotional expenses that is paid by a shareholder after purchase but before or upon redemption. Paragraph (b)(8)(A) defines an asset-based sales charge as a sales charge that is deducted from the net assets of an investment company and does not include a service fee, and paragraph (b)(8)(C) defines a front-end sales charge as a sales charge that is included in the public offering price of the shares of an investment company.

Paragraph (d) of the rule bars a member from offering or selling the shares of the investment companies it covers if the sales charges described in the prospectus are excessive, and it deems aggregate sales charges excessive if they do not conform to its provisions. For an investment company without an asset-based sales charge, paragraph (d)(1)(A) provides that aggregate front-end and deferred sales charges described in the prospectus shall not exceed 8.5 percent of the offering price. Paragraph (d)(1)(D) provides that if such a company pays a service fee, the maximum aggregate sales charge shall not exceed 7.25 percent of the offering price.

For an investment company with an asset-based sales charge, paragraph (d)(2) sets different limits, and deferred sales charges count toward them. Under paragraph (d)(2)(A), except as provided in paragraphs (d)(2)(C) and (D), if the company has adopted a plan under which service fees are paid, the aggregate asset-based, front-end and deferred sales charges described in the prospectus shall not exceed 6.25 percent of total new gross sales, plus interest charges on that amount equal to the prime rate plus one percent per annum, and the maximum front-end or deferred sales charge resulting from any transaction shall be 6.25 percent of the amount invested. Under paragraph (d)(2)(B), if the company does not pay a service fee, the corresponding limit is 7.25 percent of total new gross sales, plus the same interest charge, and the maximum front-end or deferred sales charge resulting from any transaction shall be 7.25 percent of the amount invested.

Paragraph (d)(6) places two conditions on deferred sales charges. Under paragraph (d)(6)(A), no member or person associated with a member shall offer or sell the securities of an investment company if the company has a deferred sales charge paid upon redemption that declines over the period of a shareholder's investment, called a contingent deferred sales load, unless the load is calculated as if the shares or amounts representing shares not subject to the load are redeemed first, and other shares or amounts representing shares are then redeemed in the order purchased. The paragraph adds that another order of redemption may be used if that order would result in the redeeming shareholder paying a lower contingent deferred sales load.

Under paragraph (d)(6)(B), no member or person associated with a member shall offer or sell the securities of an investment company if the company has a front-end or deferred sales charge imposed on shares, or amounts representing shares, that are purchased through the reinvestment of dividends, unless the registration statement registering the investment company's securities under the Securities Act became effective prior to April 1, 2000.

Waivers and Reinstatement

FINRA's investor page encourages investors to understand and explore any potential sales charge waivers. It states that a fund family may allow an investor who has sold shares to reinvest some or all of the proceeds without paying a sales charge, under what it calls a right of reinstatement.

Loads in FINRA's Examination Outline

FINRA's Securities Industry Essentials examination content outline carries a 2025 copyright. Section 2 of the outline, Understanding Products and Their Risks, includes topic 2.1.4, Packaged Products. The topic lists investment companies, types of investment companies, loads, share classes, sales charges, costs and fees, breakpoints, letter of intent, right of accumulation and surrender charges. The Section 2 rules lists include FINRA Rule 2342, Breakpoint Sales, and SEC Rule 12b-1 under the Investment Company Act of 1940, Distribution of Shares by Registered Open-end Management Investment Company. Candidates should check the current outline before the examination.

Common Misunderstandings

The corrections below come from the SEC's guide and investor bulletin, Investor.gov, and FINRA Rule 2341.

A back-end load is not deducted at purchase. When an investor purchases shares with a back-end sales load, no sales load is deducted at the time of purchase, and the fee is paid out of the money the investor receives when exiting the fund.

A back-end load does not always stay at the same percentage. A contingent deferred sales charge depends on how long the investor holds the shares and may gradually decline to zero, and the rate at which it declines is disclosed in the prospectus.

A back-end load is not a redemption fee. A deferred sales load compensates brokers, while a redemption fee is paid into fund assets, not to the broker. A redemption fee may be charged in addition to a back-end load.

A back-end load is not the same as a 12b-1 fee. The back-end load is paid by the investor on redemption, and the 12b-1 fee is paid out of fund assets. A fund with a contingent deferred sales charge typically also has an annual 12b-1 fee.

A back-end load does not apply to every share class. Class A shares typically charge a front-end sales load, Class B shares may charge a contingent deferred sales load, and Class C shares may have either a front-end or a back-end load.

Class C back-end loads do not shrink the way Class B charges do. Class C shares generally do not convert to another class, so the back-end load will not decrease over time.

A no-load fund can still have other fees. A no-load fund charges no sales load, but it may charge purchase, redemption, exchange and account fees, and it has annual fund operating expenses.

A back-end load is not unlimited. FINRA Rule 2341(d) limits aggregate sales charges, including deferred sales charges, as described above.

Key Points

A back-end sales load, also called a deferred sales charge or deferred sales load, is a fee investors pay when they redeem mutual fund shares.

The most common form is the contingent deferred sales charge, which depends on how long the investor holds the shares and may gradually decline to zero.

A back-end load is typically calculated on the lesser of the value of the initial investment or the value of the investment at redemption.

A redemption fee is paid into fund assets, not to a broker, and is not the same as a back-end load.

FINRA Rule 2341 requires a confirmation legend for deferred sales charges and limits the aggregate sales charges, including deferred sales charges, that an investment company may impose.

FINRA's outline for the Securities Industry Essentials examination lists loads, share classes, sales charges and surrender charges under packaged products.