Class A Shares

FINRA's investor page on mutual funds states that each class represents a similar interest in the fund's portfolio, with different fees and expenses. The factors FINRA lists for choosing among classes are how long the investor will hold the fund, the size of the investment, and whether the investor qualifies for sales charge discounts or other fee waivers. FINRA adds that a professional or firm might receive higher or lower commissions or payments from the sale of one share class relative to another.

The Kinds of Share Classes

The SEC's bulletin discusses two groups of share classes. The first group is the classes that carry sales loads and 12b-1 fees, and the bulletin names Class A, Class B and Class C in it. The second group is the no-load classes, which the bulletin describes as retail no-load shares, institutional shares labeled Class I, and retirement share classes. FINRA separately describes transaction shares, sometimes called clean shares, which have no front-end load, deferred sales charge or 12b-1 fee. Class A shares belong to the first group. The SEC's guide adds that although exchange-traded funds offer only one class of shares, many mutual funds offer more than one class.

The Front-End Sales Load on Class A Shares

The SEC's bulletin states that Class A shares usually have a front-end sales load, which is a percentage of the purchase price and which may be discounted if criteria are met, such as a minimum investment. The SEC's guide defines a front-end load as a sales charge a fund charges investors when they buy shares, typically paid to the broker that sells the shares. The guide states that the 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. The guide also defines a sales charge, or load, as the amount investors pay when they purchase or redeem shares in a mutual fund, similar to a brokerage commission.

FINRA describes the front-end load as a commission paid at the time of purchase, which can range between 2 percent and 5 percent, and states that sales charges, called loads, are calculated as a percentage of the amount invested. FINRA contrasts the front-end load with a back-end load, which is charged only if the investor sells during the period the charge applies, and with a level load, which is an amount the fund collects every year the investor holds the fund. FINRA Rule 2341 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.

The sales load appears on the fund's fee table. Form N-1A, the registration form used by open-end management investment companies, sets out the fee table in Item 3. The shareholder fees section of the table is captioned Shareholder Fees (fees paid directly from your investment), and its first line is Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price). Instruction 2(a)(ii) to Item 3 states that, when more than one type of sales charge is imposed, the first caption in the table should read Maximum Sales Charge (Load) and show the maximum cumulative percentage.

The 12b-1 Fee and Annual Expenses of Class A Shares

The SEC's guide describes distribution and service fees, called 12b-1 fees, as fees paid out of 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. Form N-1A lists the fee in the annual fund operating expenses section on a line for Distribution and/or Service (12b-1) Fees.

The SEC's bulletin states that classes with sales loads also pay 12b-1 fees, and that the 12b-1 fee on Class A shares is generally lower than the 12b-1 fee for certain other load-bearing classes. FINRA's page states that the asset-based sales charge on Class A shares is often 0.25 percent per year, generally lower than the charge imposed by the other classes, and that because the 12b-1 fees on Class A shares are generally lower than for Class B and Class C shares, total expenses are generally lower over time. FINRA also states that buying directly from the fund company can give an investor Class A-level fees without load charges or commissions.

SEC Rule 12b-1 and the Limits on the Fee

SEC Rule 12b-1 under the Investment Company Act of 1940 is the rule that governs how a registered open-end fund may pay for the distribution of its own shares. Paragraph (a)(1) makes it unlawful for a registered open-end management investment company to act as a distributor of securities of which it is the issuer, except through an underwriter, and paragraph (a)(2) treats a company that directly or indirectly finances sales activity, which includes advertising and the compensation of underwriters, dealers and sales personnel, as acting as a distributor. Paragraph (b) permits a company to act as a distributor if its payments are made under a written plan describing all material aspects of the proposed financing and the agreements are in writing.

The rule sets conditions on the plan. The plan and related agreements must be approved by the board and by the directors who are not interested persons and have no direct or indirect financial interest in the plan or the agreements, voting in person at a meeting called for that purpose. Directors may implement or continue the plan only if they conclude, in the exercise of reasonable business judgment, that there is a reasonable likelihood that the plan will benefit the company and its shareholders. Continuation beyond one year requires specific approval at least annually, and the persons who direct the payments must give the board a written report of the amounts expended and the purposes at least quarterly. 

The plan may be terminated at any time by a majority of the independent directors or a majority of the outstanding voting securities, and agreements may be terminated without penalty on not more than sixty days' written notice. The plan may not be amended to increase materially the amount to be spent for distribution without shareholder approval. If a plan covers more than one series or class, its provisions must be severable for each series or class, and actions must be taken separately for each. Copies of the plan, agreements and reports must be kept for at least six years, the first two in an easily accessible place. The rule itself does not set a percentage cap on the fee.

The percentage limits come from FINRA Rule 2341. Paragraph (b)(9) defines service fees, as used in paragraph (d), as payments by an investment company for personal service and the maintenance of shareholder accounts. Paragraph (d)(5) bars a member from offering or selling the shares of an investment company if the service fees paid by the company, as disclosed in the prospectus, exceed 0.25 percent of its average annual net assets, or if a service fee paid to any person who sells its shares exceeds 0.25 percent of the average annual net asset value of those shares. For an investment company with an asset-based sales charge, paragraph (d)(2)(E)(i) bars a member from offering or selling its shares if the asset-based sales charge exceeds 0.75 percent per year of the average annual net assets of the investment company.

Breakpoints

FINRA's breakpoints page describes breakpoints as volume discounts that reduce the front-end sales load on Class A mutual fund shares, and states that the extent of the discount depends on the amount invested in a particular family of funds. FINRA's breakpoints disclosure statement states that breakpoints are investment levels at which the Class A front-end charge drops, that larger purchases generally get a lower percentage, that very large purchases may have the entire charge waived, and that prospectuses include tables showing the breakpoint levels and discounts.

FINRA's page for investors states that breakpoints vary by fund and that whenever an investor is entitled to breakpoints, the fund is required to apply them to the investment. FINRA's breakpoints page states that firms must provide all available breakpoint discounts on sales of front-end load funds, that FINRA recommends that firms give investors a written disclosure statement explaining breakpoints, and that representatives are advised to learn each fund's breakpoint schedule from its prospectus or statement of additional information and to record clients' holdings in client files. The SEC's bulletin states that, for front-end load classes, investors may qualify for a reduced load, called a breakpoint discount, by making a large purchase, committing to regular or future purchases, or reaching a rights of accumulation threshold.

Rights of Accumulation

The SEC's bulletin states that rights of accumulation count the new purchase plus existing holdings, often including other funds in the same fund family, against a set threshold. FINRA's breakpoints disclosure statement adds detail. Funds may count existing holdings toward a breakpoint, including prior purchases in the same fund or another fund in the same family. Holdings in other accounts, such as individual retirement accounts or accounts at other broker-dealers, may also count, and the investor must tell the advisor about them and may need to provide documentation. Some funds also count holdings of related people, such as a spouse or children, and the rules differ by fund family.

The disclosure statement also states that the valuation method varies. Some funds use current net asset value, while a small number use historical cost, which is what the investor originally paid, and if a fund uses historical cost the investor may need account records such as confirmations or monthly statements. FINRA's breakpoints page states that investors also may be able to aggregate holdings in different accounts, at the same or different broker-dealers, and in account types such as 401(k) plans and 529 plans.

Letters of Intent

FINRA's breakpoints disclosure statement describes a letter of intent as a commitment to buy a set amount of Class A shares, usually within 13 months. It lets the investor receive the breakpoint rate for the full committed amount on the first and later purchases, even if each individual purchase is too small to qualify. The statement adds that some funds offer retroactive letters of intent that count recent past purchases, and that if the investor does not invest the committed amount, the fund can retroactively charge the correct sales charge based on what the investor actually invested. FINRA's page for investors lists a letter of intent as one of the ways to qualify for breakpoints, together with investments across the same fund family, household investments, and adding past investments to new ones.

FINRA Rule 2342 and Selling Just Below a Breakpoint

FINRA Rule 2342 addresses the practice of selling just below a breakpoint. Paragraph (a) bars a member from selling investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions, so as to share in the higher sales charges applicable on sales below the breakpoint. Under paragraph (b), FINRA considers the facts and circumstances, and one example the rule gives is whether the member has retained records that demonstrate that the trade was executed under a bona fide asset allocation program that is designed to meet customers' diversification needs and investment goals and that discloses to its customers that they may not qualify for breakpoint reductions.

Sales Charge Waivers

The SEC's bulletin states that Class A shares may be offered without the front-end load, described as a load waived, to certain investors, such as those investing through an advisory account. FINRA's page lists waivers that can apply to the sales charge: mutual fund exchanges within the same fund family on the same date; rights of reinstatement, generally within a set period, in the same account and in the same share class, which let an investor who has sold shares reinvest some or all of the proceeds without paying a sales charge; net asset value transfers, where Class A shares may be bought without a front-end charge using proceeds from another fund family, usually reinvested within 30 to 90 days; waivers for certain retirement plans and charities; and waivers for 529 plans in some situations. FINRA states that exchanges within the same fund family on the same proceeds generally avoid a new sales charge. FINRA encourages investors to ask their investment professional or firm about the breakpoints and waivers that are available.

Class A Shares Compared With Class B and Class C Shares

The SEC's guide states that Class B shares typically do not have a front-end sales load, but may charge a contingent deferred sales load and a 12b-1 fee along with other annual expenses, and that Class C shares might have a 12b-1 fee, other annual expenses, and either a front-end or a back-end sales load. The guide states that Class C shares tend to have higher annual expenses than either Class A or Class B shares. FINRA's breakpoints disclosure statement states that Class B and Class C shares usually have no front-end charge, and charge ongoing asset-based sales charges, which may be higher than the charges associated with Class A shares, and that they may also carry a contingent deferred sales charge when sold.

FINRA's page for investors states that Class B shares often convert to Class A shares within about two years after the contingent deferred sales charge is eliminated, and then charge Class A fees, and that Class C shares typically do not convert to Class A shares. For large purchases, for which the page gives amounts of fifty thousand dollars and one hundred thousand dollars as examples, FINRA suggests that an investor considering Class B shares consider Class A shares instead.

Sales Charges on Reinvested Dividends

Form N-1A includes a line in the shareholder fees section for the Maximum Sales Charge (Load) Imposed on Reinvested Dividends. FINRA Rule 2341 paragraph (d)(6)(B) provides that 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.

FINRA Rule 2341 and the Limits on Sales Charges

FINRA Rule 2341 bars a member from offering or selling the shares of an investment company 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 a company with an asset-based sales charge, the rule defines the 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. Under paragraph (d)(2)(A), 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, 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 interest charges, and the maximum charge resulting from any transaction shall be 7.25 percent of the amount invested.

How the Class A Charges Are Disclosed

The SEC's bulletin states that a fund may describe all of its classes in one prospectus or in separate ones, that investors should review the prospectus before choosing a class, and that the prospectus can be obtained through the SEC's EDGAR system or directly from the fund. The bulletin states that sales charges are not the only costs, and that investors should consider total costs, including 12b-1 fees and operating expenses. The bulletin and FINRA's page both state that an investor can use FINRA's Fund Analyzer to compare how the costs of different classes add up over time.

The bulletin also states that sales loads, 12b-1 fees and contingent deferred sales loads will likely compensate a financial professional, that the class chosen may affect the professional's pay, and that the professional may limit the classes available for this reason. It tells investors to ask the professional why a class was recommended.

Class A Shares 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 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, FINRA's investor page and breakpoints pages, FINRA Rules 2341 and 2342, SEC Rule 12b-1, and Form N-1A.

Class A shares do not hold a different portfolio from the other classes. Every class of a fund holds the same investments and follows the same goals and policies, and the classes differ in their fees and expenses.

The front-end load is not added on top of the amount invested. It comes off the top of the amount the investor invests, leaving the remainder to be invested in the fund.

A front-end load does not make Class A shares the most expensive class over time. Their 12b-1 fees are generally lower than for Class B and Class C shares, and FINRA states that total expenses are generally lower over time.

The front-end load does not stay at one percentage for every purchase. Breakpoints reduce the front-end charge as the size of the purchase grows, and very large purchases may have the entire charge waived.

An investor does not need to make a single large purchase to reach a breakpoint. Rights of accumulation count existing holdings toward the threshold, and a letter of intent allows the breakpoint rate on purchases made over a period, usually 13 months.

A firm does not choose whether to apply breakpoints. FINRA states that whenever an investor is entitled to breakpoints, the fund is required to apply them, and FINRA Rule 2342 bars selling just below a breakpoint to earn the higher sales charge.

Every Class A purchase does not carry the sales charge. Class A shares may be offered without the front-end load, described as a load waived, to certain investors, such as those investing through an advisory account.

Sales charges are not unlimited. FINRA Rule 2341 limits the aggregate sales charges an investment company may impose, as described above.

SEC Rule 12b-1 does not itself cap the 12b-1 fee. The rule sets conditions on the plan but no percentage cap, and FINRA Rule 2341 sets the percentage limits on asset-based sales charges and service fees.

Key Points

Class A shares typically charge a front-end sales load, which is a percentage of the purchase price and comes off the top of the amount invested.

Class A shares tend to have a lower 12b-1 fee and lower annual expenses than other mutual fund share classes.

Breakpoints, rights of accumulation and letters of intent can reduce the front-end load on Class A shares.

FINRA Rule 2342 bars selling just below a breakpoint to earn the higher sales charge.

Class A shares may be offered without the front-end load to certain investors, and FINRA lists several sales charge waivers.

FINRA Rule 2341 limits the aggregate sales charges an investment company may impose.

SEC Rule 12b-1 sets the conditions for a plan to pay distribution costs from fund assets, and FINRA Rule 2341 sets the percentage limits on the related fees.

FINRA's outline for the Securities Industry Essentials examination lists share classes, loads, sales charges, breakpoints, letter of intent and right of accumulation under packaged products.