Class B 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 B 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.

Class B Shares Today

The SEC's bulletin describes Class B shares as shares with a contingent deferred sales load and a higher 12b-1 fee, but no front-end sales load, and states that shares of this kind were once relatively common and are no longer widely available. FINRA's investor page states that most mutual funds no longer offer Class B shares, so they might not be an option for an investor.

The Back-End Sales Load on Class B Shares

The SEC's guide defines a deferred sales charge, also known as a back-end load, as a fee some mutual funds charge investors when they sell or redeem their shares. 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, the amount of which depends on the length of time the investor holds the shares and which may gradually decline to zero if the investor holds the shares long enough. FINRA uses the abbreviation CDSC for the same charge, and states that Class B shares normally impose a contingent deferred sales charge, sometimes called a back-end load. FINRA states that the charge applies if the investor sells within a certain period, often six years, and that the charge normally declines the longer the investor holds the shares and eventually disappears.

Because no front-end charge is taken, all of the investor's dollars are invested at purchase, according to FINRA. The SEC's investor bulletin on mutual fund and ETF fees and expenses, called the fees bulletin in this entry, describes the same structure for a back-end sales load: no sales load is deducted at the time of purchase, so all of the investor's money is used immediately to purchase shares, if no other fees or charges apply at the time of purchase, and the fee is paid out of the money the investor receives when exiting the fund. The SEC's guide states that a back-end sales load will reduce an investor's return on the investment.

The SEC's investor page on the mutual fund back-end load states that a deferred sales charge is a charge paid when the shares are sold, 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 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.

How the Contingent Deferred Sales Charge Is Calculated

The fees bulletin and the SEC's 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 fees bulletin tells investors to read the prospectus carefully to determine whether a fund calculates its fee in this manner. The fees bulletin states that the rate at which the fee declines is disclosed in the mutual fund's prospectus.

FINRA Rule 2341 adds a rule about which shares are treated as sold first. 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.

Rule 2341 defines a deferred sales charge in paragraph (b)(8)(B) as any amount properly chargeable to sales or promotional expenses that is paid by a shareholder after purchase but before or upon redemption. 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.

Disclosure of the Charge

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 it 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. The fees bulletin states that the prospectus fee table lists shareholder fees, among them the sales load and the redemption fee.

FINRA Rule 2341 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.

The 12b-1 Fee and Annual Expenses of Class B 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. The SEC's bulletin on mutual fund classes states that classes with sales loads also pay 12b-1 fees, and the fees bulletin states that a mutual fund with a contingent deferred sales load or charge typically also has an annual 12b-1 fee.

FINRA's investor page states that Class B shares generally impose a higher 12b-1 fee than the fee an investor would incur on Class A shares, and have a higher expense ratio than Class A shares. FINRA's investor page on Class B shares gives the figures for the asset-based charges: Class A shares may carry an asset-based charge of often 0.25 percent per year, while the asset-based charges on Class B and Class C shares are often 1 percent per year. The expense ratio of a fund does not include loads, according to FINRA, which describes loads as fees an investor may pay when buying or selling a fund.

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

SEC Rule 12b-1 under the Investment Company Act of 1940 is the rule on the distribution of shares by a registered open-end management investment company. Paragraph (a)(1) makes it unlawful for a registered open-end management investment company, other than a company complying with the provisions of section 10(d) of that Act, to act as a distributor of securities of which it is the issuer, except through an underwriter, and paragraph (a)(2) treats a company as acting as a distributor if it directly or indirectly finances any activity that is primarily intended to result in the sale of its shares, including, but not necessarily limited to, advertising, compensation of underwriters, dealers and sales personnel, the printing and mailing of prospectuses to other than current shareholders, and the printing and mailing of sales literature. 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. A company may implement or continue the plan only if the directors who vote to approve the implementation or continuation 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 any person authorized to direct the disposition of monies paid or payable by the company must provide a written report of the amounts expended and the purposes of the expenditures, which the directors review 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. 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.

Conversion of Class B Shares

The SEC's guide states that 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. The guide's glossary defines a conversion as 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 states that the fund's prospectus or summary prospectus will state whether a class ever converts to another class.

FINRA states that within two years after the contingent deferred sales charge is eliminated, Class B shares often convert to Class A shares, which then charge Class A fees. Class A shares typically charge a front-end sales load, but tend to have a lower 12b-1 fee and lower annual expenses than other mutual fund share classes, according to the SEC's guide.

Class B Shares Compared With Class A and Class C Shares

The SEC's guide states that Class A shares typically charge a front-end sales load, 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, with the load tending to be lower than for Class A or Class B shares, respectively. The guide states that Class C shares generally do not convert to another class, so the back-end load will not decrease over time, and that Class C shares tend to have higher annual expenses than either Class A or Class B shares.

FINRA's investor page states that Class A shares generally have lower 12b-1 fees than Class B and Class C shares, so total expenses on Class A shares are generally lower over time. It states that Class C shares do not impose a front-end sales charge, that they often impose a small charge, commonly 1 percent, if the investor sells within a period that is usually one year, and that they typically do not convert to Class A shares. FINRA adds that Class C shares may be cheaper than Class A or Class B shares for short holding periods but potentially more expensive for long holds.

For an investor who intends to purchase a large amount of Class B shares, for which FINRA's page gives amounts over fifty thousand dollars and one hundred thousand dollars as examples, FINRA suggests considering, with an investment professional, whether Class A shares would be preferable. FINRA's breakpoints page describes breakpoints as volume discounts to the front-end sales load charged to investors who purchase Class A mutual fund shares, and the SEC's bulletin states that investors may qualify for a breakpoint discount for front-end load classes.

Sales Charge Waivers and Reinstatement

FINRA's investor page lists waivers that can apply to sales charges, among them mutual fund exchanges within the same fund family on the same date, and rights of reinstatement, which generally have to occur within a set period, in the same account and in the same share class. FINRA's Regulatory Notice 21-07, dated March 4, 2021, describes a right of reinstatement as a feature under which a fund family may allow customers to redeem or sell shares in a fund and reinvest, or recoup some or all of a contingent deferred sales charge. The notice states that time periods may vary substantially across fund families, that breakpoint terms can vary from fund to fund, and that it does not create new legal or regulatory requirements or new interpretations of existing requirements. It states that firms have an obligation to understand and, as appropriate, apply sales charge discounts and waivers for eligible customers.

FINRA encourages investors to ask their investment professional or firm whether any breakpoint discounts or sales charge waivers are available to them, and to use FINRA's Fund Analyzer to see how fees affect an account over time.

Compensation and Disclosure

The SEC's bulletin 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. The 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. It states that sales charges are not the only costs, and that investors should consider total costs, including 12b-1 fees and operating expenses.

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.

Class B 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, net asset value, disclosures, costs and fees, breakpoints, right of accumulation, letter of intent, net transactions, surrender charges and sales charges. The Section 2 rules lists include FINRA Rule 2342, titled "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 bulletins, Investor.gov, FINRA's investor pages on mutual fund classes and Class B shares, Regulatory Notice 21-07, FINRA Rule 2341, SEC Rule 12b-1, and Form N-1A.

Class B shares typically do not have a front-end load. All of the investor's dollars are invested at purchase, and the charge is paid on redemption out of the money the investor receives.

No front-end load does not mean no sales charge. Class B shares may charge a contingent deferred sales load, and a mutual fund with that load typically also has an annual 12b-1 fee.

The deferred sales charge does not stay at one percentage. It depends on how long the investor holds the shares, normally declines the longer the shares are held, and eventually disappears.

The charge is not always calculated on the amount the investor receives. A mutual fund typically calculates a back-end sales load on the lesser of the value of the initial investment or the value of the investment at redemption.

A contingent deferred sales charge is not a redemption fee. A sales load is a fee used to compensate the brokers who sell the shares, while a redemption fee is paid directly to the mutual fund, not to a broker.

Class B shares do not keep the higher 12b-1 fee in every case. 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, and FINRA states that they often convert to Class A shares within two years after the charge is eliminated.

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

Class B shares are not available at most funds. FINRA states that most mutual funds no longer offer Class B shares, and the SEC's bulletin states that they are no longer widely available.

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.

Deferred sales charges are not unlimited. FINRA Rule 2341 limits the aggregate sales charges an investment company may impose, including deferred sales charges.

Key Points

Class B shares typically have no front-end sales load and instead may charge a contingent deferred sales load and a 12b-1 fee.

The contingent deferred sales charge depends on how long the investor holds the shares, normally declines the longer they are held, and eventually disappears.

A mutual fund typically calculates a back-end sales load on the lesser of the value of the initial investment or the value of the investment at redemption.

Class B shares generally carry a higher 12b-1 fee and a higher expense ratio than Class A shares, and they often convert to Class A shares within two years after the charge is eliminated.

Most mutual funds no longer offer Class B shares.

FINRA Rule 2341 sets the confirmation legend for deferred sales charges, the order in which shares are treated as redeemed for a contingent deferred sales load, and the limits on sales charges.

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