Class C 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 C 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.

Loads and Charges on Class C Shares

FINRA's investor page on mutual funds describes a front-end load as a commission paid at the time of purchase, a back-end load as a charge paid only if the investor sells during the period the charge applies, and a level load as an amount the fund collects every year the investor holds the fund. Investor.gov defines a load as a fee that investors pay when they buy, in the case of a front-end sales load, or redeem, in the case of a back-end sales load, shares, and compares it to a commission.

FINRA states that Class C shares do not impose a front-end sales charge on the purchase, so the full dollar amount paid is invested. The SEC's guide states that Class C shares might have either a front-end or a back-end sales load. FINRA's investor page on Class B shares states that the asset-based charges on Class B and Class C shares are often 1 percent per year, and that the asset-based charge on Class A shares is often 0.25 percent per year. The Report of the Mutual Fund Task Force on mutual fund distribution, which is published on FINRA's website, states that rather than charging a front-end load, Class C shares typically impose higher asset-based sales charges than Class A shares.

The Contingent Deferred Sales Charge on Class C Shares

The SEC's bulletin on mutual fund classes states that Class C shares might have a 12b-1 fee and a contingent deferred sales load, which it describes as a percentage-based fee that investors pay only when they redeem fund shares, for some period of time, often a year. FINRA states that Class C shares often impose a small charge, often 1 percent, if the investor sells within a short time, usually one year. The task force report likewise states that Class C shares often impose a small contingent deferred sales charge if the investor sells within a short time of purchase, usually one year.

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. 

The SEC's investor bulletin on mutual fund and exchange-traded fund fees and expenses, called the fees bulletin in this entry, 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 treats the charge as a deferred sales charge, which paragraph (b)(8)(B) defines 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)(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.

The 12b-1 Fee and Annual Expenses of Class C 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, that Class C shares generally have a higher 12b-1 fee than other load bearing classes, and that for this reason an investor could end up paying more by holding Class C shares for a long time.

FINRA states that, like Class B shares, Class C shares typically impose higher annual operating expenses than Class A shares due primarily to higher 12b-1 fees. The SEC's guide states that Class C shares tend to have higher annual expenses than either Class A or Class B shares. 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 and Class C Shares

The SEC's guide states that Class C shares generally do not convert to another class, and as a result the back-end load will not decrease over time. 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, unlike Class B shares, Class C shares typically do not convert to Class A shares and instead continue to charge higher annual expenses. The task force report makes the same point, that since Class C shares generally do not convert into Class A shares, their asset-based sales charge is not reduced over time.

Holding Period and Cost

FINRA states that Class C shares may be less expensive than Class A or Class B shares for an investor with a shorter-term investment horizon, and that the annual expenses of Class C shares could be higher than those of Class A shares, and even Class B shares, if the investor holds the shares for a long time. The SEC's bulletin on mutual fund classes tells investors to consider how much they plan to invest and how long they plan to hold the investment, and states that the share class with the lowest initial fees may not be the share class with the lowest fees over time.

Class C Shares Compared With Class A and Class B Shares

The SEC's guide states that 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. It 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 the amount of the contingent deferred sales load typically decreases the longer an investor holds the shares. The SEC's bulletin on mutual fund classes states that Class B shares with a contingent deferred sales load and a higher 12b-1 fee, but no front-end sales load, were once relatively common and are no longer widely available, and FINRA states that most mutual funds no longer offer 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 operating expenses on Class A shares are generally lower over time. It 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, while Class C shares typically do not convert.

Breakpoints and Class C Shares

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. FINRA's breakpoints disclosure statement states that Class B and Class C shares usually do not carry any front-end sales charges, that they pay asset-based sales charges, which may be higher than the charges associated with Class A shares, and that investors in them may also be required to pay a contingent deferred sales charge when they sell their shares, depending upon the rules of the particular mutual fund. The task force report states that an investor purchasing Class B or C shares cannot take advantage of breakpoint discounts.

The SEC's bulletin on mutual fund classes states that, for share classes with a front-end sales load, an investor may qualify for a reduced sales load, called a breakpoint discount, by making a large purchase, by committing to purchase the fund's shares regularly or to purchase a certain amount in the future, or by reaching or surpassing a rights of accumulation breakpoint. FINRA Rule 2342 provides that no member shall sell 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.

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 Share Class Selection

The SEC's bulletin on mutual fund classes 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.

How the Class C Charges Are Disclosed

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.

The SEC's bulletin on mutual fund classes 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 investors should always consider the total cost of an investment, including sales charges, 12b-1 fees and other operating expenses.

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.

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 C 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 breakpoints, Regulatory Notice 21-07, the Mutual Fund Task Force report, FINRA Rules 2341 and 2342, SEC Rule 12b-1, and Form N-1A.

The sources do not describe the front-end load on Class C shares in the same way. FINRA states that Class C shares do not impose a front-end sales charge on the purchase, and FINRA's breakpoints disclosure statement states that Class B and Class C shares usually do not carry any front-end sales charges, while the SEC's guide states that Class C shares might have either a front-end or a back-end sales load.

No front-end charge does not mean no sales charge. FINRA states that Class C shares often impose a small charge, often 1 percent, if the investor sells within a short time, usually one year, and the SEC's bulletin states that Class C shares might have a contingent deferred sales load.

The small charge on sale is not the whole cost. Class C shares generally have a higher 12b-1 fee than other load bearing classes, according to the SEC's bulletin, and FINRA states that they typically impose higher annual operating expenses than Class A shares due primarily to higher 12b-1 fees.

Class C shares are not always the less expensive choice. FINRA states that they may be less expensive than Class A or Class B shares for an investor with a shorter-term investment horizon, and that their annual expenses could be higher than Class A shares, and even Class B shares, if the investor holds the shares for a long time.

Class C shares do not convert in the way Class B shares often do. FINRA states that Class C shares typically do not convert to Class A shares and instead continue to charge higher annual expenses, while Class B shares often convert to Class A shares within two years after the contingent deferred sales charge is eliminated.

Breakpoint discounts are not a feature of Class C shares. FINRA's breakpoints page describes breakpoints as volume discounts to the front-end sales load charged to investors who purchase Class A shares, and the task force report states that an investor purchasing Class B or C shares cannot take advantage of breakpoint discounts.

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.

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.

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

Key Points

FINRA states that Class C shares do not impose a front-end sales charge, often impose a small charge, often 1 percent, if sold within a short time, usually one year, and typically impose higher annual operating expenses than Class A shares due primarily to higher 12b-1 fees.

The SEC's guide states that Class C shares might have either a front-end or a back-end sales load, tending to be lower than for Class A or Class B shares, respectively.

Class C shares generally do not convert to another class, so the back-end load will not decrease over time, and FINRA states that they continue to charge higher annual expenses.

FINRA states that Class C shares may be less expensive than Class A or Class B shares for a shorter-term investment horizon and could be more expensive for a long hold.

The task force report states that an investor purchasing Class B or C shares cannot take advantage of breakpoint discounts.

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.