Rights of Accumulation

The Kinds of Breakpoint Discounts

FINRA's investor page on mutual funds states that the amounts at which sales charges drop are called breakpoints. FINRA's breakpoints topic page states that breakpoint discounts are volume discounts to the front-end sales load charged to investors who purchase Class A mutual fund shares, and that investors can qualify for breakpoints through a single purchase of Class A mutual fund shares, with a letter of intent (LOI) or through rights of accumulation (ROA).

Regulatory Notice 21-07 states that customers also may be eligible to receive other volume-based discounts when their purchases are aggregated through Rights of Accumulation (ROA), Letters of Intent (LOI), and householding and family discounts.

FINRA's investor page states that some funds let investors qualify for breakpoints if all their investments within the same fund family add up to the breakpoint level, that some funds let the total investments made by all the members of a household count toward the breakpoint, and that some funds let investors qualify for a breakpoint over time, instead of with a single investment, by adding their past investments to their new ones.

The History of Breakpoint Enforcement

Regulatory Notice 08-07 states that on July 30, 2007, NASD and the New York Stock Exchange consolidated their member regulation operations, and that the combined organization was renamed FINRA. FINRA's breakpoints topic page states that in the process of conducting routine firm examinations in 2002, NASD identified problems in mutual fund transactions, in which eligible customers did not always receive their entitled breakpoints. It states that in 2003, at the request of the SEC, NASD, joined by the Securities Industry Association and the Investment Company Institute, led a task force on breakpoints charged with recommending industry-wide changes to address errors and missed opportunities to provide breakpoint discounts. The task force's Report of the Joint NASD/Industry Task Force on Breakpoints, dated July 2003, is called the task force report in this entry.

The Rule 2341 Definition

FINRA Rule 2341(b)(7) defines rights of accumulation, as used in paragraph (d), as a scale of reducing sales charges in which the sales charge applicable to the securities being purchased is based upon the aggregate quantity of securities previously purchased or acquired and then owned plus the securities being purchased. It then provides that the quantity of securities owned shall be based upon one of three measures: the current value of such securities, measured by either net asset value or maximum offering price; or total purchases of such securities at actual offering prices; or the higher of the current value or the total purchases of such securities. It adds that the quantity of securities owned may also include redeemable securities of other registered investment companies having the same principal underwriter.

Paragraph (d)(1)(B)(i) of the rule provides that rights of accumulation, which it also calls cumulative quantity discounts, may be made available to any person in accordance with one of the alternative quantity discount schedules provided in paragraph (d)(1)(C)(i), as in effect on the date the right is exercised. Paragraph (d)(1)(B)(ii) provides that if rights of accumulation are not made available on terms at least as favorable as those specified in paragraph (d)(1)(C)(i), the maximum aggregate sales charge shall not exceed 8.0 percent of offering price.

Paragraph (d)(1)(C)(i) provides that quantity discounts, if offered, shall be made available on single purchases by any person in accordance with one of two alternatives. The first is a maximum aggregate sales charge of 7.75 percent on purchases of ten thousand dollars or more and a maximum aggregate sales charge of 6.25 percent on purchases of twenty-five thousand dollars or more. The second is a maximum aggregate sales charge of 7.50 percent on purchases of fifteen thousand dollars or more and a maximum aggregate sales charge of 6.25 percent on purchases of twenty-five thousand dollars or more.

How a Right of Accumulation Reduces the Sales Charge

Regulatory Notice 21-07 states that ROAs provide discounts on the front-end sales charge or other sales charges of mutual funds and 529 plans by aggregating new purchases of shares with the customers' existing holdings to reach a volume discount threshold. It states that the ROA reduces the sales charge to incremental new purchases, but not any prior transactions.

How Holdings Are Valued

The task force report describes several methods for valuing the holdings that count toward a breakpoint. It states that most mutual fund families use the net asset value of the investor's mutual fund holdings to determine whether an investor's aggregate purchases meet a breakpoint at which a discount is available. It states that some fund families allow existing investor holdings to be valued using a method referred to as the public offering price, in which an investor's holdings in the fund are grossed up over and above net asset value to take into account the maximum load chargeable for the particular fund, and that some mutual funds allow investors to use the greater of market (net asset value or public offering price) or historical cost.

The task force report states that during a period in which market values have increased, the net asset value of the investor's holdings or the public offering price is likely to be greater than historical cost. It states that in a down market, the historical cost, or what the investor actually paid for the mutual funds at the time of purchase, may exceed the net asset value and the public offering price.

Which Holdings and Accounts Count

FINRA's frequently asked questions about breakpoints state that, under a fund's ROA rules, an investor may aggregate holdings that he has in different accounts at the same broker-dealer, at different broker-dealers, or in different types of accounts, such as 401(k)s and 529 plans, as well as the holdings in the accounts of related parties toward achieving an investment threshold at which a breakpoint discount is available. They state that, to find information regarding ROA rules for each mutual fund, the reader should review the fund's prospectus and statement of additional information, or consult with the firm's compliance officer.

FINRA's Breakpoints Training Outline lists the types and examples of ROA as existing customer holdings, other eligible account holders, and purchases made the same day. It lists three kinds of existing customer holdings: same fund family, same account; same fund family at other broker/dealer; and other eligible fund holdings at broker/dealer or elsewhere. It lists one kind of other eligible account holders: same fund family in any eligible account at broker/dealer or elsewhere.

FINRA's Breakpoints Disclosure Statement states that many mutual funds allow investors to count the value of holdings in accounts of certain related parties, such as spouses or children, to qualify for breakpoint discounts. It states that an investor who wishes to rely upon the holdings of related parties to qualify for a breakpoint discount should advise the financial advisor about these accounts.

The task force report states that the terms upon which breakpoints are offered, particularly the account aggregation opportunities or rights of accumulation, are not standardized among funds. It states that, for example, although most funds allow parents to aggregate their holdings with the holdings of their children to achieve a breakpoint discount, the definition of child varies from fund family to fund family, and that some funds may offer the investor the opportunity to link to the accounts of grandparents or other further removed relatives.

Rights of Accumulation and the Letter of Intent

FINRA's Breakpoints Disclosure Statement states that most mutual funds allow investors to qualify for breakpoint discounts based upon current holdings from prior purchases through Rights of Accumulation, and future purchases, based upon Letters of Intent. It states that most mutual funds allow investors to qualify for breakpoint discounts by signing a Letter of Intent, which commits the investor to purchasing a specified amount of Class A shares within a defined period of time, usually 13 months.

The task force report states that mutual funds generally grant investors rights of accumulation, which allow investors to aggregate their own prior purchases and the holdings of certain related parties toward achieving the breakpoint investment thresholds, including reaching investment thresholds necessary to satisfy letters of intent.

The Breakpoints Disclosure Statement states that some funds offer retroactive Letters of Intent that allow investors to rely upon purchases in the recent past to qualify for a breakpoint discount. It states that if an investor fails to invest the amount required by the Letter of Intent, the fund is entitled to retroactively deduct the correct sales charges based upon the amount that the investor actually invested.

Share Classes and Rights of Accumulation

FINRA's investor page states, under its heading for Class A shares, that depending on the size of a purchase, the mutual fund might offer discounts, called breakpoints, on the front-end sales charge. Under its heading for Class B shares, it states that the mutual fund also may offer large-purchase breakpoint discounts from the front-end sales charge for Class A shares.

Under its heading for Transaction Shares, FINRA's investor page states that with Transaction Shares, some brokerage firms may not offer sales charge breakpoint discounts or waivers that would be available if an investor invested in Class A shares, such as through rights of accumulation, letters of intent and exchanging shares of one fund for shares of another fund in the same family.

Fund Rules and Sales Charge Schedules

FINRA's investor page states that the breakpoints are different for each fund, that the investment firm must tell investors what they are and must apply breakpoints if the investment qualifies, and that funds can offer breakpoints any number of ways, or they may not offer them at all. It states that whenever an investor is entitled to breakpoints, the fund is required to apply them to the investment.

FINRA's Breakpoints Disclosure Statement states that mutual funds have different rules regarding the availability of Rights of Accumulation and Letters of Intent, and that investors should discuss these issues with a financial advisor and review the mutual fund prospectus to determine the specific terms upon which a mutual fund offers them.

Section 22(d) of the Investment Company Act of 1940 provides that no registered investment company shall sell any redeemable security issued by it to any person except either to or through a principal underwriter for distribution or at a current public offering price described in the prospectus. 

SEC Rule 22d-1 provides that a registered investment company that is the issuer of redeemable securities, a principal underwriter of such securities or a dealer therein shall be exempt from the provisions of section 22(d) to the extent necessary to permit the sale of such securities at prices that reflect scheduled variations in, or elimination of, the sales load. 

It provides that these price schedules may offer such variations in or elimination of the sales load to particular classes of investors or transactions, provided that four conditions are met. Under paragraph (a), the company, the principal underwriter and dealers in the company's shares apply any scheduled variation uniformly to all offerees in the class specified. 

Under paragraph (b), the company furnishes to existing shareholders and prospective investors adequate information concerning any scheduled variation, as prescribed in applicable registration statement form requirements. Under paragraph (c), before making any new sales load variation available to purchasers of the company's shares, the company revises its prospectus and statement of additional information to describe that new variation. 

Under paragraph (d), the company advises existing shareholders of any new sales load variation within one year of the date when that variation is first made available to purchasers of the company's shares.

FINRA Rule 2342 and Sales Just Below a Breakpoint

FINRA Rule 2342, titled Breakpoint Sales, provides in paragraph (a) 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. Paragraph (b) provides that, for purposes of determining whether a sale in dollar amounts just below a breakpoint was made in order to share in a higher sales charge, FINRA will consider the facts and circumstances, including, for example, whether a member has retained records that demonstrate that the trade was executed in accordance with a bona fide asset allocation program that the member offers to its customers (1) which is designed to meet their diversification needs and investment goals; and (2) under which the member discloses to its customers that they may not qualify for breakpoint reductions that are otherwise available.

Firm Obligations and Linking Accounts

Regulatory Notice 21-07 states that failure to apply sales charge discounts or waivers correctly may adversely affect customers' rates of return on their investment and contravenes firms' obligations under FINRA rules. It states that FINRA continues to find situations where firms fail to identify and apply relevant sales charge discounts or waivers, and fail to establish, maintain or enforce supervisory systems and written supervisory procedures reasonably designed to identify accounts that would be eligible for such discounts or waivers. It states that the notice does not create new legal or regulatory requirements or new interpretations of existing requirements.

FINRA's breakpoints topic page states that, to assist firms in fulfilling their obligation to provide all available breakpoint discounts on the sales of front-end load mutual funds, FINRA recommends that firms at the time of purchase or periodically thereafter provide investors with a Written Disclosure Statement explaining the availability of breakpoint discounts. It lists steps that help clients assess their opportunities to receive breakpoint discounts, including asking clients for the information necessary to determine their eligibility, such as their fund holdings and the holdings of their spouse or children, among other relatives, and recording this information in each client's file so it can be applied to future purchases of a particular fund, which might result in additional breakpoint discounts.

The task force report states that, in order to link other accounts eligible for aggregation under a mutual fund's offered rights of accumulation, the broker/dealer must disclose aggregation opportunities to the investor; ask the investor whether there are other accounts held by the broker/dealer that may be linked for the purposes of achieving a breakpoint; and have systems in place to connect the TIN, or tax identification number, of the investor's own accounts with the TINs of other link-eligible accounts at the same broker/dealer. It states that, to deliver a discount based upon a right of accumulation, the parties executing the mutual fund transaction must be able to identify all the related accounts that may be aggregated and ascertain the value of all those accounts to determine the breakpoint level that has been achieved and what resulting discount is available.

Rights of Accumulation 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. Under knowledge of, 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 list includes FINRA Rule 2342, titled Breakpoint Sales. Candidates should check the current outline before the examination.

Common Misunderstandings

The corrections below come from FINRA Rule 2341, FINRA Rule 2342, FINRA's frequently asked questions about breakpoints, FINRA's Breakpoints Disclosure Statement, FINRA's investor page on mutual funds, Regulatory Notice 21-07 and the task force report.

A right of accumulation does not look only at the shares bought in a single transaction. The FINRA Rule 2341 definition bases the sales charge on the aggregate quantity of securities previously purchased or acquired and then owned plus the securities being purchased.

A right of accumulation does not reduce the sales charge on shares bought earlier. Regulatory Notice 21-07 states that the ROA reduces the sales charge to incremental new purchases, but not any prior transactions.

A right of accumulation is not the same as a letter of intent. The Breakpoints Disclosure Statement states that most mutual funds allow investors to qualify for breakpoint discounts based upon current holdings from prior purchases through Rights of Accumulation, and future purchases, based upon Letters of Intent.

Holdings are not always valued at current value. FINRA Rule 2341(b)(7) bases the quantity owned on the current value, on total purchases at actual offering prices, or on the higher of the two.

The holdings that count are not limited to one account. FINRA's frequently asked questions state that an investor may aggregate holdings in different accounts at the same broker-dealer, at different broker-dealers, or in different types of accounts, as well as the holdings in the accounts of related parties.

Rights of accumulation are not the same at every fund. The Breakpoints Disclosure Statement states that mutual funds have different rules regarding the availability of Rights of Accumulation and Letters of Intent, and the task force report states that account aggregation opportunities or rights of accumulation are not standardized among funds.

Rights of accumulation are not offered by every brokerage firm for every kind of share. FINRA's investor page states that with Transaction Shares, some brokerage firms may not offer sales charge breakpoint discounts or waivers that would be available in Class A shares, such as through rights of accumulation.

Key Points

FINRA Rule 2341(b)(7) defines rights of accumulation as a scale of reducing sales charges in which the sales charge applicable to the securities being purchased is based upon the aggregate quantity of securities previously purchased or acquired and then owned plus the securities being purchased.

FINRA Rule 2341(b)(7) bases the quantity owned on the current value, total purchases at actual offering prices, or the higher of the two.

Regulatory Notice 21-07 states that the ROA reduces the sales charge to incremental new purchases, but not any prior transactions.

FINRA states that the breakpoints are different for each fund, and that whenever an investor is entitled to breakpoints, the fund is required to apply them.

FINRA Rule 2342 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.

FINRA's outline for the Securities Industry Essentials examination lists breakpoints, right of accumulation and letter of intent under knowledge of in topic 2.1.4, and lists FINRA Rule 2342 in the Section 2 rules list.