Capital-gain Distribution

Ignatius owns Class A shares of a load fund and has elected to reinvest the annual capital gain distribution. When the distribution is paid, the additional shares he receives are priced at:

1. A.net asset value, with no sales charge added.Correct. Distributions are reinvested at NAV.
2. B.the public offering price, because he holds a load fund and every purchase carries the load.A reinvested distribution is not treated as a new retail purchase for sales charge purposes.
3. C.net asset value plus a reduced sales charge equal to half the front-end load.There is no half-load convention for reinvestment.
4. D.whatever price the fund quoted on the record date, since that is when his entitlement was fixed.Pricing follows the NAV next computed after the distribution, not a record-date price.

Why: Fund families almost universally reinvest distributions at net asset value with no sales charge, and FINRA rules on investment company sales charges treat the reinvestment of distributions at a price other than net asset value as an unfair sales charge practice. Ignatius therefore buys the new shares at NAV rather than at the public offering price, even though his original purchase carried a front-end load.

Over four years, Nadia's Class A shares of Fairmount Fund have generated 18,000 dollars of dividend and capital gain distributions, all automatically reinvested. Regarding sales charges and breakpoints, these reinvested distributions:

1. A.are purchased at net asset value and count fully as new purchases toward the next breakpointThe first half is right and the second half is not. A dollar on which no load was ever paid does not earn a load discount.
2. B.are purchased at the public offering price and count fully as new purchases toward the next breakpointBoth halves are wrong. Reinvested distributions buy shares at NAV, and they are not qualifying purchases.
3. C.are purchased at net asset value with no sales charge, but generally are not treated as purchases toward a breakpointCorrect. No load is charged on reinvestment, and reinvested amounts are not qualifying purchases for breakpoint purposes.
4. D.are purchased at the public offering price, with the sales charge waived only above 100,000 dollarsReinvestment at NAV is not conditioned on any dollar threshold. This invents a breakpoint where none exists.

Why: Reinvested distributions buy additional shares at net asset value with NO sales charge, which is one of the three features a fund must offer to charge the maximum 8.5% load. However, those reinvested amounts generally do not count as purchases toward reaching a breakpoint, because the investor never paid a sales charge on them in the first place. Many families do count the resulting SHARES in the account balance for rights of accumulation purposes, which is a separate question from treating them as qualifying purchases. The clue is that the question asks about two different things at once. Review: reinvestment and sales charges.