Contingent Deferred Sales Charge

Reviewing the fee table of the Wexbury Balanced Fund with a customer, a representative points to the 0.94% total annual fund operating expense figure. That percentage includes the management fee, the 12b-1 fee and other operating expenses, but it does NOT include:

1. A.custody and transfer agency costs, which the adviser always absorbs.Those are ordinary fund operating expenses and are included.
2. B.the 12b-1 fee, which is charged against distributions rather than against assets.The 12b-1 fee is an annual asset-based charge and is included in the ratio.
3. C.the fund investment advisory fee, which is disclosed only in the statement of additional information.The advisory fee is the largest component of the expense ratio and appears in the fee table.
4. D.front-end sales loads and contingent deferred sales charges, which appear separately as shareholder fees.Correct. Sales charges are shareholder fees, not annual operating expenses.

Why: The expense ratio measures the recurring costs deducted from fund assets each year: the advisory fee, any 12b-1 distribution and service fee, and administrative costs such as custody, transfer agency, audit and legal. It excludes one-time transaction charges paid by the shareholder, namely front-end sales loads and contingent deferred sales charges, which appear in the separate shareholder fees section of the table. It also excludes the brokerage commissions the fund pays to trade its portfolio, which are absorbed into the cost of the securities.

The contingent deferred sales charge in a deferred annuity is best described as a charge that

1. A.the insurer subtracts from each premium payment before crediting it to the contract value.Wrong. That is a front-end load, and the contingent design exists precisely to avoid taking anything at deposit.
2. B.applies only where the owner withdraws more than the contract permits in the early years, and declines over time.Correct. Both halves matter: it is triggered by an early excess withdrawal, and it steps down until it lapses.
3. C.compensates the insurer for the possibility that the annuitant lives longer than the pricing assumed.Wrong. That is the mortality element of the mortality and expense charge, which is levied whether or not anyone withdraws.
4. D.is assessed each year against the contract value to cover recordkeeping, statements and tax reporting.Wrong. That describes the annual administration fee, which runs regardless of any withdrawal activity.

Why: A contingent deferred sales charge lets the insurer recover the distribution cost it paid up front without deducting anything from the premium at the outset. It bites only if the owner takes out more than the contract allows during the early contract years, and it steps down on a published schedule until it disappears. Because nothing is skimmed from the deposit, the owner sees the entire premium credited on day one, which is what makes the charge contingent rather than certain. An owner who stays within the free withdrawal allowance, or waits out the schedule, never pays it.

Class B mutual fund shares typically carry:

1. A.An exchange-listed market priceTrading at a price set by supply and demand describes a closed-end fund or an ETF, not an open-end share class. Every class of an open-end fund is bought and redeemed with the fund itself at a price derived from net asset value, which is why share classes differ by fee structure rather than by where they trade.
2. B.A contingent deferred sales charge that declines over timeCorrect - a declining back-end load.
3. C.A front-end sales chargeThat is the Class A structure: pay the load at purchase and get breakpoints for larger investments. Class B was designed for the investor who wants the entire deposit working immediately, which is why the charge is deferred to redemption instead.
4. D.No fees of any kindBecause nothing is deducted at purchase, Class B can look free, and that impression is the reason the class is often sold where it does not belong. The cost is simply relocated: a higher annual 12b-1 fee runs the whole time the shares are held, plus the deferred charge if they are sold early.

Why: Class B shares have a contingent deferred sales charge (back-end load) that declines the longer shares are held.

Cordelia Wren bought Class B shares of a mutual fund seven years ago. The contingent deferred sales charge schedule expired last year, and the fund prospectus provides that Class B shares convert to Class A after the deferred charge period ends. She asks her IAR what the conversion accomplishes. What is the correct answer?

1. A.It refunds the contingent deferred sales charges she paid over the earlier years of her holding period.Incorrect. Conversion is forward looking. It does not refund charges already incurred, and in her case no deferred charge was paid because she held past the schedule.
2. B.It is treated as a redemption of Class B shares and a purchase of Class A shares, so she realises any gain in the year of conversion.Incorrect. A conversion between share classes of the same fund is not a taxable disposition and does not restart the holding period.
3. C.It converts her holding into a no-load fund with no ongoing distribution fee of any kind.Incorrect. Class A shares typically still carry a 12b-1 fee; it is simply lower than the Class B fee. Conversion reduces the fee, it does not eliminate it.
4. D.It moves her into the share class with the lower ongoing 12b-1 fee now that the deferred charge period has ended, improving her net return going forward, and it is not a taxable event.Correct. The higher Class B distribution fee has no continuing justification once the CDSC schedule has run, and the exchange within one fund is not taxable.

Why: Class B shares are sold without a front-end load. The distributor recovers its selling costs in two ways instead: a contingent deferred sales charge payable if the investor redeems within a stated number of years, declining to zero over that schedule, and an ongoing annual 12b-1 fee that is materially higher than the fee on Class A shares. Once the deferred charge schedule has run its course, the distributor has been fully compensated, and there is no longer any justification for continuing to levy the higher ongoing fee. The conversion to Class A therefore lowers the shareholder ongoing expense ratio going forward, which directly improves net return for the remaining holding period. The conversion is effected within the same fund at net asset value and is not a redemption and repurchase, so it is not a taxable event and does not start a new holding period for capital gains purposes. Where a fund fails to convert eligible shares on schedule, investors are overcharged, which is why the conversion feature receives regulatory attention.