Letter Of Intent

A Letter of Intent (LOI) to reach a breakpoint is valid for:

1. A.90 days totalThe 90-day figure appears in this rule, but it is the backdating allowance rather than the duration. Confusing the two collapses the letter into a three-month commitment, which would defeat its purpose of giving an investor time to accumulate.
2. B.The life of the accountAn open-ended commitment is what rights of accumulation provide, and no letter is needed for it. The letter exists because the investor is being given a discounted price today for money not yet invested, and the firm can only extend that credit against a deadline.
3. C.13 months, and may be backdated up to 90 daysCorrect - 13 months with a 90-day backdate.
4. D.12 months, no backdatingTwelve months is the intuitive guess and it is wrong on both counts. The window runs a month longer than a year, and the letter may be dated back so that a purchase already made can count toward the total.

Why: An LOI covers 13 months and may be backdated up to 90 days.

An investor places $40,000 into Class A shares of a fund whose first breakpoint is $50,000, and tells the rep she expects to invest more within the year. Signing a letter of intent (LOI) would:

1. A.Let her pay the breakpoint-discounted load now, with 13 months (backdatable 90 days) to invest the remaining amountCorrect. That is exactly the LOI mechanism - discount today, completion window ahead, escrowed shares if she falls short.
2. B.Legally obligate her to invest the additional $10,000 within 13 monthsAn LOI is not a binding contract; failure just means the higher load is recouped from escrowed shares.
3. C.Apply only to purchases of this single fund, not other funds in the same familyBreakpoint privileges, including LOIs, generally aggregate purchases across the fund family.
4. D.Provide the same benefit as rights of accumulation, which also look forward 13 monthsRights of accumulation look BACKWARD at existing holdings to price new purchases; only the LOI has a forward window.

Why: An LOI lets her pay the REDUCED sales charge immediately on the current purchase, with 13 months to complete the breakpoint amount - and it can be backdated up to 90 days to capture a recent purchase. It is not a binding obligation; if she falls short, the load is adjusted retroactively (shares held in escrow cover it). The clue is expects to invest more soon. Review: Pooled Investment Vehicles.

If a client signs a Letter of Intent for a breakpoint but fails to invest the stated amount, the fund will:

1. A.Redeem escrowed shares to collect the higher sales chargeCorrect - the LOI shortfall is recovered from escrow.
2. B.Forgive the differenceNothing is forgiven. The fund holds shares in escrow for exactly this outcome and redeems enough of them to collect the higher sales charge that the smaller investment actually earned.
3. C.Close the accountFalling short of a Letter of Intent is not a compliance event and carries no account-closing penalty. The client keeps the account and the shares; only the sales-charge adjustment is made.
4. D.Refund all sales chargesThis runs the adjustment backwards. The client paid a reduced charge in anticipation of a larger investment that never arrived, so more is owed, not refunded.

Why: The fund redeems shares held in escrow to collect the higher sales charge that actually applied.

A client who signs a document committing to invest enough to reach a breakpoint over 13 months uses a:

1. A.12b-1 electionA 12b-1 fee is an ongoing annual charge against fund assets for distribution and shareholder servicing. It is a cost the investor pays year after year, not a document that earns a reduced sales charge.
2. B.Conversion privilegeA conversion or exchange privilege lets a shareholder move between funds in the same family without paying a new sales charge. It governs switching money already invested, not committing new money to reach a breakpoint.
3. C.Rights of accumulationThis is the closest wrong answer, since rights of accumulation also deliver a breakpoint discount. The difference is direction and paperwork: accumulation counts holdings the client already owns and requires no signed promise, while the stem describes a forward commitment over a 13-month window.
4. D.Letter of intentCorrect - forward-looking breakpoint commitment.

Why: A letter of intent lets the client receive the breakpoint sales-charge reduction based on a commitment to invest over up to 13 months.