Switching

Every eleven months, agent Radomir Petrescu advises clients to redeem Class A shares of one fund family and buy substantially similar Class A funds at another sponsor, incurring a fresh front-end sales charge each time. He also routinely sizes purchases just below the next breakpoint. His conduct is best characterized as:

1. A.Permissible, because the client is free to move between fund families at any timeClient freedom does not excuse an adviser recommendation that imposes avoidable costs.
2. B.Churning, because of the frequency of the transactionsChurning describes excessive trading for commissions generally; these facts point to the specific abuses of switching and breakpoint sales.
3. C.Permissible so long as each new fund is individually suitable for the clientSuitability of the destination fund does not justify a needless second sales charge.
4. D.Unethical switching combined with prohibited breakpoint salesCorrect. Repeated cross-family switching and deliberately staying below breakpoints are both prohibited practices.

Why: Switching clients between substantially similar funds in different families imposes a new sales charge with no corresponding benefit and is an unethical practice unless the adviser can document a genuine advantage to the client. Sizing a purchase just short of a breakpoint, so the client pays a higher percentage sales charge and the agent earns more, is a prohibited breakpoint sale. Both practices are evaluated by whether the client, rather than the agent, benefits.

Over ten months a representative moves a customer out of Class A shares of the Larkfield family and into Class A shares of the Brayton family, then back again, then into a third family - three round trips, each incurring a new front-end sales charge. The growth funds involved have substantially similar objectives and holdings. This pattern is BEST described as:

1. A.Front running, because the representative traded ahead of the customer's own investment decision.Wrong. Front running means trading ahead of a known customer BLOCK order to profit from its market impact. That is not what happened here.
2. B.Switching, which requires a documented explanation of why each new fund materially better serves the customer despite the repeated sales charges.Correct. Repeated moves across unrelated fund families, each carrying a fresh load, is classic switching and demands justification.
3. C.A permissible use of the exchange privilege, since every purchase was of the same share class.Wrong. The exchange privilege applies only within one fund family. Moving between families is a redemption and a new, fully loaded purchase.
4. D.Breakpoint selling, because the customer ended up paying more than one sales charge.Wrong. Breakpoint selling means steering a purchase to just below a quantity-discount threshold. Nothing here involves a breakpoint.

Why: This is SWITCHING (sometimes called fund switching). Moving a customer between unrelated fund families imposes a fresh sales charge each time, so a representative who recommends it must be able to document why the new fund materially better serves the customer than the one being sold. Where the funds are substantially similar, that justification is very hard to make, and a repeated pattern suggests the charges - not the customer - are driving the trades.