Redemption Fee

A fund prospectus discloses a 1% fee on shares redeemed within 60 days of purchase, with the fee proceeds paid into the fund itself. This fee is best described as:

1. A.An exchange feeThe fee here is triggered by redemption, not by moving between funds in the family.
2. B.A contingent deferred sales charge compensating the distributorA CDSC pays the distributor and follows a multi-year declining schedule - this fee goes to the fund over a 60-day window.
3. C.A redemption fee designed to discourage short-term trading, payable to the fundCorrect - short window, paid into the fund: the defining features of a redemption fee.
4. D.A 12b-1 fee12b-1 fees are ongoing asset-based distribution charges, not transaction-triggered redemption charges.

Why: A redemption fee is a short-term-trading deterrent paid to the fund, compensating remaining shareholders for the costs rapid traders impose. A CDSC, by contrast, compensates the distributor. The stem clue is the fee destination - into the fund. Review: redemption fees versus sales charges.

Wrenbury Global Fund board wants to deter rapid in-and-out trading by charging shareholders who redeem within 90 days of purchase. Under SEC Rule 22c-2, the largest fee the fund may impose for this purpose, and its destination, are:

1. A.There is no ceiling; the fund may charge whatever the prospectus discloses, payable to the adviser.Disclosure does not remove the 2% cap, and routing the fee to the adviser would defeat its purpose.
2. B.1% of the redemption proceeds, paid to the transfer agent for processing.1% is a common fee level in practice but it is not the rule ceiling, and the money does not go to the agent.
3. C.8.5% of the redemption proceeds, matching the FINRA sales charge ceiling, paid to the distributor.The 8.5% figure is the FINRA cap on sales charges. A redemption fee is a different animal and does not pay the distributor.
4. D.2% of the redemption proceeds, retained by the fund itself.Correct. Rule 22c-2 caps the fee at 2% and directs it to the fund.

Why: Rule 22c-2 permits a fund to charge a short-term redemption fee of up to 2% of the amount redeemed, and the proceeds must be retained by the fund for the benefit of remaining shareholders. That is what distinguishes a redemption fee from a sales charge: it compensates the portfolio for the trading costs the departing shareholder imposed, rather than paying the distributor or the selling firm.

A mutual fund redemption fee is designed to:

1. A.Pay the selling broker a commissionBroker compensation comes from the sales load or a contingent deferred charge, which flow to the distributor. A redemption fee goes back into the portfolio, so no one selling the fund benefits from it.
2. B.Discourage short-term trading (returned to the fund)Correct - anti-market-timing fee.
3. C.Cover the sales loadThese are two separate charges. The load is assessed on the way in and compensates the sellers, while the redemption fee is assessed on the way out and reimburses the fund for the cost of short-term trading.
4. D.Increase the manager's bonusThe proceeds are credited to fund assets, which benefits the shareholders who stayed rather than the adviser. Manager compensation runs through the management fee instead.

Why: A redemption fee deters rapid trading and is generally paid back into the fund.

Isolde tells her representative she is investing 25,000 dollars that she expects to need for a business expense in about seven weeks. The fund he was about to suggest imposes a 2% fee on shares redeemed within 90 days of purchase. He should:

1. A.recommend the fund because the 2% fee is smaller than the front-end sales charge she would pay elsewhere.Comparing two costs she should not incur at all does not make either recommendation right.
2. B.recommend the fund and advise her to hold past 90 days, deferring the business expense.Reshaping the customer plans to fit the product inverts the analysis.
3. C.recommend the fund and disclose the 2% fee, since disclosure satisfies his obligation.Disclosure does not cure a recommendation that conflicts with the customer stated horizon.
4. D.recommend a vehicle matched to a seven-week horizon, such as a money market fund, rather than the fund carrying the redemption fee.Correct. The horizon and the product should match; the fee is a symptom of the mismatch.

Why: Her stated horizon of roughly seven weeks falls squarely inside the fund ninety-day redemption fee window, so on the facts she has given, the recommendation would cost her 2% on the way out for holding the fund exactly as long as she said she would. The right response is to recommend something matched to the horizon, such as a money market fund, rather than to recommend the equity fund and disclose the fee. Disclosure informs a customer; it does not make an ill-matched recommendation suitable.