Reinstatement Privilege

Many funds offer a reinstatement (reinvestment) privilege to Class A shareholders. Under this privilege, a shareholder who redeems shares may:

1. A.Reinvest up to the redemption proceeds in the fund or family within a stated period at NAV, paying no new sales chargeCorrect - the privilege waives the load on the round-trip repurchase within the prospectus window.
2. B.Repurchase at the original purchase price rather than the current NAVAll fund transactions occur at the next computed NAV - no price rollback exists.
3. C.Reverse the tax consequences of the redemptionThe redemption stays taxable - and reinvesting within 30 days after redeeming at a loss can trigger wash-sale disallowance, worsening the tax picture.
4. D.Recover the sales charges paid when the shares were originally purchasedNo refund of prior loads occurs - the benefit is only avoiding a second charge.

Why: The reinstatement privilege lets a redeeming shareholder reinvest up to the redemption proceeds in the same fund or family within a stated period at NAV - no new sales charge - often limited to one use. The original redemption remains a taxable event (and a repurchased loss position within 30 days triggers wash-sale disallowance). Review: shareholder privileges.

Six months after his variable life policy lapsed for nonpayment, Owen asks to reinstate it. The insurer will typically:

1. A.Reinstate only after the separate account recovers to its prior high valueInvestment performance has nothing to do with insurance underwriting or the reinstatement decision.
2. B.Reinstate the policy within the contract reinstatement window if he provides satisfactory evidence of insurability and pays the required back amounts, keeping his original issue ageCorrect. Reinstatement revives the original contract on its original terms rather than issuing a new one.
3. C.Refuse, because a lapsed variable policy can never be reinstated and must be replaced with a new contractOverstates the rule. Policies contain a reinstatement provision precisely so a lapse can be cured within a stated period.
4. D.Reinstate automatically at his current attained age with no health questionsThis confuses reinstatement with a guaranteed-issue purchase. Underwriting protects the insurer against adverse selection.

Why: Reinstatement restores the ORIGINAL contract. Within the reinstatement window stated in the policy, the owner must show satisfactory evidence of insurability again and pay the required back premiums or charges. Because the original contract comes back, the owner keeps the original issue age pricing and the original cost basis rather than starting over at current age. Clue in the stem: he asks to reinstate, not to buy a new policy.

On March 4, Thaddeus redeems 45,000 dollars of Class A shares of Ravencourt Equity Fund, realizing a 6,000 dollar loss. On April 30 he uses the fund family's reinstatement privilege to put the full 45,000 dollars back into the same fund at net asset value with no new sales charge. Which statement correctly describes the outcome?

1. A.He avoids a new sales charge and may deduct the 6,000 dollar loss, because the reinstatement privilege is a fund-family feature and not a tax eventThe privilege is indeed not a tax rule, which is exactly why it cannot rescue the loss. The repurchase within 30 days triggers the wash sale independently.
2. B.The 6,000 dollar loss is permanently lost, since a wash sale eliminates rather than defers the deductionA wash sale defers the loss by shifting it into the basis of the replacement shares. The benefit surfaces when those shares are eventually sold.
3. C.He avoids a new sales charge, but the 6,000 dollar loss is disallowed as a wash sale and added to the basis of the reinstated sharesCorrect. The two rules operate independently - the privilege addresses the load, and the wash sale rule addresses the loss because he repurchased within 30 days.
4. D.The reinstatement is unavailable because he sold at a loss, and loss positions may not be reinstated at net asset valueReinstatement does not depend on whether the sale produced a gain or a loss. Only the time window and the prospectus terms matter.

Why: The reinstatement privilege waives a new sales charge on money returned to the family within the stated window, typically 90 days. It does not change the tax treatment of the round trip. Because he repurchased substantially identical shares within 30 days of the sale, the 6,000 dollar loss is disallowed as a wash sale and is added to the basis of the new shares, deferring rather than destroying the benefit. The clue is the 57-day gap for the sales charge combined with the same-fund repurchase for tax purposes. Review: reinstatement privilege and wash sales. Trap: assuming a sales-charge waiver carries a tax consequence, or that a 57-day gap avoids the wash sale.

Forty days ago Marcus redeemed 60,000 dollars of Class A shares from Winslow Growth Fund. He now wants to invest that money in Class A shares of Ardmore Balanced Fund, a completely unaffiliated sponsor, and asks whether the reinstatement privilege lets him buy without a new sales charge. The representative should tell him:

1. A.the privilege applies, but only to 50% of the redeemed amountNo partial-reinstatement fraction exists. The privilege either applies to the reinvested amount or it does not apply at all.
2. B.the privilege applies if Ardmore agrees to honor Winslow's original sales charge as a creditUnaffiliated sponsors do not credit one another's sales charges. There is no mechanism for this.
3. C.the privilege applies, because he is redeeming and reinvesting within 90 daysTiming alone is not enough. The privilege is a feature of the original fund family's schedule.
4. D.the privilege does not apply, because reinstatement at net asset value is available only within the same fund familyCorrect. He is within the time window, but reinstatement never crosses to an unaffiliated sponsor.

Why: The reinstatement (reinvestment) privilege lets an investor who redeemed Class A shares buy back into the SAME fund or another fund in the SAME family at net asset value, typically within 90 days, once per redemption. Marcus is inside the time window, but he wants to move to an unaffiliated sponsor, and no reinstatement privilege reaches across fund families. Ardmore never collected his original sales charge and has no reason to waive its own. The clue is the word unaffiliated, not the number of days. Review: the reinstatement privilege.