Sales Charge

A fund's sales charge is also known as the:

1. A.SpreadThe dollar difference between NAV and POP is loosely described as a spread, so the association is understandable. In dealer markets spread means the gap between bid and ask, while the industry term for a mutual fund's sales charge is the load.
2. B.LoadCorrect - sales charge = load.
3. C.Basis pointA basis point is a unit of measurement, one hundredth of one percent, and fund fees are routinely quoted in them. Measuring a charge is not the same as naming it; the sales charge itself is called the load.
4. D.CouponA coupon is the stated interest a bond issuer pays to the investor, money flowing toward the customer rather than away. The charge a fund investor pays to buy shares is the load.

Why: The sales charge is commonly called the load; a fund without one is a no-load fund.

Reinvested mutual fund distributions purchase additional shares at:

1. A.Net asset value, with no sales chargeCorrect - reinvestment is at NAV.
2. B.A premium to NAVTrading at a premium or discount to NAV is closed-end fund behavior, driven by supply and demand for a fixed pool of shares. Reinvested distributions in an open-end fund buy shares at NAV, with nothing added.
3. C.A fixed 8.5% markupThis has the relationship exactly backwards. Offering reinvestment at NAV is one of the conditions a fund must satisfy before it may charge the maximum load on new purchases, so the privilege exists precisely to spare reinvested distributions from any markup.
4. D.The public offering price plus loadThis double-counts, since the public offering price already includes the sales charge. Reinvestment does not use the offering price at all: additional shares are purchased at NAV with no load.

Why: Reinvested dividends and capital gains buy additional shares at NAV, with no sales charge.

For a front-end load fund, the public offering price (POP) equals:

1. A.NAV plus the sales chargeCorrect - investors pay NAV plus the load.
2. B.NAV minus the sales chargeThis reverses the arithmetic and would have the customer paying less than the shares are worth, which no distributor would offer. The load is added to NAV, not deducted from it, so POP is the larger of the two figures.
3. C.NAV plus the 12b-1 feeA 12b-1 fee is a genuine cost, which is what gives this choice its pull, but it is charged annually against fund assets and shows up as a drag on NAV over time. It is never added to the purchase price; the front-end load is what separates POP from NAV.
4. D.NAV onlyThis is correct for a no-load fund and for any redemption, so the statement is true in other settings. The stem specifies a front-end load fund, and there the offering price is NAV plus that charge.

Why: POP = NAV plus the front-end sales charge.

Selling a customer an amount just below a breakpoint to earn a higher sales charge is:

1. A.Encouraged by FINRAThis inverts the rule. Breakpoints exist to lower the customer's cost at higher investment levels, and steering a purchase just below one to preserve a bigger commission is a recognized violation known as a breakpoint sale.
2. B.A prohibited breakpoint-sale violationCorrect - it denies the customer the discount.
3. C.Required disclosureThere is a genuine disclosure duty in this area: the representative must tell the customer that breakpoints exist and what they would save. Disclosing is the cure, not the conduct described here, and structuring the purchase to fall just short of the discount remains prohibited even if mentioned.
4. D.Good salesmanshipFraming it as salesmanship misses whose interest is being served. The practice increases the representative's compensation by denying the customer a discount he qualified for, which makes it a violation rather than a technique.

Why: A breakpoint sale - selling just under a breakpoint to increase commission - is a prohibited violation.