Mutual Fund Fraud
Purchasing mutual funds through a broker or investment professional usually means choosing among different mutual fund classes. The only difference among the different classes of mutual funds is how much you will pay in expenses and how much more your broker will be paid for selling you the fund.
Before purchasing B shares in a mutual fund a careful analysis should be undertaken by your broker to determine whether Class B shares are in your best interest. Part of this analysis includes the broker asking you the following questions:
- How long do you plan to hold the fund?
- The size of your investment?
- The expenses that you will pay for each different class of shares?
- Whether you qualify for commission discounts?
Class B shares do not impose front-end sales charges, which is the most common selling point. However, Class B shares charge higher expenses in the form of 12b-1 fees and other charges to investors that are assessed over the lifetime of the investment compared to Class A shares. Class B shares normally impose a contingent deferred sales charge (CDSC) which an investor pays if the shares are sold within a certain number of years.
Class B shares also deprive investors of breakpoint discounts on the commission earned by a broker. Large purchases of Class A shares receive discounted commissions while purchases of B share do not.
In June 2003 the NASD censured and fined a brokerage firm, suspended its chairman and directed that restitution be paid to customers for among other things recommending the purchase of large positions in Class B shares. The NASD found that the sales practice violated NASD suitability rules.
The NASD National Adjudicatory Council has also held that a broker's suitability obligation includes the requirement to minimize the sales charges paid for mutual fund shares, when consistent with the customer investment objectives.