FINRA Rule 2342: “Breakpoint” Sales

FINRA-Rule-2342-Breakpoint-Sales Consumers love to shop at wholesalers. MarketWatch reports that Costco, one of the nation’s most prominent wholesale retail chains, took in nearly $120 billion in revenue in the year 2016 alone. The reason for the popularity of wholesalers is simple: buying in bulk is a great way to save money.

By buying a large quantity of a product or service, a consumer is often able to get lower price on each individual unit. This same general concept applies to investing in many investment funds, including most mutual funds. If an investor puts a certain amount of money into the fund, they may be entitled to a discount on the commission fees. This is great news for investors, as reducing investment fees is one of the best ways to increase returns.

Unfortunately, some brokers take advantage of investors and will try to intentionally push them away from available discounts. This is a direct violation of FINRA rule 2342 which prohibits a practice known as a ‘breakpoint’ sale.

Understanding Breakpoint Sales Through an Example

To better understand how breakpoint sales work, consider an example with the following set of basic facts:

  1. When more than $10,000 is invested into a certain mutual fund, the buyer gets a 10 percent discount on the commission fees;
  2. A customer wants to invest $18,000 into that mutual fund in the coming months;
  3. They have no knowledge that a discount is available with a $10,000 investment;
  4. Their broker recommends that they make two different $9,000 investments.

As a result of the broker’s recommendation, they missed out on that available discount and were forced to pay additional investment fees. This broker recommended a ‘breakpoint sale’. Either intentionally, or through negligence, the broker kept the client’s investments under the discount point and received a higher commission rate as a result.

Mutual Funds Must Disclose Their Breakpoints

Each fund has its own formula for determining when investors are entitled to discounts on their commissions and investment fees. Not only can the dollar amount required to hit a breakpoint vary considerably, but some funds will only consider the value of a single one time purchase whereas other funds will consider the collective value of all investments made over a certain time period. Investors should always take active steps to try to figure out the breakpoint of any fund that they are investing in. Of course, getting that information can potentially be challenging. Mutual funds have a legal duty not only to disclose how their breakpoints work, but, under FINRA rule 2342, funds must also avoid selling investors an amount of shares that are just below the breakpoint level.

Were You the Victim of Securities Fraud?

We can help. At the Sonn Law Group, our securities fraud attorneys have spent nearly three decades helping victims recover fair compensation for their losses. Our firm protects investors through the United States, Mexico and South America. To learn more about what we can do for you, please call us today at 1-844-689-5754 to request a free review of your case.

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