Breakpoint

B is correct. Thomas has committed a breakpoint sale violation. By recommending $245,000 (just $5,000 below the $250K breakpoint), he prevents the client from accessing the 3.00% load tier. At $245,000, the client pays $9,187.50 in loads (3.75% × $245,000). At $250,000, the client would pay $7,500 (3.00% × $250,000), saving $1,687.50. Recommending an investment amount just below a breakpoint to avoid the reduced load (and earn higher commission) is a prohibited practice.

A is incorrect because staying "under the higher breakpoint tier" actually costs the client more money, not less. Thomas's reasoning is backwards. C correctly identifies the solution but doesn't capture that Thomas committed a violation. D is incorrect and demonstrates fundamental misunderstanding: higher breakpoint tiers result in LOWER loads, not higher costs. The client should always be informed of opportunities to reduce costs by reaching the next breakpoint.

B is correct. Registered representatives must proactively disclose ALL available breakpoints, rights of accumulation (which allow existing holdings to count toward breakpoints), and letter of intent provisions (which allow future purchases to qualify for current breakpoint discounts). This disclosure obligation exists regardless of the client's current investment amount.

A is insufficient because clients must be informed of ALL breakpoint levels so they can make informed decisions about increasing their investment to reach lower load tiers. C is incorrect because breakpoint disclosure is mandatory, not optional. Representatives cannot wait for clients to ask. D is incorrect because breakpoint disclosure is required for all investment amounts, not just those over $1 million. Even investors with $40,000 to invest should be informed that reaching $50,000 might reduce their load percentage.

A is correct. Rights of accumulation allow the investor to combine the new $95,000 purchase with $8,000 in existing holdings for a total of $103,000. This qualifies the investor for the $100,000-$249,999 breakpoint tier with a 3.75% load. Calculate: $95,000 × 0.0375 (3.75%) = $3,562.50 in sales charges.

B ($4,275.00) incorrectly applies the 4.50% load without considering rights of accumulation ($95,000 × 4.50% = $4,275). This would be the charge if the existing $8,000 holdings were ignored. C ($5,462.50) incorrectly applies the 5.75% load to $95,000 ($95,000 × 5.75% = $5,462.50), ignoring both the fact that $95,000 alone qualifies for the 4.50% tier AND the rights of accumulation. D ($5,925.00) incorrectly calculates the load on the combined total of $103,000 at 5.75% ($103,000 × 5.75% = $5,922.50), which both uses the wrong percentage and applies the load to existing holdings.

C is correct (the EXCEPT answer). Breakpoint discounts do NOT reduce 12b-1 fees or expense ratios. Breakpoints only apply to front-end sales loads (one-time charges at purchase). The ongoing annual expense ratio (which includes management fees, 12b-1 fees, and operating expenses) remains the same regardless of how much you invest. This is a critical distinction students often miss.

A is accurate: breakpoints are designed to reduce the front-end load percentage as investment amounts increase, rewarding larger investments with lower sales charges. B is accurate: rights of accumulation allow investors to count the value of existing holdings in the same fund family toward qualifying for breakpoint discounts on new purchases. D is accurate: a letter of intent (typically 13 months) allows investors to commit to reaching a certain investment level and immediately receive the breakpoint discount, with shares held in escrow until the commitment is fulfilled.

B is correct. Statements 1, 2, and 4 are accurate.

Statement 1 is TRUE: Rights of accumulation allow the client to combine the new $180,000 purchase with $80,000 in existing holdings for a total of $260,000. This qualifies for the $250,000-$499,999 tier at 3.00% load, reducing the sales charge from 3.75% to 3.00%.

Statement 2 is TRUE: The client could sign a letter of intent to invest a total of $500,000 within 13 months (committing to invest an additional $240,000 beyond the current $260,000 total) to immediately access the 2.50% load on the current $180,000 purchase. Shares would be held in escrow until the commitment is fulfilled.

Statement 3 is FALSE: Sales charges are calculated only on the NEW purchase amount ($180,000), not on the combined total value including existing holdings. While the $260,000 total determines which breakpoint tier applies, the 3.00% load is applied only to the $180,000 new investment: $180,000 × 3.00% = $5,400 sales charge. The existing $80,000 was already purchased and had loads applied at that time.

Statement 4 is TRUE: Recommending a client invest less than they could ($160,000 instead of $180,000) to avoid reaching the beneficial $250,000+ breakpoint would be a breakpoint sale violation. This is prohibited because it increases costs to benefit the adviser (higher commission on higher load percentage) at the client's expense.