Series 99

Chapter 5: Investment Companies - C. Mutual Fund Distribution and Rules

Mutual Fund Distribution

Most mutual funds do not sell their own shares directly to investors.  The distribution of the shares is the responsibility of the underwriter.  The underwriter for a mutual fund is also known as the sponsor or distributor.  The underwriter is selected by the fund’s board of directors and receives a fee in the form of a sales charge for the shares it distributes.  As the underwriter receives orders for the mutual fund shares, it purchases the shares directly from the fund at the net asset value (NAV).  The sales charge is then added to the NAV as the underwriter’s compensation.  This process of adding the sales charge to the NAV is responsible for the mutual fund pricing formula, which is NAV + SC = public offering price (POP).  The underwriter may purchase shares from the mutual fund only to fill customer orders. They may not hold mutual fund shares in inventory in anticipation of receiving future customer orders.

Selling Group Member

Most brokerage firms maintain selling agreements with mutual fund distributors, which allows them to purchase mutual fund shares at a discount from the POP. Selling group members may then sell the mutual fund shares to investors at the POP and earn part of the sales charge. In order to purchase mutual fund shares at a discount from the POP, the selling group member must be a member of FINRA. All non-FINRA members and suspended members must be treated as members of the general public and pay the POP.

Distribution of No-Load Mutual Fund Shares

No-load mutual funds do not charge a sales charge to its investors. Because there is no sales charge, the mutual fund may sell the shares directly to investors at the NAV.

Anti-Reciprocal Rule

A mutual fund may not select a broker dealer to execute the orders for its portfolios based on the dollar amount of the mutual fund that the broker dealer sells. The fund’s selection of broker dealers to execute orders and to provide other services must be solely based on the merits of the broker dealer performing the service. Alternatively, a brokerage firm may not recommend a mutual fund to a client based on the amount of commission the firm receives from executing the mutual fund’s securities transactions. A broker dealer also may not:

  • Allow a registered representative to share in the commission revenue generated by the execution of the fund’s order to induce them to sell more mutual fund shares
  • Use the amount of sales of the fund as a way to leverage a higher rate on the fund’s execution business
  • Create a list of preferred funds based on the amount of commission business that the funds give the clients

Series 99 test prep




comments powered by Disqus
Trading Center