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 Exam Prep Help

A. Introduction: Securities Industries Rules and Regulations

Related Articles
  1. Investing

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  2. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  3. Investing

    Consider These Fees When Evaluating Mutual Funds

    The best way to evaluate a mutual fund is by digging a bit deeper into the fees charged.
  4. Investing

    The Advantages Of Mutual Funds

    Learn how to get diversification, liquidity and professional management at an affordable price.
  5. Financial Advisor

    5 Secrets You Didn’t Know About Mutual Funds

    Learn five of the "secrets" about mutual funds that can have a significant impact on mutual fund choices and investor profitability.
  6. Investing

    The Lowdown On No-Load Mutual Funds

    These funds let you cut out the middleman - and the fees.
  7. Investing

    How to Choose Between Mutual Funds and ETFs

    Mutual funds and ETFs are both investment funds, but they are not as similar as you might think.
Frequently Asked Questions
  1. What's considered to be a good debt-to-income (DTI) ratio?

    Your debt-to-income ratio helps lenders determine your credit worthiness. Find out how to calculate your score and how to ...
  2. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ...
  3. What does a Chief Financial Officer (CFO) do?

    A CFO is responsible for accurate reporting of a company's financial information, investing the company's money and identifying ...
  4. How did George Soros break the Bank of England?

    George Soros pocketed $1 billion by betting against the British pound, cementing his reputation as the premier currency speculator ...
Trading Center