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Mutual Funds

Mutual funds are a type of investment product that collects money from many investors in exchange for shares in the fund. The fund then pools the money together and invests in different securities depending on the type of fund and the underlying investment strategy. Mutual funds are subject to regulations under the Investment Company Act of 1940 which are enforced by the U.S.Securities and Exchange Commission (SEC).

FINRA Regulation and Rules Concerning Mutual Funds

FINRA does not directly regulate mutual funds; it regulates the brokerage firms and stockbrokers that sell them and the way that mutual funds are sold.

Mutual fund sales practice violations are common occurrences that many times go undetected by investors. Mutual funds are one of the top 15 security types in FINRA customer arbitration claims.

When recommending mutual fund investments to investors, financial advisors must recommend the mutual fund share class that is most suitable for the investor and not the share class which generates the greatest sales commission (FINRA Rule 2341 Investment Company Securities) considering the investors profile and time horizon.

Mutual Fund Share Classes

Mutual fund fees are a main consideration for investors making investments in mutual funds. Detailed descriptions of the fees charged are found in the fund’s prospectus. Investors should request a copy of the prospectus prior to making an investment in a mutual fund.

Mutual fund investors can purchase several different types of share classes for the same mutual fund differing based on the amount or timing of the sales commission charged. Some share classes have sales commissions (load funds), some have no sales commission (no-load), and some have a deferred sales commission (back-end load) with a contingent sales commission based on how long the mutual fund shares are held.

In addition to sales commissions, there are different operating expenses and management fees to further complicate the decision-making process. For investors, these differences can be difficult to understand but could make a big difference in the long run.

The Mutual Fund Analyzer tool on the FINRA website allows investors to view information on the specific mutual fund they hold or plan to purchase and also look up applicable fees and available discounts for the funds.

Common Misconduct Concerning Mutual Funds

Mutual funds are investments intended for a long-term holding period. While short-term investments in mutual funds are not generally recommended, at times a transaction between different mutual funds or different mutual fund families could be considered suitable if it is a part of a legitimate asset reallocation or investment strategy.

Investors should keep in mind the following when investing in mutual funds:

  • Mutual fund switching occurs when one mutual fund is sold to invest in another mutual fund. While this may be related to a legitimate investment strategy investors should be wary if the mutual funds have similar investment objectives or no apparent difference in investment strategy. This type of activity may only serve to charge the investor a sales commission with no real purpose.

  • Mutual fund breakpoints provide discounts on the sales commission an investor pays based on the size of the investment. When a financial advisor recommends that a customer purchase a mutual fund in an amount just below the breakpoint amount where the customer could have paid a lower sales commission charge, a sales practice violation may have occurred. FINRA Rule 2342 Breakpoint Sales (Also see FINRA Investor Alert “ Are you Owed a Refund ”)

Contact our Firm if You’ve Lost Money Investing in Mutual Funds

The Silver Law Group can help you determine whether an investment loss is the result of a brokerage firm and their financial advisor’s violation of mutual fund switching or mutual fund sales breakpoint rules in an investment account. If an investor suffers losses as a result of mutual fund switching or mutual fund sales breakpoint violations they may be able recover their losses in a FINRA arbitration claim.

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