Series 7: 6.1.5. Prohibited Mutual Fund Practices

6.1.5. Prohibited Mutual Fund Practices

Breakpoint sales. Because breakpoints can be confusing to investors, registered representatives should help their customers understand and take advantage of breakpoints. If the investor could take advantage of a breakpoint, the representative should advise the investor of this, even if it means the commission is reduced. When a rep fails to do this and sells a mutual fund to a customer in an amount just under the breakpoint, the result is a breakpoint sale. Breakpoint sales are prohibited by FINRA.

Late trading. This is the prohibited practice of placing mutual fund orders after the fund has calculated its daily NAV. As noted earlier, investors who buy and sell shares of mutual funds receive the forward price, which is the NAV calculated at the end of the trading day. Typically, the NAV is calculated when markets close at 4:00 p.m. ET. If an order to buy or sell comes in after the NAV has been calculated, the investor should receive the NAV that is calculated on the following day. Late trading refers to filling orders at that day’s NAV after that day’s close of trading. This practice gives these customers an information advantage—they can sell shares when the NAV is higher than expected and buy shares when the NAV is lower than expected. Late trading also allows customers to benefit from any breaking news that comes