The $540 Breakpoint the Ticket Says the Client Declined
During Tuesday's trade-blotter review you find that on Monday a registered representative entered a $24,000 purchase of Class A shares of the Ridgeway Growth Fund for Margaret Osei, age 58, in a new individual account. Your fund family's Class A schedule is 5.75% on purchases under $50,000, 4.50% from $50,000 to $99,999, and 3.50% at $100,000 and above. Osei already holds $88,000 of the same fund in a joint account with her spouse and $12,000 in an IRA, both through your branch, and both accounts are eligible for rights of accumulation. The order ticket reads "client declined LOI." Osei has told the rep she intends to add $2,000 a month for the next five years. The trade settled this morning at $18.42 per share.
1. What sales charge was Osei actually entitled to, and what is the dollar difference? Show the calculation and explain whether a letter of intent was necessary.
Read the worked answer
Entitlement. Rights of accumulation let a purchaser count existing holdings in eligible linked accounts toward the breakpoint on the current purchase. Osei holds $88,000 (joint) + $12,000 (IRA) = $100,000, so the new $24,000 should have been priced in the 3.50% tier.
- Charged: $24,000 x 5.75% = $1,380
- Correct: $24,000 x 3.50% = $840
- Excess: $540
An LOI was never required. The notation "client declined LOI" answers a question nobody needed to ask and, standing alone, is not evidence that Osei was told about ROPA or asked whether she held linked accounts. Her stated plan to add $2,000 monthly makes it worse: those purchases, layered on $124,000, also belong in the 3.50% tier and should never be sold at 5.75%.
2. How should the firm correct the transaction, and what correction must you avoid?
Read the worked answer
Correct the sales charge, not the share price.
- Do: remit $540 in cash, or purchase additional shares at today's NAV with that amount; confirm the correction to the client in writing; check her prior purchases for the same error.
- Do not: cancel and rebook the original order at Monday's NAV. Under the forward-pricing requirement of Investment Company Act Rule 22c-1, a fund order must be executed at the NAV next computed after receipt. Retroactive repricing at a prior NAV is a late-trading-type adjustment and is improper even when fixing a firm error.
The distinction matters because the sales charge is a distribution expense that sits outside the NAV computation; adjusting it leaves the share price untouched and the client whole.
3. Is this a supervisory failure? Identify the obligations implicated and the review you would order.
Read the worked answer
Yes. FINRA Rule 2341's breakpoint provisions require reasonable efforts to inform customers about breakpoints and to determine whether a customer qualifies for ROPA or an LOI. Rule 3110 requires written procedures reasonably designed to achieve compliance.
Symptoms of a design defect, not just rep error:
- The order-entry system appears to lack a mandatory ROPA/LOI prompt.
- "Client declined LOI" is being used as a substitute for a ROPA inquiry.
- No one reconciled the new account against linked accounts the firm already knew about.
Ordered review:
- 12-month lookback of this rep's Class A purchases above $10,000 against all household accounts.
- Sample audit of the branch for the same pattern.
- Recalculation and refund for every miss found.
- Procedure and system changes plus documented training.
If the lookback shows a pattern rather than an isolated lapse, treat it as a potential Rule 2010 issue and evaluate reporting under Rule 4530.