Mutual Fund Fraud

Don't assume that mutual funds are inherently safe as compared to individual investments.  While mutual funds can offer diversification and professional management, mutual funds can be just as risky as individual investments.  Make sure that the types of mutual funds you own are suitable for you in light of your overall portfolio. 

Every time you purchase a mutual fund, you must select the class of shares to own. The only difference among the different shares classes is how much you will pay in expenses and how much more your broker will be paid for selling you the fund. If you have purchased mutual funds and did not have explained to you the different share classes (A, B, C, etc.), then you should investigate whether you were the victim of fraud.

Generally, Class A shares impose a front-end sales charge on the customer, which is taken from the principal amount of your investment, and some or all of it is paid to the broker. Class B shares do not impose a front-end sales charge, charging instead a contingent deferred sales charge, the amount of which is determined at the time you sell the fund but your broker still receives their commissions.

Critically important is the distinction between Class A and Class B shares. Class B shares charge a significantly higher annual expense (12b-1 fee) to the fund holder than do Class A shares, which means your investment performance is constantly getting charged more in expenses than is necessary. Also, Class A shares offer investors breakpoints in commissions charged, whereas B shares do not. If an investor buys a certain dollar amount of a fund (or from a family of funds), the investor is entitled to a discounted commission. Obviously, if the investor is paying less in commissions, the broker is receiving less in commissions.

Before purchasing B shares in a mutual fund a careful analysis should be undertaken by your broker to determine whether Class B shares are in your best interest. Part of this analysis includes the broker asking you the following questions:

  • How long do you plan to hold the fund?
  • The size of your investment?
  • The expenses that you will pay for each different class of shares?
  • Whether you qualify for commission discounts?

Class B shares may deprive the investor of commission discounts, while charging the customer more than necessary in commissions.

The NASD National Adjudicatory Council has also held that a broker's suitability obligation includes the requirement to minimize the sales charges paid for mutual fund shares, when consistent with the customer investment objectives.

To learn more about mutual fund fraud, call us at 903-597-2221 or contact us online.