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SIE practice questionhardMutual Funds — Letter of Intent

An investor signs a letter of intent (LOI) to invest $100,000 over 13 months to receive a breakpoint discount. After 13 months, only $80,000 has been invested. What happens?

  1. AThe investor keeps the breakpoint discount on all shares purchased
  2. BThe fund company sues the investor for the remaining $20,000
  3. CThe investor must return all shares purchased
  4. DThe fund retroactively charges the higher sales load on all shares purchased, or uses escrowed shares to cover the difference✓ Correct answer
Explanation

Why D — The fund retroactively charges the higher sales load on all shares purchased, or uses escrowed shares to cover the difference

If an LOI is not fulfilled, the fund company adjusts the sales charges retroactively to the rate that should have applied to the actual amount invested. The fund typically holds a portion of shares in escrow to cover this adjustment. The investor does not lose all shares (C) and is not legally forced to invest the full amount (D). LOIs can be backdated up to 90 days.

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