The report, issued jointly by the US Securities and Exchange Commission (SEC), the NASD and the New York Stock Exchange (NYSE), summarized the results of their three-month investigation. As a result of those findings, approximately 2,000 broker-dealers are being required to review samples of their front-end load mutual fund purchase transactions and report the results to NASD. NASD is requiring the broker dealers to use a specified sampling methodology, developed in conjunction with the SEC. That methodology will be forwarded to broker dealers shortly.
According to the report, from November 2002 through January 2003, SEC, NASD and NYSE examiners reviewed thousands of mutual fund transactions by 43 broker-dealers that sell front-end load funds. Examiners found significant failures to deliver “breakpoint” sales load discounts to eligible customers among the transactions reviewed. Typically, breakpoint discounts are applied to front-end load funds to reduce sales loads at the investment levels of $50,000, $100,000, $250,000, $500,000 and $1 million.
Major examination findings include:
- Most breakpoint problems did not appear to be intentional failures to apply sales load discounts. The most frequent causes were: not linking a customer’s ownership of different funds in the same mutual fund family to reach the breakpoint amount (44%), and not linking a customer’s purchase of fund shares with shares owned by related persons, such as a spouse or minor children (21%).
- Breakpoint issues were less frequent in firms that process transactions using paper applications rather than by utilizing electronic order processing.
- Many firms can improve their compliance and supervisory systems and controls with respect to breakpoint discounts. Following a December NASD/SEC staff directive to review their breakpoint policies and procedures, most firms report that they are undertaking significant reviews of their supervisory practices and a number have already implemented changes.
A Task Force for Change
NASD is leading an industry task force to recommend ways that the mutual fund and broker-dealer industries can prevent breakpoint problems and eliminate errors in sales load calculations in the future. Specifically, the group’s participants — NASD, the NYSE, the Investment Company Institute, the Securities Industry Association and industry leaders — have been given the task of finding possible universal order processing solutions.
Investors who believe they have not received breakpoint discounts to which they were entitled should first contact their brokers and ask that the discount be applied. If a broker does not correct the account or provide a satisfactory explanation, the investor should write a letter to the firm’s compliance department and ask for a written response. If that response is not satisfactory, the investor can file a complaint with the SEC online at or with the NASD .
Investors can learn more about reduced front-end sales loads by going to http://www.sec.gov/answers/breakpt.htm . Investors can access fund expense calculators at http://www.sec.gov/investor/tools/mfcc/mfcc-int.htm and
the full examination sweep report, at http://www.sec.gov/news/studies/breakpointrep.htm .