Compliance October 3, 2003

Sources: Fund Probe Uncovers Widespread Discount Problems

March 10, 2003 (PLANSPONSOR.com) - An investigation by securities regulators has found that almost all of the 40 brokerage firms examined did not properly apply mutual fund discounts known as "breakpoints," to eligible customers, Dow Jones reported.

Reported by

Fred Schneyer

Citing unnamed sources, Dow Jones said regulators now plan a second, more widely spread probe of industry practices covering more firms over a longer period. The initial findings are expected to be released in time for a Wednesday House Financial Services subcommittee hearing.

Dow Jones said regulators found that outright cheating didn’t seem to be an issue when it came to applying the fund discounts. Instead, problems seemed to come down to communication between brokers and customers, which have kept investors from getting the proper discounts.

Sloppy Stuff?

Other contributing factors mentioned by Dow Jones’ sources:

Laziness or sloppiness may be at work. Since discounts reduce commissions for brokers, the brokers may have little incentive to find out about customers’ price-break eligibility.
Complexity of fund discount policies may be another factor. Some funds allow shareholders to accumulate discounts if investments reach a certain level in a predetermined amount of time. Brokers may not realize customers qualify for such discounts, particularly if they invest through more than one brokerage company, regulators said.
Aggregation adds another level of potential problem. Funds may apply discounts to shareholders on all load funds they hold at the fund company, for instance. Others may aggregate multiple accounts in a fund held by a husband and wife, by parents and children, or even an entire family.A common failing involved brokers who didn’t determine whether a customer qualified for discounts based on accounts held by or for other family members, individuals familiar with the matter said.

Brokerage industry officials say if customers are being overcharged, it isn’t deliberate. They fault computer systems that may not identify when a customer or account qualifies for a discount.

The study was prompted by problems NASD examiners uncovered in Philadelphia, individuals familiar with the matter said. The NASD followed up with a survey of practices at a handful of brokerage firms and issued a statement with the SEC in December warning brokers about discounting fund sales fees (See SEC Looking at Breakpoints ).