At the request of the U.S. Securities and Exchange Commission, NASD, working with the Securities Industry Association (SIA) and the Investment Company Institute (ICI), led a task force on breakpoints (PDF 537 KB), a problem first uncovered by NASD’s routine examination program. The task force was charged with recommending industry-wide changes to address errors and missed opportunities to provide discounts in the calculation of sales loads charged on the purchase of mutual fund shares that carry a front-end sales load.
Additional Background Information
In December 2002, NASD issued a Special Notice to Members which reminded broker/dealers of their obligation to apply correctly breakpoint discounts to front-end sales load mutual fund transactions. The Notice states that broker/ dealers must: (a) understand the breakpoint discounts offered by mutual funds; (b) ascertain the information that should be recorded on their own books and records to allow them to provide all available discounts, such as qualifying prior or prospective transactions of a particular customer; (c) apprise each customer of the discount opportunities and inquire about other qualifying holdings that might entitle the customer to receive a discount;2 and (d) correctly process the transaction so that the customer receives the applicable discount. On that same date, the SEC staff issued a letter stressing the importance of the NtM and of NASD members' attention to it.
In addition, the staffs of NASD, the SEC, and the New York Stock Exchange (NYSE) conducted further examinations of broker/dealers to assess their ability to deliver breakpoint discounts. A March 2003 report (PDF 361 KB) on those examinations states that most of the 43 broker/dealers examined failed to provide the appropriate breakpoint discount to customers in a significant number of cases. The group of firms examined in the sweep did not provide breakpoints in about 1/3 of the breakpoint-eligible transactions analyzed, and the average dollar amount of the discount not provided was $364. The Joint Report, however, notes that most breakpoint problems did not appear to be intentional failures to charge correct sales loads.