Facilitating Refunds of Missed Breakpoint Discounts

March 30, 2004




In March 2003, NASD directed firms that processed 100 or more automated purchases of front-end load mutual funds in either 2001 or 2002 to conduct a "self-assessment" of their record of delivering breakpoint discounts. The self-assessment was designed to produce a statistically significant sample that would allow NASD to determine the scope of overcharges at individual member firms and to gauge the scope of the problem across the industry as a whole.


In November 2003, based on the results of the self-assessment, NASD directed more than 450 securities firms to notify customers who purchased front-end load mutual fund shares since January 1, 1999 that they may be due refunds as a result of the firms' failure to provide breakpoint discounts. NASD also directed almost 175 of those firms with poor records of providing breakpoint discounts to complete a comprehensive review of transactions since the beginning of 2001 for possible missed discount opportunities.


Locating Customers and Calculating Refunds

NASD has learned that some firms that have been directed to undertake these steps have experienced difficulty in locating certain customers and former customers and obtaining trade data necessary to effectuate refunds. There is no comprehensive checklist of procedures for firms to follow, but firms must use their best efforts, taking all reasonable steps to locate customers and former customers. At a minimum, the firm should:

  • Attempt to obtain the client's current address from the mutual fund or mutual fund distributor involved, the fund transfer agent, or, if the customer has transferred his or her account, from the new firm;
  • Offer written agreements to relevant third parties to not use the information for any purpose other than effectuating breakpoint discount refund programs;
  • If the mutual fund, fund distributor, transfer agent, or new firm will not provide the customer's address, request that one or all of the third parties forward the material to the customer; and
  • Take additional steps, including use of information data base services. Firms should look for guidance, with respect to these procedures, to SEC Rule 17Ad-17, which sets forth a transfer agent's obligation to locate "lost security holders," requires transfer agents to "conduct two data base searches using at least one information data base service [and to] search by taxpayer identification number or by name if a search based upon taxpayer identification number is not reasonably likely to locate the security holder."

Any firm that has tried and failed to obtain the information necessary to effectuate refunds should thoroughly document its efforts. Such firms that must file a report of their trade-by-trade analysis by April 16, 2004, should include in their report a detailed description of the steps that they have taken to locate customers and former customers and, if applicable, an explanation of why those steps failed.


Duty of Other Firms to Cooperate


An NASD regulated firm, pursuant to Rule 2110, must be responsive to a request from another regulated firm for information that is needed to correspond with a customer for the purpose of making a refund to or other adjustment for the benefit of that customer. A firm may as a condition of providing such information request a written agreement that the information will not be used for competitive purposes.


NASD has been informed that in some cases in which a customer has transferred an account to a different firm after the purchase of front-end load mutual fund shares, mutual funds have refused to provide transaction data and/or the customer's current address to the old firm, citing privacy concerns or contractual agreements with the new firm that prohibit the fund from disclosing customer account information.


Depending on the circumstances, cooperation may mean providing the customer's address directly to the requesting firm, agreeing to waive enforcement of contractual provisions that would otherwise prevent a mutual fund or a transfer agent from disclosing the customer's address, or agreeing to forward the customer refunds and/or notification to the customer. Failure to cooperate subjects a firm to potential disciplinary action for violation of NASD rules as conduct inconsistent with high standards of commercial honor and just and equitable principles of trade.


NASD also notes, as it has previously, that privacy laws are not a valid basis for refusing to provide customer account information for the purpose of providing customer notification or performing trade-by-trade analysis pursuant to a breakpoint discount refund program. The Securities and Exchange Commission staff concurs in this view.