NASD Notice to Members 03-47 - August 2003

Refunds to Customers Who Did Not Receive Appropriate Breakpoint Discounts in Connection with the Purchase of Class A Shares of Front-End Load Mutual Funds and the Capital Treatment of Refund Liability

Executive Summary

In late 2002, as a result of several routine examinations, NASD discovered that some members had failed to deliver breakpoint discounts to investors purchasing Class A shares of front-end load mutual funds. This led to a joint examination of 43 broker/dealers by NASD, the Securities and Exchange Commission (“SEC”), and the New York Stock Exchange (“NYSE”), which confirmed that broker/dealers were not uniformly delivering appropriate breakpoint discounts. In December 2002, NASD issued Special Notice to Members 02-85, which reminded members of their obligation to deliver all available breakpoint discounts to customers purchasing Class A shares of front-end load mutual funds.

 

In March 2003, NASD directed member 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 to customers. 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.

 

A preliminary analysis of the data obtained as a result of the self-assessment indicates that most members did not uniformly deliver appropriate breakpoint discounts; the degree to which firms applied the appropriate discount varied. It is imperative that member firms make appropriate refunds to customers who did not receive discounts for which they were eligible and that members properly account for overcharge liabilities. This Notice to Members provides guidelines for firms to follow when calculating refunds to customers and discusses how firms must account for their anticipated refund liabilities.

 

Questions regarding refunds may be directed to Janene Marasciullo, Senior Attorney, NASD Office of General Counsel, at (202) 974-2978. Questions regarding net capital issues may be directed to Susan DeMando, Director, Financial Operations, NASD, Member Regulation at (202) 728-8411.