SEC, NASD, NYSE Release Findings of Breakpoint Examination Sweep; Broker-Dealers to Review Transactions
Washington, D.C., March 11, 2003 — Securities regulators issued a report today showing that nearly one in three mutual fund transactions in front-end load mutual funds that appeared eligible for a breakpoint discount did not receive one, based on the results of a three-month examination sweep of selected broker-dealers. The report, issued jointly by the Securities and Exchange Commission (SEC), NASD and the New York Stock Exchange (NYSE), revealed the average discount not provided was $364 per transaction. 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.
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. Industry figures show that less than seven percent of all mutual fund sales in 2002 were of front-end load funds.
The limited nature of the examination sweep does not allow regulators to determine the full extent of the breakpoint issue industry-wide. Accordingly, NASD is requiring broker-dealers selling front-end load mutual funds to assess their own compliance using a specified sampling methodology, developed in conjunction with the SEC. That methodology will be forwarded to broker-dealers shortly.
In addition, examiners are following up with the firms already examined to determine whether deficiencies are being corrected and that excessive sales load charges are being refunded to customers.
Major examination findings include:
- Nearly one in three transactions that appeared eligible for a breakpoint discount or sales charge waiver did not receive one.
- Most firms failed to provide breakpoint discounts in at least some instances. Three firms did not provide a discount on any of the sampled transactions that were eligible for a discount. Only two firms provided customers with all available discounts.
- The average discount not provided was $364 per transaction.
- 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 percent), and not linking a customer's purchase of fund shares with shares owned by related persons, such as a spouse or minor children (21 percent).
- 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.
NASD is leading an industry task force to explore and 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 - are tasked with finding possible universal order processing solutions.
Both the SEC and NASD have alerted investors to the breakpoint issue and placed additional information on their Web sites. Investors can learn more about reduced front-end sales loads by going to www.sec.gov/answers/breakpt.htm and www.nasdr.com/alert_breakpoint.htm. Investors can access fund expense calculators at www.sec.gov/investor/tools/mfcc/mfcc-int.htm and http://apps.nasd.com/Rules_&_Regulations/breakpoint_calculator/default.asp.
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 www.sec.gov/complaint.shtml or with NASD at www.nasdr.com/complaints_file.asp.
The full examination sweep report, entitled Joint SEC/NASD/NYSE Report of Examinations of Broker-Dealers Regarding Discounts on Front-End Sales Charges on Mutual Funds, is available at www.sec.gov, http://www.nasd.com/, and www.nyse.com.