In a letter to NASD Chairman and Chief Executive Officer Robert R. Glauber, dated January 15, 2003, former Securities and Exchange Commission (“SEC”) Chairman Harvey L. Pitt requested that NASD, joined by the Securities Industry Association (“SIA”) and the Investment Company Institute (“ICI”), convene a task force to recommend 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. Chairman Pitt’s letter set into motion an industry response to this problem, first uncovered by NASD’s routine examination program. Prior to the formation of the Joint NASD/Industry Task Force on Breakpoints (the “Task Force”), NASD, in light of its examination findings, issued Special Notice to Members 02-85 (the “NtM”), dated December 23, 2002, which reminded broker/dealers of their obligation to apply correctly breakpoint discounts to front-end sales load mutual fund transactions. In sum, the NtM 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; and (d) correctly process the transaction so that the customer receives the applicable discount. On the same date, the SEC staff issued a letter stressing the importance of the NtM and of NASD members’ attention to it.
Concurrently with the issuance of the NtM and the SEC staff’s letter, 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. The findings of those examinations were memorialized in the Joint SEC/NASD/NYSE Report of Examinations of Broker/Dealers Regarding Discounts on Front-End Sales Charges on Mutual Funds (the “Joint Report”), which was published on March 11, 2003. Most of the 43 broker/dealers examined in this joint sweep 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.
The Task Force has met formally on three occasions prior to the issuance of this report, with subgroups and individual members of the Task Force consulting frequently between meetings. The members of the Task Force represent clearing broker/dealers, introducing and self-clearing broker/ dealers, mutual fund service providers, transfer agents, a depository and clearing corporation, academia, legal experts, the SIA, ICI, NYSE, and NASD.