Regulators Find Broker-Dealers Not Offering Mutual Fund Discounts to Eligible Investors

WASHINGTON – Nearly one in three 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 March 11 report, issued jointly by the Securities and Exchange Commission, NASD and the New York Stock Exchange, revealed the average discount not provided was $364 per transaction. 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 7% of all mutual fund sales in 2002 were of front-end load funds. 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. Major 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. The report also found that 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%), and not linking a customer’s purchase of fund shares with shares owned by related persons, such as a spouse or minor children (21%). Breakpoint issues were less frequent in firms that process transactions using paper applications rather than by utilizing electronic order processing, regulators found. 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. Some firms have made changes following a December 2002 NASD/SEC staff directive to review their breakpoint policies and procedures, with “most firms reporting that they are undertaking significant reviews of their supervisory practices and a number have already implemented changes.” 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. [email protected]