[16351]
July 25, 2003
TO: SALES DESK MANAGERS ROUNDTABLE No. 7-03
SALES FORCE MARKETING COMMITTEE No. 12-03
RE: REPORT OF THE JOINT NASD/INDUSTRY TASK FORCE ON SALES CHARGE
BREAKPOINTS
Last January, the Chairman of the Securities and Exchange Commission requested that
NASD, together with the Institute and the Securities Industry Association (SIA), convene a task
force to recommend industry-wide changes to address errors and failures in providing
breakpoint discounts to investors in connection with the purchase of mutual fund shares that
carry a front-end sales load. The Task Force that was created pursuant to the SEC’s request has
published a report of its findings and recommendations to address these errors and failures and
ensure that processes are in place so that investors are provided any breakpoint discounts to
which they are entitled.1
The Report notes that, with only a few exceptions, the Task Force’s recommendations,
which are briefly summarized below, call for a voluntary industry response. The Institute has
already begun working with its members and with the SIA and the National Securities Clearing
Corporation (NSCC) to determine how to best implement the recommendations. The Report
encourages the SEC and the self-regulatory organizations to monitor these efforts and
recommends that, in the event these voluntarily efforts fail, the SEC and SROs stand ready,
where appropriate, to adopt rules that would mandate implementation.
SUMMARY OF THE TASK FORCE’S RECOMMENDATIONS
The Task Force’s recommendations were grouped into three categories: (1) assessing and
understanding breakpoint discounts; (2) gathering and communicating the information
necessary to ensure that investors are appropriately awarded breakpoints; and (3) meeting
challenges in processing breakpoint information. The recommendations in each of these three
areas are summarized below.
1 See Report of the Joint NASD/Industry Task Force on Breakpoints, NASD (July 2003) (the “Report”). A copy of the Report
is available on the NASD’s website at: http://www.nasdr.com/pdf-text/breakpoints_report.pdf.
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A. ASSESSING AND UNDERSTANDING BREAKPOINT DISCOUNTS
The Report notes that, because fund families that impose front-end sales loads consider
their breakpoint discounts to be a proprietary competitive feature, the terms upon which they
are offered are not standardized among funds. Accordingly, a broker/dealer selling funds
offered by multiple fund families must understand each family’s terms in order to deliver all
appropriate breakpoint discounts to customers. Moreover, the disclosure concerning
breakpoints is usually contained in a fund’s statement of additional information (SAI), which is
not provided to prospective investors or broker/dealers as a matter of course, and such
disclosure is “often lengthy and complex.” To address these issues, the Task Force makes the
following recommendations:
• Funds should use “common definitional standards.” The Task Force recommends
that the mutual fund industry adopt common definitions of terms frequently used in
describing breakpoint opportunities such as “spouse” and “minor child.” The Report
emphasizes that this recommendation is not intended to mean that funds “can or
should conform the bases on which they offer breakpoints to investors.”
• Funds should create a central, comprehensive database of pricing methods,
breakpoint schedules, and the linkage rules used to determine when a breakpoint
has been reached. Such database, which is intended to provide broker/dealer
representatives with easy access to breakpoint information at the point of sale,
should be easily accessible to broker/dealer representatives, preferably by providing
electronic access to the database from the desktops of registered representatives.2
• Mutual funds should provide, in a prominent and clear format, additional
prospectus and website disclosure concerning pricing methods, breakpoint
schedules, and linkage rules. According to the Task Force, to assist the public in
understanding these disclosures, they should depict the breakpoint schedules in
easily readable charts and contain brief and easily understood explanations about
the mutual funds’ account linkage opportunities. The Report clarifies that this
recommendation is not intended to require mutual funds to include in their
prospectus and on their websites all relevant information relating to breakpoints.3
Instead, it is intended to ensure that “the most important pricing and linkage data be
clearly presented in prospectuses and on websites, possibly in a chart format.”
• Confirmations should be revised to disclose the entire percentage sales load
charged on each front-end load mutual fund purchase transaction. Consistent with
2 The Report notes that the infrastructure for such a centralized database already exists through the Mutual Fund
Profile Service (MFPS) of the NSCC. The Report recommends that the MFPS be expanded to include breakpoint
aggregation terms and rules for all fund families and include identification of both link-eligible related parties and
link-eligible products. Such information should be presented to registered representatives of all firms, regardless of
the firm’s size, by the MFPS in a chart or other form that readily facilitates comparisons among fund families. The
Report notes that mutual funds would need to “fully and accurately populate the database” and update it on a timely
basis.
3 The Report notes that disclosure on a website should only be required where a fund family has a website. See Report
at n.14.
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this recommendation, the Task Force recommends that the SEC “revisit” its 1979 no-
action letter that permits confirmations to omit sales charges so long as such
information is included in a mutual fund’s prospectus.4
B. GATHERING AND COMMUNICATING RELEVANT INFORMATION
According to the Task Force, to determine all breakpoint discounts available to an
investor, broker/dealers must be able to link all eligible accounts held by the broker/dealer and
must ask the investor whether there are other accounts held by the broker/dealer or by other
broker/dealers that might be eligible for aggregation in order to qualify for a breakpoint
discount. The Report notes that this process is complicated by the fact that there is no
technological mechanism currently in place that allows a broker/dealer to automatically locate
and aggregate the holdings of investor accounts that are held outside the firm. To assist
broker/dealers in communicating with investors about breakpoint opportunities and to gather
the data necessary to fully deliver all appropriate breakpoint discounts, the Task Force makes
the following recommendations:
• Broker/dealers should require their registered representatives to maintain
documents evidencing that they have communicated the availability of breakpoint
discounts to investors and made the necessary inquiry to gather the relevant data
to calculate breakpoint discounts before transactions are processed. The Report
notes that the NASD will develop and post on its website a sample template to assist
broker/dealers in implementing this recommendation.
• Broker/dealers should record and update, whenever necessary, an investor’s
linkage information. The Report recommends that a broker/dealer obtain linkage
information, preferably using a standardized worksheet that the NASD expects to
develop, at the time an investor first purchases front-end load shares of a particular
fund family. Such information should be updated as frequently as necessary to
properly calculate breakpoint discounts.
• The SEC should require mutual fund prospectuses to: (1) disclose that investors
may need to provide their broker/dealers with information necessary to take full
advantage of breakpoint discounts; and (2) clearly explain whether breakpoint
discounts are available based upon the historical cost of the investor’s total
investment or whether they are available based only upon the net asset value
(NAV) of the investor’s holdings or the public offering price (POP). In addition, if
the mutual fund allows investors to rely upon historical costs to obtain breakpoint
discounts, the prospectus should plainly advise the investor that he or she should
keep the records necessary to demonstrate his or her historical costs because neither
the mutual fund, its transfer agent, nor the broker/dealer may have this information.
In the absence of an SEC mandate, funds are encouraged to provide this disclosure
on a voluntary basis.
4 See Investment Company Institute, SEC No-Action Letter (Pub. Avail. April 18, 1979).
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• Confirmations for mutual funds with front-end loads should include a disclosure
legend relating to breakpoints. The Task Force recommends that this legend alert
investors that they may be eligible for breakpoint discounts and refer them to the
appropriate materials (prospectus or website) to determine breakpoint eligibility.
• Broker/dealers should provide each investor with a written disclosure statement at
the time of or prior to the confirmation of the investor’s initial purchase of front-
end load mutual fund shares. This disclosure statement, which could be a
supplement to the confirmation, should: (1) alert the investor to the breakpoint
opportunities; (2) refer the investor to appropriate materials to determine breakpoint
eligibility; and (3) explain that, unless the investor provides the broker/dealer with
relevant information concerning his or her holdings, the broker/dealer cannot
identify and link related accounts to determine the investor’s eligibility for
breakpoint discounts. In addition, for mutual funds that allow breakpoints to be
achieved based upon historical costs, the broker/dealer should disclose whether the
account records it maintains include these costs, and, if not, the broker/dealer
should identify the information it requires from the investor in order to obtain
discounts based on historical costs. NASD expects to post on its website guidance to
assist broker/dealers in drafting this recommended disclosure.
• The continuing education requirements for registered representatives should be
enhanced to place greater focus on breakpoint rules, terms, and considerations.
This recommendation is intended to apply to both the regulatory element and the
firm element of the self-regulatory organizations’ mandatory continuing education
requirements.
• Participants in the sale of mutual funds and regulators should develop
appropriate educational materials – such as statement stuffers – that clearly
explain breakpoint opportunities to retail investors. While the Report
acknowledges that the SEC, NASD, the ICI, and SIA have already published
educational materials explaining breakpoints, it notes that these materials “should be
viewed as the starting point for more extensive investor education efforts.”
C. MEETING CHALLENGES IN PROCESSING BREAKPOINT INFORMATION
The Report discusses the challenge of ensuring that all relevant parties obtain and share
the information necessary so that investors are provided any breakpoint discounts to which
they are entitled. It notes some of the problems associated with linking and aggregating related
accounts – particularly accounts that are held in an omnibus form, accounts in which the name
of the beneficial owner is not readily accessible, and investor accounts that span multiple
broker/dealers or are held in platforms outside of broker/dealers. After considering – and
rejecting – various solutions to address these concerns, the Task Force recommended the
following changes to provide for better collection and sharing of information that is necessary
to ensure that an investor receives any applicable breakpoint discounts:
• Non-omnibus broker/dealers should transmit tax identification number (TIN) and
broker/dealer information number (BIN) data to mutual funds to assist in the
linking of accounts. To facilitate wider access to information necessary to compute
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breakpoint discounts, the Task Force recommends that the following steps be taken:
(1) Fund/SERV should add additional data fields to accommodate information
necessary to link accounts for purposes of determining an investor’s eligibility for
breakpoint discounts; (2) Fund/SERV should take steps to ensure that funds and
broker/dealers are using the same data fields for the same purposes and that would
prevent the processing of orders where inappropriate information is entered into a
particular field; and (3) for omnibus or Networking Level 3 processing of orders that
do not reveal the TIN/BIN of the mutual fund’s beneficial owner, broker/dealers
should explore the feasibility of developing alternative mechanisms for providing
TIN/BIN information to mutual funds or their transfer agents.
• Transfer agents should perform automated searches of the TIN and/or the BIN
and letter of intent data supplied by the broker/dealers to calculate and verify
breakpoint discounts across broker/dealers on transactions that are executed on a
fully disclosed basis. In addition, the Task Force recommends that broker/dealers
have electronic access to their customer account information that results from the
transfer agent’s TIN/BIN searches in order to enable them to maintain or update
breakpoint information prior to order execution.
The Institute will continue to work with members and other appropriate parties to
implement, as expeditiously as possible, the Task Force’s recommendations.
Craig S. Tyle
General Counsel