SEC and NASD Announce Actions as a Result of Findings of "Breakpoint" Overcharges on Mutual Fund Transactions

FOR IMMEDIATE RELEASE
2003-147

National Association of Securities Dealers

Securities and Exchange Commission

For Release: Monday, November 3, 2003
Contact: Herb Perone (SEC)
202-942-7165
Nancy Condon (NASD)
202-728-8379

Washington, D.C., November 3, 2003 -- The Securities and Exchange Commission (SEC) and NASD today announced a series of actions in connection with overcharges to customers on their mutual fund purchases. NASD is directing almost 450 securities firms to notify customers who purchased Class A mutual fund shares since Jan. 1, 1999, that they may be due refunds as a result of the firms' failure to provide breakpoint discounts. NASD is also directing almost 175 of those firms with poor records of providing breakpoint discounts to complete a comprehensive review of transactions since the beginning of 2001 for possible missed discount opportunities, and a number of those firms may be the subject of enforcement actions by NASD and the SEC.

Breakpoint discounts are volume discounts applied to the front-end load charged to investors who purchase Class A mutual fund shares. The extent of the discount depends upon the amount the customer invested in a particular mutual fund family.

Today's actions follow examinations that revealed that many investors were not receiving correct breakpoint discounts on their mutual fund purchases. The exam findings were outlined in the Joint Report of Examinations of Broker-Dealers Regarding Discounts on Front-End Sales Charges on Mutual Funds (available at: http://www.nasdr.com/pdf-text/bp_joint_exam.pdf and at http://www.sec.gov/news/studies/breakpointrep.htm). As a result, NASD directed securities firms to conduct an assessment of their mutual fund transactions, using a statistically significant sample of the 2001 and 2002 transactions, from which overall performance was determined.

The assessments showed that most firms did not uniformly deliver appropriate breakpoint discounts to customers. Overall, discounts were not delivered in about one of five eligible transactions. The average amount overcharged per transaction was $243, and ranged up to $10,000. NASD estimates that at least $86 million is owed to investors for 2001 and 2002 alone. NASD notified firms in August that they must make appropriate refunds, plus interest, owed to their customers.

SEC Chairman William H. Donaldson said "It is essential that mutual fund investors receive the correct sales charges on their investments. Broker-dealers who process fund transactions on behalf of investors simply must do so in a way that ensures that all available discounts are given to the investor. The actions we announce today are another step we are taking to ensure that fund investors are protected in our markets."

"We found that a large number of investors did not receive the discounts they deserved when they made these investments," said Mary Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "While NASD has already told firms to make refunds of identified overcharges, we are now directing firms to specifically notify their customers, alerting them to this problem so that the appropriate refund can be made promptly."

Earlier this year, NASD led an industry task force that explored and recommended ways that the mutual fund and broker-dealer industries could prevent breakpoint problems and errors in sales load calculations in the future. The Task Force issued a report that recommends a number of operational enhancements, disclosure requirements and regulatory changes, which is available at: http://www.nasdr.com/breakpoints_report.asp. Industry working groups are in the process of implementing the Task Force's recommendations.

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 http://www.nasd.com/Investor/alerts/alert_breakpoint_refund.htm. Investors can access fund expense calculators at www.sec.gov/investor/tools/mfcc/mfcc-int.htm and www.nasdr.com/fundcalc/expense_analyzers.asp.