By Electronic Mail
February 13, 2004
Jonathan G. Katz
Re: Release Nos. 33-8347 and 34-48939; IC-26298; File No.S7-28-03; Disclosure of Breakpoint Discounts by Mutual Funds
Dear Mr. Katz:
The Financial Planning Association ("FPATM")1 is pleased to submit comments with respect to the SEC's proposal to adopt the July 2003 recommendations of the Joint NASD/Industry Task Force on Breakpoints that would require enhanced disclosure regarding breakpoint discounts. In light of evidence that investors often fail to receive breakpoint discounts for which they are eligible2, FPA supports the proposed Rule to ensure that investors are not overcharged when they purchase funds with front-end sales loads.
Because financial planners play a beneficial role in offering to clients a disciplined approach to mutual fund investing, we describe below how the Rule benefits professional advisers in performing due diligence as well as how it benefits the public.3
A. The Role of Financial Planners
Making recommendations to clients -- or assisting clients in their own research -- concerning the selection of suitable investments from the more than 15,900 mutual funds currently available constitutes a major part of the professional services offered by many FPA members. In order to create investment portfolios that assist a client in reaching personal and financial goals, this intermediary function between the mutual fund companies and the investing public requires that financial planners have access to timely and accurate information, and that the fund companies comply with all relevant rules. In this regard, we note that registered investment advisers are subject to disclosure and fiduciary standards of the Investment Advisers Act of 1940, offering a consistent "flow through" of protections to clients holding mutual fund shares. We note further that most FPA members are affiliated with investment advisory firms and are also subject to the professional standards of the CFP Code of Ethics and Professional Responsibility.4
The enhanced disclosure requirements in the proposed SEC Rule would assist FPA member compliance with Rule 704 of the CFP Code of Ethics, which requires CFP® practitioners to undertake a "reasonable investigation regarding the financial products recommended to clients."5 Improved disclosure would greatly assist financial planners in evaluating fund options for their clients and in satisfying the general requirements of Rule 704. Similarly, Rule 201 of the Code of Ethics requires CFP practitioners to "exercise reasonable and prudent professional judgment in providing professional services."6
B. SEC Proposal on Breakpoint Discounts
The proposed Rule would, among other things, require each mutual fund to describe in its prospectus any arrangements that result in breakpoints in sales loads, including a summary of the frequently misunderstood eligibility requirements. In addition, the SEC would require mutual funds to describe the methods used to value accounts for purposes of determining whether an investor has met sales load breakpoints. The SEC is also proposing to require a mutual fund to state in its prospectus whether it makes information about its sales loads and breakpoints available through its website.
Although FPA supports these important changes, we note that these additional disclosures are likely to be only marginally helpful to consumers. Anecdotal evidence from financial planners who must carefully evaluate their clients' financial sophistication during the financial planning process suggests that the vast majority of shareholders fail to read fund prospectuses. 7 Absent the professional services offered by financial planners and/or refinement of fund prospectuses, adding to an investor's reading burden may be of little additional value.
FPA, nonetheless, supports the SEC's proposal for greater disclosure about breakpoint discounts. This enhanced disclosure will assist financial planners and investors in understanding the breakpoint opportunities available to them and will have an overall beneficial effect on consumer protection.
We would be pleased to provide any additional information requested by the SEC. Please do not hesitate to call the undersigned at (202) 626-8558.
Neil A. Simon, Esq.
FPA Director of Government Relations