SEC Approves NYSE Governance Structure Changes; Proposes Mutual Fund Disclosure Rules; Solicits Comment on Fund Transaction Cost Issues


On Nov. 7, 2003, the New York Stock Exchange filed a proposal with the Commission to amend and restate its Constitution to implement a series of governance changes (SR-NYSE-2003-34). The proposal was published for public comment in the Federal Register on Nov. 13, 2003. The Commission voted to approve the proposal.

The NYSE will make a number of revisions to its governance structure, including, most significantly, the following changes:

  • Independent Board of Directors. The Board of Directors will be reduced from 24-27 members to between 6-12 members, plus the Chairman of the Board and CEO (if different than the Chairman). Board members (except the CEO) will be required to be independent of management, the members, and issuers.
  • Constituent Board of Executives. The Board of Executives will be created as an advisory board, consisting of the Chairman and the CEO (if different than the Chairman), and at least 20 but no more than 25 members who will serve for one-year terms. The members of the Board of Executives will include representatives of the Exchange's various stakeholders, including member firms, institutional investors, and listed companies.
  • Autonomous Regulatory Office. The position of Chief Regulatory Officer will be created to oversee the NYSE's regulatory function. The Board will appoint the Chief Regulatory Officer, who will report directly to the Regulatory Oversight & Regulatory Budget Committee. That independent Board committee will exercise control over the NYSE's regulatory plan, budget and staffing, and recommend the compensation of senior regulatory employees.
  • Independent Key Board Committees. Four Standing Committees, consisting only of independent directors, will be created to oversee certain critical functions. These are the Nominating & Governance Committee, the Human Resources & Compensation Committee, the Audit Committee, and the Regulatory Oversight & Regulatory Budget Committee.

Enhanced Disclosure of Mutual Fund Breakpoint Discounts

The Commission decided to propose amendments that would require a mutual fund to provide enhanced disclosure regarding breakpoint discounts on front-end sales loads. This enhanced disclosure would assist investors in understanding the breakpoint opportunities available to them.

Some mutual funds with a front-end sales load provide discounts for larger investments. The investment levels required to obtain a reduced sales load are commonly referred to as "breakpoints." In determining whether an investor meets a "breakpoint," funds often allow the investor to use a "right of accumulation" to aggregate shares purchased at different times, in different funds within a fund family, and by family members of the investor.

An examination sweep of broker-dealers initiated by the Commission, NASD, and the New York Stock Exchange late last year revealed that in 32% of the transactions that appeared to be eligible for a reduced sales charge, investors did not receive the full reduction to which they were entitled. The most frequent causes for not providing a breakpoint discount involved problems with rights of accumulation, including not linking an investor's ownership of different funds in the same mutual fund family, shares owned by the investor in different accounts, or shares owned by persons related to the investor. Following the joint examination sweep, NASD formed a Joint NASD/Industry Task Force on Breakpoints, which issued its recommendations in July of this year.

As a result of the examination sweep and the Task Force report, the Commission is aggressively attacking industry failures to deliver breakpoint discounts through both enforcement investigations and regulatory initiatives. The proposals would require enhanced disclosure by mutual funds regarding breakpoints, as recommended by the Task Force. The proposals would

  • require a mutual fund to provide a brief description in its prospectus of arrangements that result in sales load breakpoints, including a summary of eligibility requirements, with more detailed information permitted to be in the statement of additional information (SAI);
  • require a mutual fund to describe in its prospectus the methods used to value accounts in order to determine whether a shareholder has met sales load breakpoints;
  • require a mutual fund to state in its prospectus, if applicable, that in order to obtain a breakpoint, it may be necessary for a shareholder to provide information and records, such as account statements, to a mutual fund or financial intermediary; and
  • require a mutual fund to state in its prospectus whether it makes available on its website information regarding its breakpoints.

Comments on the proposed rule amendments should be sent to the Commission within 45 days of their publication in the Federal Register.

Investors can learn more about reduced front-end sales loads by going to and Investors can access fund expense calculators at and

Investors who believe that 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 or with NASD at

The examination sweep report "Joint SEC/NASD/NYSE Report of Examinations of Broker Dealers Regarding Discounts on Front-End Sales Charges on Mutual Funds" is available at A copy of the Joint NASD/Industry Task Force on Breakpoints report can be found at

Request for Comments on Ways to Improve Mutual Fund Transaction Cost Disclosure

The Commission decided to issue a concept release on mutual fund transaction costs. The release will seek public comment on whether mutual funds should be required to quantify and disclose to investors the amount of transaction costs they incur; include transaction costs in their expense ratios and fee tables; provide other measures or additional disclosure that would indicate the level of a fund's transaction costs; or some combination of the above. In addition, the release will seek comment on whether mutual funds should be required to record transaction costs or the portion of those costs that represent soft dollar benefits as an expense in their financial statements. The release also will ask for comment on the adequacy of existing requirements for board review of transaction costs.

Comments in response to the concept release should be sent to the Commission within 60 days of its publication in the Federal Register.

Last modified: 12/18/2003