Fifteen Firms to Pay Over $21.5 Million in Penalties to Settle SEC and NASD Breakpoints Charges


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National Association
of Securities Dealers
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Securities and
Exchange Commission

Affected Mutual Fund Customers to Receive Refunds

Washington, D.C., February 12, 2004 -- The Securities and Exchange Commission (SEC) and NASD today announced enforcement and disciplinary actions against a total of 15 firms for failure to deliver mutual fund breakpoint discounts during 2001 and 2002. Breakpoint discounts are volume discounts applicable to front-end sales charges on Class A mutual fund shares (front-end loads). SEC and NASD each brought cases against a group of 7 firms, and NASD separately brought actions against the other 8 firms. The 15 firms have agreed to compensate customers for the overcharges, pay fines in an amount equal to their projected overcharges that total over $21.5 million, and undertake other corrective measures.

The SEC and NASD had previously determined that many investors were not receiving correct breakpoint discounts on their mutual fund purchases. (See Joint SEC/NASD/NYSE Report of Examinations of Broker-Dealers Regarding Discounts on Front-End Sales Charges on Mutual Funds, link below). NASD directed securities firms to conduct an assessment of their mutual fund transactions, using a statistically significant sample of the 2001 and 2002 transactions. 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 (eligible transactions were certain automated purchases of Class A shares). The average amount of overcharge per transaction was $243, ranging up to $10,000. Based on the self-assessment, NASD estimated that at least $86 million was owed to investors for 2001 and 2002 alone. NASD directed all firms to provide refunds to customers who were overcharged, directed 446 firms to notify customers that they may be due refunds and directed 174 firms to conduct a complete review of individual transactions for possible missed opportunities. The firms named in today’s enforcement actions fell into two categories: those with higher than average failure rates and high dollar amounts of total overcharges; and those whose failure rates were significantly higher than average.

To resolve these actions, each of the 15 firms agreed to review all front-end load mutual fund trades in excess of $2,500 conducted between January 1, 2001 and November 3, 2003; to provide written notification of the firm’s problem delivering breakpoint discounts to each customer who purchased front-end load mutual funds from January 1, 1999 through November 3, 2003, and advise these customers that they may be entitled to a refund; to provide refunds where appropriate; and to pay a fine equal to the amount of the firm’s projected overcharges.

The names of the firms charged, fines to be paid (equal to projected overcharges to customers), and projected rates of missed breakpoints, are as follows:

Firms settling with the SEC and NASD in separate actions:
Wachovia Securities, LLC$4,844,46528.77%
UBS Financial Services Inc.$4,621,76830.03%
American Express Financial Advisors Inc.$3,706,69329.70%
Raymond James Financial Services, Inc.$2,595,12931.78%
Legg Mason Wood Walker, Inc.$2,315,46734.61%
Linsco/Private Ledger Corp.$2,232,80535.64%
H.D. Vest Investment Securities, Inc.$ 725,21633.39%
Firms settling with NASD only:
Bear, Stearns & Co. Inc.$280,46952.00%
Lehman Brothers Inc.$123,88259.96%
Cresap, Inc.$ 99,45888.48%
SWS Financial Services$ 66,46889.69%
Kirkpatrick, Pettis, Smith, Polian Inc.$ 39,93553.56%
Southwest Securities, Inc.$ 36,97189.02%
David Lerner Associates, Inc.$ 32,71164.88%
Brecek & Young Advisors, Inc.$ 31,22453.74%

The SEC orders find that the firms, by failing to disclose to certain customers that they were not receiving the benefit of applicable breakpoint discounts, violated Section 17(a)(2) of the Securities Act of 1933. The NASD made findings that the firms violated NASD’s just and equitable principles of trade rule by failing to give customers the benefit of applicable breakpoint discounts and by failing to disclose to those customers that they were not receiving the benefit of applicable discounts. In addition, the Commission charged six of the seven firms (all but Raymond James Financial Services) with failing to disclose on customer confirmations the remuneration the firms received in connection with the front-end loads, in violation of Rule 10b-10 under the Securities Exchange Act of 1934. H.D. Vest also resolved charges by the Commission related to unsuitable sales of Class B mutual fund shares, as described in more detail below. The fine imposed on Cresap, Inc. was reduced to $50,000 based on the firm’s demonstrated financial condition.

Stephen M. Cutler, Director of the Commission’s Division of Enforcement, remarked: “These Commission actions target seven firms whose breakpoint overcharges totaled $21 million over a two-year period. But our actions and the NASD’s are a message to every broker-dealer: you must exercise due care to provide appropriate breakpoint discounts to mutual fund investors, or enforcement action will be taken against you, and substantial penalties will be imposed.”

“Securities firms must deliver on promises made to customers; breakpoints are no exception. We estimate that for 2001 and 2002 alone, $86 million is owed to investors from the failure to award breakpoint discounts, demonstrating just how critical it is that firms identify, remediate and take steps to prevent problems in this critical segment of the markets,” said Mary Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. “The fines and other remedial measures make clear that these types of failures, whatever the cause, will not be tolerated, and that the interests of customers are paramount.”

As described in the NASD and Commission settlements, when an investor buys mutual fund shares with a front-end load, the sales charge, or load, portion of the offering price is not invested in the fund, but instead is paid to the fund’s principal underwriter or distributor. When the purchase is made through a broker-dealer, the fund's principal underwriter or distributor pays a part of the front-end load amount to the broker-dealer that sold the fund shares to the investor. Mutual funds that sell shares charging front-end loads usually offer discounts at certain pre-determined levels of investment, which are called breakpoints. Front-end loads and breakpoints can vary among funds within a fund complex or across fund complexes. For example, a mutual fund might charge an investor 5.75 percent of the sales price for purchases of less than $50,000, but reduce the sales charge to 4.75 percent for investments between $50,000 and $99,999. An investor can usually procure discounts on sales charges at investment levels of $50,000, $100,000, $250,000, and $500,000. At the $1 million investment level, generally there is no sales charge. Investors may aggregate purchases in one or more accounts to reach a breakpoint threshold.

The NASD and Commission orders further state that broker-dealers that sell mutual fund shares to retail customers must disclose applicable breakpoint discount information to their customers and must have procedures reasonably designed to ascertain information necessary to determine the availability and appropriate level of breakpoints. A failure to do so can result not only in the customer being deprived of a benefit to which he or she is entitled, but also in the broker-dealer and registered representative receiving increased commissions at the customer's expense.

In addition to finding breakpoint violations, the Commission’s settled order against H.D. Vest Investment Securities, Inc. finds that the firm, in recommending that certain customers purchase large amounts ($100,000 or greater) of Class B mutual fund shares, failed to adequately disclose that an equivalent investment in Class A shares could yield a higher return as a result of applicable breakpoint discounts and reduced ongoing expenses. Among other things, the order directs Vest to pay a $691,812 fine based on its excess Class B share commissions, and to offer the affected customers the opportunity to convert their Class B shares to A shares. Further, Vest agreed to retain an independent consultant to conduct a review of, and make recommendations regarding, the firm’s Class B share policies and procedures.

The original examination findings underlying these breakpoints actions were outlined in the Joint SEC/NASD/NYSE Report of Examinations of Broker-Dealers Regarding Discounts on Front-End Sales Charges on Mutual Funds (available at: and at 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: Industry working groups are in the process of implementing the Task Force's recommendations.

Investors can learn more about breakpoints by going to and

Investors can access mutual fund expense calculators at and

For further information about these actions, contact:

At the SEC:
Lawrence A. West, Associate Director, (202) 942-4822
    Regarding H.D. Vest:
Spencer C. Barasch, Associate Director Fort Worth Office, (817) 978-6425

Nancy A. Condon, (202) 728-8379

The SEC’s Administrative Orders are posted on the Commission’s website,

See Also:  Rel. No. 33-8365 (In re American Express Financial Advisors Inc.); Rel. No. 33-8368 (In re Legg Mason Wood Walker, Inc.); Rel. No. 33-8371 (In re Linsco/Private Ledger Corp.); Rel. No. 33-8374 (In re Raymond James Financial Services, Inc.); Rel. No. 33-8377 (In re UBS Financial Services Inc.); Rel. No. 33-8380 (In re Wachovia Securities, LLC); Rel. No. 33-8383 (In re H. D. Vest Investment Securities, Inc.)
Last modified: 2/12/2004