The NASD's breakpoints task force has turned in its report [PDF format] and it does not contain any silver bullet to solve the problem. Rather, its calls for a number of common sense changes and the tweaking of industry databases to better tie sales data to accounts. Even with the recommendations, though, the bottom line conclusion must be that the ultimate responsibility for ensuring that the proper breakpoint is charged will lie with the investor.

Indeed, the task force's first recommendation is that 200 or so fund firms selling commissioned shares offering breakpoints take steps to make investors aware of the discounts. Those steps having the SEC mandate disclosure of clear information on the discounts in their fund prospectii. Absent a rule, fund families should voluntarily make this disclosure, recommends the task force.

Another, perhaps more controversial recommendation, is for the amount of the commissions paid by investors be disclosed on trade confirmations and that the SEC revisit its April 18, 1979 No-Action Letter, which permits the omission of sales charge information from confirmations.

"Confirmations should reflect the entire percentage sales load charged to each front-end load mutual fund purchase transaction," states the report. "This information would enable investors to verify that the proper charge was applied."

Web sites should also be covered by the rules and be required to include the breakpoint schedules and linkage rules, recommended the task force. It added that links to that information should be "quick and obvious."

"Providing disclosures in mutual fund prospectuses and on mutual fund Web Sites would allow investors, who generally do not have access to NSCC systems and products ... to obtain information on their own, without the assistance of a financial professional," reads the report.

Database changes

Tweaks of the technology used to track shareholder and sales information were also recommended by the task force, although it also believes that technology is unable to cure the problem at a reasonable cost.

One solution it recommended is for the NSCC to adapt its Mutual Fund Profile Service (MFPS) to better track the information. The MFPS Profile II database currently maintains breakpoint schedules that delineate the sales charges applicable at various dollar levels for a limited number of mutual funds, noted the task force. It recommended that the database be expanded to include breakpoint aggregation terms and rules for all fund families, and identification of both link-eligible related parties and link-eligible products.

Further, it recommends that all registered reps should be allowed access to MFPS Profile II and that the date should be formatted to make it accessible through broker-dealers' internal systems and Web-based applications.

The NSCC has already said that it could readily expand the MFPS Profile II database to accommodate breakpoint linkage information for all mutual funds.

While noting that existing database could better track information needed to determine breakpoints, the task force also admitted the futility of trying to create a "black box" to solve the problem once and for all. The cost of such a system would outweigh the benefits, it concluded. The task force pegged the costs required to create such a system at $2.5 billion to $5.0 billion. Yet few fund investors are eligible for breakpoints, it noted.

It found similar problems with requiring transfer agents to track the data, although it noted that it would be less costly to adapt these existing systems than to create a black box from whole cloth.

One additional problem faced by transfer agents is the practice of most broker-dealers using Networking Level 3 not sharing the id codes and customer names with the mutual fund transfer agent. Additionally, it acknowledged that a number of broker-dealers prefer to settle on an omnibus basis. In those cases, the transfer agent lacks account level data to track breakpoints.

Still, the task force did recommend that non-omnibus broker-dealers transmit TIN/BIN data to mutual funds to assist in the linking of accounts. It did not specify how they should transmit the data, however.

It also recommended that Fund/SERV add data fields that request the BIN, TIN, and any letter of intent of the investor purchasing mutual funds, as well as the BINs and TINs for all related accounts. That Fund/SERV specify each field's particular purpose and include logic that would prevent the processing of orders where the inappropriate information is entered into a particular field.

For omnibus or Networking Level 3 processing of orders that do not reveal the TIN/BIN of the beneficial owner of the mutual funds, it recommended that broker-dealers explore the feasibility of developing alternative mechanisms for providing TIN/BIN information to mutual funds or their transfer agents.

It also recommends that transfer agents perform automated searches of the TIN and/or 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.  

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