The confusing slew of regulations that have followed on the heels of the Sarbanes-Oxley Act has tapped a strange feeling in brokers: the fear of violating securities rules unwittingly. A recent investigation by the NASD shows their worries are not unfounded.
In January, the NASD sent word to several firms that it had discovered brokers are not providing earned discounts to mutual fund investors, thereby overcharging them.
The investigation centers around “breakpoints” — sales charge discounts that mutual fund companies provide for investors who put in a certain amount in a selected fund.
Fund companies are not obliged to provide breakpoints, but if they do, brokers are required to inform clients of the discounts.
The NASD charges that various brokers at undisclosed firms were ignoring breakpoints and charging clients the customary loads. None of the major firms contacted by Registered Rep. were able to confirm they had received the notice, but the NASD says all member firms received it.
Some brokers believe this might be a case of accidental lack of compliance, saying their firms don't always have the necessary infrastructure to inform a rep that clients have reached breakpoints. “Hell, I've probably [not provided the discounts] a few times myself,” one broker says. “A lot of times, investors — and us — don't even know they have it available.”
The problem arises with some individual firms' support systems. Breakpoints are typically set at high levels, often around $50,000, with subsequent breakpoints at $100,000, $250,000, $500,000, so on. A breakpoint is triggered when an investor puts in a large amount. Most often, though, investors put something like $10,000 in a fund incrementally. Many systems won't ring that same bell when an amount reaches a breakpoint gradually.
The NASD, which is working with the SEC, says firms found guilty of the violations could face serious fines and could also be required to repay clients lost funds.
Paying the Piper/Individual firms' individual burden in the conflict-of-interest scandal. Amounts include, fines, independent research payments and investor education contributions.
| Firm | $Millions paid |
|---|---|
| Salomon Smith Barney | $400 |
| Credit Suisse Group | $200 |
| Merrill Lynch | $200 |
| Morgan Stanley | $125 |
| Goldman Sachs | $110 |
| Bear Stearns | $80 |
| Deutsche Bank | $80 |
| J.P. Morgan Chase | $80 |
| Lehman Brothers | $80 |
| UBS | $80 |
| Source: SEC | |