The NASD, acting on a tip acquired during an investigation, has sent several brokerage firms word that it has discovered brokers are not providing earned discounts to mutual fund investors, therefore overcharging them.
The investigation, which began last summer, centers on what’s known as "breakpoints," the sales charge discounts that mutual fund companies provide for investors who put in a certain amount in a select fund. Mutual fund companies are not obligated to provide breakpoints, but if they do, brokers are required to inform their clients of the discounts. The NASD charges that various brokers at undisclosed firms—no firms reached by Registered Rep. were able to confirm they had received the notice—were ignoring breakpoints and charging clients the normal amount.
An NASD spokesperson says there is no timeframe for the investigation’s results to be completed or made public. Firms found guilty of the violations could face serious fines from the NASD and/or the SIA, which is assisting the investigation. They could also be required to repay clients lost funds.
Some brokers believe this might be a case of accidental lack of compliance on the part of individuals. Some brokers say that their firms don’t always have the necessary infrastructure to appropriately inform a broker that his client has reached a breakpoint.
"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. The breakpoints are typically set at rather high levels, often around $50,000, with subsequent breakpoints at $100,000, $250,000, $500,000, so on. If an investor decides, for example, to pour $75,000 into a particular mutual fund, a firms’ internal system will typically raise a red flag, informing the broker that a discount is available. But, more often, an investor will put something like $10,000 into a mutual fund, then another $10,000, then another. Many systems, say some brokers, won’t ring that same bell when an amount reaches a breakpoint, depriving an investor of his justified discount. Next thing you know, a broker has overcharging an investor without even knowing it.
"I personally don’t have a lot of $10 million clients," says a broker. "Rarely do my clients dump that much in a mutual fund account. In the thousands I’ve done over the last two years, I’ve had to even discuss breakpoints maybe twice."