SEC Passes Breakpoint Amendment—With an ‘Ethics’ Twist

The SEC has issued its long-awaited amendments on breakpoints, and the end result of months of deliberations surprised no one.

The SEC has issued its long-awaited amendments on breakpoints, and the end result of months of deliberations surprised no one.

The SEC’s announcement, which followed a comment period and recommendations from the NASD/Industry Task Force on Breakpoints, requires “open-end management companies” to “enhance” their disclosures in the prospectus of any mutual funds. Mutual funds must now clearly state in prospectuses when breakpoint discounts are available. They must also detail their methods for coming up with a payment formula and state whether or not further descriptions of the discounts are available on its Web site.

Breakpoints are sales-charge discounts that mutual fund companies provide for investors who put a certain amount in a selected fund. Several firms and mutual funds—including Morgan Stanley and Merrill Lynch—have been fingered by the SEC for not providing the appropriate discounts.

Most importantly for advisors, the SEC now requires all investment advisors to adopt (and sign and return) a uniform code of ethics, with subsections like Standards of Business Conduct, Personal Securities Reporting and Reporting of Code Violations. Advisors and firms must be in compliance with the new provisions by Jan. 7, 2005.

The Securities Industry Association applauded the measures.

“SIA strongly supports both new rules and is committed to continuing to work with the regulator on reforms that will help us to better serve our clients,” said SIA President Marc Lackritz, in a statement.

Many advisors wonder if the SEC amendments will make the difference the organization hopes.

“A professional code of ethics is kind of insulting,” one A.G. Edwards rep says. “Breakpoints weren’t something any one was keeping from anyone on purpose, at least in my case.”

He added, “If it makes them feel better though—both the regulators and my clients—sure, I’ll sign something saying I have a code of ethics. But I’ve always had one.”

The SEC did not say—and did not return calls at press time—how or when the amendments (and advisories on their usage) would be officially disseminated to firms. But with all the talk of breakpoints that has been going on for months, the amendments are the first official “legislation” the SEC has passed on the discounts.

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