Linsco/Private Ledger (LPL Financial Services), an stalwart independent broker-dealer, has been advised by the National Association of Securities Dealers and the Securities and Exchange Commission that enforcement actions are pending as a consequence of certain clients not receiving appropriate commission discounts, otherwise known as “breakpoints,” on Class A mutual fund purchases.
LPL is one of roughly 2,000 firms conducting internal examinations into breakpoints as a result of a joint investigative report filed in March by the SEC, NASD, and the New York Stock Exchange. The report found that, from a sampling of 43 firms and 9,000 transactions, only 1 in 3 share purchases eligible for breakpoints actually received them. The average cost to investors was $364, but went as high as $10,000, according to the report.
Firms already admitting failures to provide breakpoints include American Express, Wachovia, and Legg Mason. Many more firms are expected to announce similar findings in the coming months.
“The failures were very much administrative in nature,” said Jim Putnam, the managing director of national sales for LPL, explaining the reason for missing investor discounts. The internal review by the firm discovered “no evidence that LPL representatives acted in bad faith,” according to a company statement.
Applying the breakpoints to every qualified investor it turns out is an operational and administrative quagmire for firms they wish they had some help solving. “This is a good example of where regulators could step in and standardize some of these things,” said Mark Casady, the president and CEO of LPL.
The joint report in March found the most frequent causes for not providing breakpoints to be 1) not linking ownership of different funds in a fund family 2) not linking shares owned in a fund or fund family in all of a customer’s accounts and 3) not linking shares owned in the same fund or fund family by persons related to the customer (e.g., spouse, children).
The lack of these links is a massive collective failure on the part of broker-dealers that according to the most recent report filed by the NASD and the SEC, cost investors $86 million in 2001 and 2002 alone. The NASD notified firms in August that all the money is to be repaid, with interest, to affected investors.