DTCC Launches New Breakpoint Compliance Service For US Mutual Funds

The Depository Trust & Clearing Corporation (DTCC) has launched a service called Networking for Direct Accounts, which it says will help the mutual fund industry achieve greater operational transparency and meet regulatory recommendations surrounding the "breakpoints" at which clients benefit

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The Depository Trust & Clearing Corporation (DTCC) has launched a service called Networking for Direct Accounts, which it says will help the mutual fund industry achieve greater operational transparency and meet regulatory recommendations surrounding the “breakpoints” at which clients benefit from lower commissions.

In its July 2003 report, the Joint NASD/Industry Task Force recommended that Networking, as well as NSCC’s Fund/SERV and Mutual Fund Profile Service, be used to help solve the overall breakpoint problem. Its Recommendation L, in particular, argued that Networking could assist in providing “the broker/dealer firm with information on holdings carried away from the broker/dealer but for which that firm is the broker/dealer of record.” These services are provided by DTCC’s National Securities Clearing Corporation (NSCC) subsidiary.

“The lack of information at the distributor level has made it difficult to accurately calculate breakpoints on these accounts,” says Ann Bergin, managing director, Mutual Fund Services for DTCC. “We’ve been able to enhance the functionality of our Networking service so that fund companies can use this system to provide distributors with additional information that will allow them to better comply with regulatory requirements. As a result, a customer’s direct accounts can be linked with their other fund accounts, and full breakpoints can be applied.”

Direct accounts are fund accounts held in an investor’s name at a fund company. Frequently, investors also use a broker/dealer or other distributor for additional fund investments. If the distributor – called the “broker of record” – is not aware of the customer’s direct accounts with the fund company, those investments will not be reflected on his or her books and records.

“DTCC expects that customers will begin using the new service over the next few months, once they complete modifications to their systems to fully leverage this new tool,” adds Bergin.

A special sub-committee of an Investment Company Institute task force worked with NSCC to identify all the information on direct accounts that fund companies need to provide distributors, as well as to map out the record layout changes required so that Networking can accept this new information.

DTCC says that, since its introduction in 1988, Networking has been considered the industry standard for exchanging mutual fund customer account-level information between fund companies and distributor firms. Because it is a centralized and standardized service, this information appears identically on the records of both sides of fund transactions.

In “regular” Networking, a distributor firm establishes its accounts on the books of the fund company; and the firm handles many of the reporting responsibilities for the account. With direct accounts, the fund company maintains and controls these accounts and passes along to the distributor firm information needed to comply with recordkeeping requirements.

By changing Networking’s format to accept fund account numbers in lieu of brokers’ account numbers (BINs) and Rights of Accumulation (ROA) numbers, which are assigned when a group of accounts is combined, distributor firms can now receive fund conversion files – that establish direct accounts held at the fund, including changes to branch and rep, name and address, as well as social security and Rights of Accumulation numbers; activity files that include changes in share balances; position files – for the closing balance of each direct account as of a specific date; dividend processing – that include dividend and capital gain information and associated closing share balances; and reinvested share quantity, and any withholding information.

DTCC’s Breakpoint work began in 2004. That year and this it pursued a number of breakpoint-related initiatives, including Breakpoint Compliance SolutionM, an automated data upload of security information for funds; a central database for breakpoint linkage rules within the Mutual Fund Profile Service; a dictionary of common definitional standards related to the terms associated with breakpoints; and enhancements to Fund/SERV in the form of new codes and indicators, enabling fund companies to transmit and receive information necessary to identify and apply proper breakpoints on transactions, and requiring sales loads paid on transactions to be stated in percentage terms.

Fund/SERV is the industry standard for processing and settling a broad range of investment funds, and linking fund companies with their distributor partners.

Mutual Fund Profile Service provides a standardized, centralized and automated solution for communicating nontransactional information to and from fund companies and their distributors. It acts as a conduit and repository, enabling users to exchange information on daily mutual fund prices and dividend rates; breakpoint and other security-related data; firm and fund member contacts and capabilities, and projected and actual periodic distribution declarations.

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