Shortly before Christmas, the Securities and Exchange Commission (SEC) in the US published for comment proposals that would amend mutual fund disclosure requirements regarding breakpoint discounts and front end loads. It also published a concept release to solicit public comment on mutual fund transaction cost issues.
The Commission decided to propose amendments that would require a mutual fund to provide enhanced disclosure regarding breakpoint discounts on front-end sales loads. This enhanced disclosure would assist investors in understanding the breakpoint opportunities available to them.
Some mutual funds with a front-end sales load provide discounts for larger investments. The investment levels required to obtain a reduced sales load are commonly referred to as “breakpoints.” In determining whether an investor meets a “breakpoint,” funds often allow the investor to use a “right of accumulation” to aggregate shares purchased at different times, in different funds within a fund family, and by family members of the investor. An examination sweep of broker-dealers initiated by the Commission, the NASD, and the New York Stock Exchange late last year revealed that in 32% of the transactions that appeared to be eligible for a reduced sales charge, investors did not receive the full reduction to which they were entitled.
The most frequent causes for not providing a breakpoint discount involved problems with rights of accumulation, including not linking an investor’s ownership of different funds in the same mutual fund family, shares owned by the investor in different accounts, or shares owned by persons related to the investor. Following the joint examination sweep, NASD formed a Joint NASD/Industry Task Force on Breakpoints, which issued its recommendations in July of this year.
As a result of the examination sweep and the Task Force report, the Commission is aggressively attacking industry failures to deliver breakpoint discounts through both enforcement investigations and regulatory initiatives. The proposals would require enhanced disclosure by mutual funds regarding breakpoints, as recommended by the Task Force. The proposals would require a mutual fund to provide a brief description in its prospectus of arrangements that result in sales load breakpoints, including a summary of eligibility requirements, with more detailed information permitted to be in the statement of additional information (SAI); require a mutual fund to describe in its prospectus the methods used to value accounts in order to determine whether a shareholder has met sales load breakpoints; require a mutual fund to state in its prospectus, if applicable, that in order to obtain a breakpoint, it may be necessary for a shareholder to provide information and records, such as account statements, to a mutual fund or financial intermediary; and require a mutual fund to state in its prospectus whether it makes available on its website information regarding its breakpoints.
The Commission also decided to issue a concept release on mutual fund transaction costs. The release seeks public comment on whether mutual funds should be required to quantify and disclose to investors the amount of transaction costs they incur; include transaction costs in their expense ratios and fee tables; provide other measures or additional disclosure that would indicate the level of a fund’s transaction costs; or some combination of the above. In addition, the release seeks comment on whether mutual funds should be required to record transaction costs or the portion of those costs that represent soft dollar benefits as an expense in their financial statements. The release also asks for comment on the adequacy of existing requirements for board review of transaction costs.