Tension between US regulators and fund managers increased today with the launch by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) of an “action plan” to investigate possible overcharging on mutual fund sales. On 23 December the SEC has asked the mutual fund industry to form a task force to look into whether fund investors have received the so-called “breakpoint” fee discounts they were entitled to for investing large amounts in some funds.
The SEC and the NASD are now seeking reports from all NASD member firms on the adequacy of their policies and procedures to ensure that larger mutual fund investors receive the promised reductions. Additionally, the NASD is surveying all of its members to obtain data on their mutual fund sales. Currently, the SEC and NASD, along with the New York Stock Exchange, are conducting examinations of selected firms that sell front-end load mutual funds. The examinations are designed to determine whether mutual fund purchasers are receiving promised sales load reductions for making larger investments. The investment levels required to obtain a reduced sales load are commonly referred to as “breakpoints.” The SEC and NASD expect to issue a joint statement of the examination results and firm responses in early February.
In addition, SEC Chairman Harvey L. Pitt, in a Jan. 15 letter, asked NASD, the Securities Industry Association, and the Investment Company Institute to convene a working committee under NASD’s aegis to explore and recommend ways in which the mutual fund and brokerage industries can prevent abuses and eliminate errors in the calculation of sales loads, make operational changes to ensure the accuracy of and assist brokers in calculating sales loads, improve investor education on sales loads, and simplify or enhance disclosure of sales discounts. “This is an issue that demands swift action by regulators, as well as the focused attention of the mutual fund and brokerage industries, others knowledgeable about the issue, and consumer advocates, to protect the investing public,” said Pitt.
The issue is attracting attention in Congress, where Republican Representative Michael Oxley -chairman of the House of Representatives Financial Services Committee- welcomed the SEC plan. “I will be closely monitoring the investigation into breakpoints mismanagement and possible fraud,” he said. This followed a joint appeal with fellow Congressman Richard Baker for a study of mutual fund fees by the General Accounting Office. Oxley’s committee is also probing “soft-dollar” research-for-commission deals between fund managers and brokers.