Understanding Mutual Fund Breakpoints

Investors who buy mutual funds that are sold with front-end sales loads often are provided the opportunity to pay reduced sales loads based on the dollar amount of their purchase or series of purchases. The level at which the discount is applied is commonly referred to as a “breakpoint.” The higher the level of investment, the more likely an individual is to qualify for a breakpoint discount. For example, a mutual fund might charge a front-end sales load of 5.5 percent for purchases less than $25,000; 5.25 percent for purchases between $25,001 and $50,000; 4.75 percent between $50,001 and $100,000; and so on. Each mutual fund or family of funds offers different breakpoints and these terms vary from one fund to another.

In December 2002, the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD), which regulates brokerages, sought to ensure that mutual fund investors were receiving the appropriate breakpoints. The NASD has directed each of its member firms that sell mutual fund shares to review its policies and procedures to ensure that they are designed and implemented so that investors are charged the correct sales loads on mutual fund transactions. Many dealer firms operate their own proprietary recordkeeping systems for mutual fund accounts. In these cases the mutual fund maintains a single account on its books for the dealer, known as an “omnibus account,” and the dealer keeps records of the identities and transaction histories of, or account privileges elected by, individual shareholders in the dealer’s “omnibus account.”

The NASD has reiterated to its members the importance of entering breakpoint data correctly into automated order processing and settlement systems, such as Fund/SERV. Implemented in 1986, Fund/SERV standardizes mutual fund transaction processing and facilitates the processing of mutual fund share purchases at reduced sales loads. As long as the originating party (i.e., the dealer firm) properly completes the Fund/SERV order, the correct sales load for that transaction will be applied to the order.

While Fund/SERV is the industry standard by which financial intermediaries transmit to funds their clients’ mutual fund orders, it is by no means the only method used by intermediaries. Many intermediaries still operate manually, sending orders through the mail or by telephone. Still others utilize proprietary systems or web-based services operated by third parties. All mutual fund transfer agent systems in use today include logic that ensures the proper application of sales load breakpoints, irrespective of how those orders are submitted (whether through Fund/SERV or other methods). As long as the dealer firm’s system that accumulates fund transactions from sales personnel and branch offices also accounts for breakpoints, and the correct data are entered by sales personnel for submission to the fund, proper load charges will be assessed.

The Investment Company Institute, on behalf of mutual fund shareholders, fully supports NASD and SEC efforts to ensure that mutual fund investors receive applicable breakpoints, or discounts, offered by funds. The NASD is forming a working group of executives from the mutual fund and brokerage industries, as well as other knowledgeable individuals. The mutual fund industry is looking forward to participating and assisting the SEC and NASD in identifying potential problems and taking steps to address them.

January 2003