Case Study: TAKTED engineer assists broker dealer firms in fulfilling their obligation to provide all available breakpoint discounts
Breakpoint Disclosure Statement
To assist firms in fulfilling their obligation to provide all available breakpoint discounts on the sales of front-end load mutual funds, FINRA recommends that firms at the time of purchase or periodically thereafter provide investors with a Written Disclosure Statement explaining the availability of breakpoint discounts. FINRA provides this statement as an example of what it believes is appropriate. Firms may wish to tailor the statement to reflect the rules of the mutual funds they sell.
Stay ahead in a rapidly changing world
You can help your clients assess their opportunities to receive breakpoint discounts by taking the following steps:
- Become familiar with breakpoint discounts offered by the mutual funds that you sell. These are located in a fund’s prospectus and/or statement of additional information.
- Discuss with your clients whether breakpoint discounts are available before they buy mutual fund shares.
- Ask your clients for the information necessary to determine their eligibility for breakpoint discounts, such as their fund holdings and the holdings of their spouse or children, among other relatives.
- Record this information in each client’s file so it can be applied to future purchases of a particular fund, which might result in additional breakpoint discounts.
NASD, in conjunction with an industry working group, developed the outline provided below in response to Recommendation J of the Report of the Joint NASD/Industry Task Force on Breakpoints, which recommended that member firms provide enhanced training regarding mutual fund breakpoint discounts.
This outline is intended as a model of the critical topics that firms should address in training regarding breakpoint discounts. FINRA recognizes that every firm has a unique business model, and, as a result, firm element training methods and content may vary. However, every firm that sells mutual funds or anticipates selling mutual funds should cover the topics discussed in parts I and II of the outline regardless of the firm’s particular business model. For the convenience of members, FINRA has also provided suggestions regarding topics firms should address in the firm-specific portion of their training. Firms should feel free to tailor these sections to reflect their particular business models and record keeping practices.
Although FINRA believes that this outline will assist in educating registered representatives regarding breakpoint discounts and the need to deliver all available discounts, the use of this outline to develop training programs does not diminish members’ obligation to provide proper training and supervision to registered representatives that sell mutual funds. Likewise, use of this outline does not constitute a “safe harbor” with respect to a member firm’s obligation to comply with all applicable rules and regulations.
I) General Breakpoint Information
- Mutual fund breakpoint definition
- Location of breakpoint-related information
- Prospectus
- Statement of Additional Information (SAI)
- Mutual fund web sites
- Breakpoint rules vary across mutual fund families
- Impact of breakpoint eligibility on share class selection and suitability analysis
II) Fundamentals of Breakpoint Eligibility
- Determining breakpoint eligibility
- Types of accounts eligible (e.g. 401(k), 529 plan, IRA, directly-held with mutual fund)
- Account holders eligible (e.g. spouse, children)
- Fund holdings eligible (e.g. at the firm or away from the firm)
- Eligibility based on current purchase amount
- Rights of Accumulation (ROA)
- ROA Defined
- Types/examples of ROA
- Existing customer holdings
- Same fund family, same account
- Same fund family at other broker/dealer
- Other eligible fund holdings at broker/dealer or elsewhere
- Other eligible account holders
- Same fund family in any eligible account at broker/dealer or elsewhere
- Purchases made the same day
- Existing customer holdings
- Obligation to inquire versus customer privacy issues
- Letter of Intent (LOI)
- LOI Defined
- Appropriateness of recommending LOI
- Based on customer’s investment plans
- Consequences of customer not fulfilling LOI
- Types/Examples of LOI
- Existing LOI
- New LOI
- Based on plans to purchase over next 13 months
- Retroactive LOI based on previous, current, and possibly future purchases
- LOI held by other eligible account holders
- Valuation of eligible fund holdings
- Current net asset value (NAV)
- Public offering price (POP)
- Historical cost
- Documentation required for historical cost
III) Firm-specific topics
- Types of communications and materials the firm is planning to send or has sent to customers regarding breakpoint issues (e.g. special notices, written disclosure statements, inclusion of breakpoint information on trade confirmations)
- How to enter breakpoint information into order entry system; or, how to record breakpoint information on paper application
- Where to store account linkage information so that the right breakpoint discount is applied to current and future purchases
- Where to record the disclosure of availability of breakpoint discounts
- Where to record that registered representative made the necessary inquiry to gather the relevant data to calculate breakpoint discounts before transactions are processed
- Supervisory systems and procedures (for registered principals)
IV) Other topics
- Understanding opportunities available to customers to move their investments without sales charge from fund to fund within a fund family through reinstatement privileges, and between fund families through NAV transfer privileges
- Procedures for handling customer requests for refund of missed breakpoint discounts
Although FINRA believes that this outline will assist in educating registered representatives regarding breakpoint discounts and the need to deliver all available discounts, the use of this outline to develop training programs does not diminish members’ obligation to provide proper training and supervision to registered representatives that sell mutual funds. Likewise, use of this outline does not constitute a “safe harbor” with respect to a member firm’s obligation to comply with all applicable rules and regulations.
Designed, developed and implemented daily process (Oracle, Unix Shell, PL/SQL, SQR) in respond of breakpoint requirements to review/verify all front load Mutual Funds transactions to determine if correct commission charges where applied based on how much the client had invested or their Breakpoint based on Right of Accumulation, Letter Of Intent or household rules to produce exception reports.