he NASD's letter to the fund industry on a widespread failure in the industry to properly recognize commission breakpoints is gaining more currency. The NASD released the notice just prior to Christmas on December 23 (see the notice here
The issue has been exacerbated by the rise of automated processing and settlement systems in the mutual fund industry, such as Fund/SERV, according to the NASD. The organization recognizes that many times the breakpoints are ignored due to human error and improper data entry by brokers, not through mal intent. Although the notice does not carry the heft of a new formal rule (the practice is already covered under rules 2310 and 2110) the circular does warn firms that they need to put controls and procedures into place to ensure that fund shareholders are charged the proper commission.
"... it is essential for members to enter correctly into these systems the breakpoint information pertaining to customer transactions. Members must have procedures reasonably designed to ascertain all information necessary to establish the correct breakpoint level; training and procedures to ensure that personnel understand the proper steps for inputting the information correctly into the automated processing and settlement system; and supervisory procedures that reasonably ensure compliance in this area. Due to the fact that automated processing and settlement systems may not disclose to the mutual fund company the identity of the member's customer, members cannot rely on the mutual fund company to allocate the correct breakpoint to a transaction or override the member's failure to do so," the NASD wrote in its notice.
Now, the NASD says it will soon take the next step of taking action against a number of firms, reports the Wall Street Journal
. Neither the NASD nor the SEC have announced the identity or the number of firms that they are investigating. The NASD is targeting "big, medium and small" broker-dealers and not mutual fund firms, said Mary Schapiro
, vice chairman of the NASD.
Part of the action will likely be for the firms to make pay restitution to clients. The penalties are likely to include demands that offending firms pay restitution to clients. Mutual-fund companies aren't being targeted.
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