More Breakpoint Violations

The SEC and FINRA announced disciplinary actions for the failure to pass breakpoint discounts to their customers during 2001 and 2002.

To resolve the SEC and FINRA actions, the 15 firms agreed to review all front-end load mutual fund trades in excess of $2,500 conducted between January 1, 2001 and November 3, 2003; to provide written notification of the firm’s problem delivering breakpoint discounts to each customer who purchased front-end load mutual funds, and advise these customers that they may be entitled to a refund; to provide refunds where appropriate; and to pay a fine equal to the amount of the firm’s projected overcharges.

Below you will find a list of the firms charged, the fines they were charged to pay, equal to projected overcharges to customers, and the projected rates of missed breakpoints.

Firms settling with the SEC and FINRA in separate actions:
Wachovia Securities, LLC n/k/a Wells Fargo Advisors$4,844,46528.77%
UBS Financial Services Inc.$4,621,76830.03%
American Express Financial Advisors Inc.$3,706,69329.70%
Raymond James Financial Services, Inc.$2,595,12931.78%
Legg Mason Wood Walker, Inc.$2,315,46734.61%
Linsco/Private Ledger Corp.$2,232,80535.64%
H.D. Vest Investment Securities, Inc.$ 725,21633.39%

As described in the FINRA and SEC settlements, when an investor buys mutual fund shares with a front-end load, the sales charge, or load, portion of the offering price is not invested in the fund, but instead is paid to the fund’s principal underwriter or distributor. When the purchase is made through a broker-dealer, the fund's principal underwriter or distributor pays a part of the front-end load amount to the broker-dealer that sold the fund shares to the investor. Mutual funds that sell shares charging front-end loads often offer discounts at pre-determined levels of investment called breakpoints. Front-end loads and breakpoints vary among funds that are part of a fund complex or across fund complexes. For instance, a mutual fund might charge an investor 5.75% of the sales price for purchases of less than $50,000, but reduce the sales charge to 4.75% for investments between $50,000 and $99,999. An investor can usually procure discounts on sales charges at investment levels of $50,000, $100,000, $250,000, and $500,000. At the $1 million investment level, generally there is no sales charge. Investors can aggregate purchases in one or more accounts to reach a breakpoint threshold.

The FINRA and SEC ordered broker-dealers that sell mutual fund shares to retail customers to disclose applicable breakpoint discount information to these customers and the broker-dealers must have procedures reasonably designed to ascertain information necessary to evaluate the availability and appropriate level of breakpoints. A failure to do so can result in the customer being deprived of a benefit to which he or she is entitled, and also in the broker-dealer and registered representative receiving increased commissions at the customer's expense.

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