The U.S. Securities and Exchange Commission and the National Association of Securities Dealers are sanctioning 15 of the worst offenders for failing to deliver millions of dollars of mutual fund breakpoint discounts during 2001 and 2002.

Breakpoint discounts are volume discounts that apply against funds sold on a front-end sales charge. The SEC and NASD each brought cases against a group of seven firms, and the NASD separately brought actions against the other eight. The 15 firms have agreed to compensate customers for the overcharges, pay fines in an amount equal to their projected overcharges that total over US$21.5 million and undertake other corrective measures.

The firms settling with the SEC and NASD are:
Wachovia Securities LLC, UBS Financial Services Inc., American Express Financial Advisors Inc., Raymond James Financial Services Inc., Legg Mason Wood Walker Inc., Linsco/Private Ledger Corp.
and H.D. Vest Investment Securities Inc.

Firms settling with the NASD only are: Bear, Stearns & Co. Inc., Lehman Brothers Inc., Cresap Inc., SWS Financial Services, Kirkpatrick, Pettis, Smith, Polian Inc., Southwest Securities Inc., David Lerner Associates Inc. and Brecek & Young Advisors Inc.

The SEC and NASD had previously determined that many investors were not receiving correct breakpoint discounts on their mutual fund purchases. The NASD found that, overall, discounts were not delivered in about one of five eligible transactions. Some of the firms sanctioned failed to deliver discounts to almost 90% of investors that were entitled to them. In total, the NASD estimated that at least $86 million was owed to investors for 2001 and 2002 alone.

The NASD directed all firms to provide refunds to customers who were overcharged, directed 446 firms to notify customers that they may be due refunds and directed 174 firms to conduct a complete review of individual transactions for possible missed opportunities. The firms named in the enforcement actions fell into two categories: those with higher-than-average failure rates and high dollar amounts of total overcharges; and those whose failure rates were significantly higher than average.

Each of the 15 firms agreed to review all front-end load mutual fund trades in excess of $2,500 conducted between Jan. 1, 2001 and Nov. 3, 2003; to provide written notification of the firm’s problem delivering breakpoint discounts to each customer who purchased front-end load mutual funds from Jan. 1, 1999 through Nov. 3, 2003, 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.

“Securities firms must deliver on promises made to customers; breakpoints are no exception. We estimate that for 2001 and 2002 alone, $86 million is owed to investors from the failure to award breakpoint discounts, demonstrating just how critical it is that firms identify, remediate and take steps to prevent problems in this critical segment of the markets,” said Mary Schapiro, NASD vice chairman and president of Regulatory Policy and Oversight. “The fines and other remedial measures make clear that these types of failures, whatever the cause, will not be tolerated, and that the interests of customers are paramount.”

The NASD and commission orders also state that broker-dealers that sell mutual fund shares to retail customers must disclose applicable breakpoint discount information to their customers and must have procedures reasonably designed to ascertain information necessary to determine the availability and appropriate level of breakpoints.