SEC Orders More Disclosure Over 'Breakpoint' Discounts

by Glen Shapiro, LawAndTax-News.com, New York

28 May 2004

Following a 4-0 vote on Wednesday, the US Securities and Exchange Commission (SEC) announced that from September 1, mutual funds will be required to disclose more information regarding "breakpoint" discounts due to large investors.

Some mutual funds with a front-end sales load provide discounts for larger investments. The investment levels required to obtain a reduced sales load are commonly referred to as "breakpoints."

According to the SEC, following the identification in late 2002 by SEC and NASD staff of concerns regarding the extent to which mutual fund investors were receiving breakpoint discounts, fifteen brokerage firms have been disciplined for failing to grant the discounts, and have agreed to pay $21.5 million in combined fines.

Separately, the SEC also voted unanimously to oblige registered investment advisers to adopt and enforce codes of ethics applicable to their supervised persons.

The new rule is designed to prevent fraud by reinforcing the fiduciary principles that must govern the conduct of advisory firms and their personnel. An adviser's code of ethics will have to include certain minimum provisions.

"Advisers owe their clients more than mere honesty and good faith. Recent experience suggests that all too many advisers were delivering much less," SEC chairman, William Donaldson explained.

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