Nearly one of every three mutual fund transactions in front-end load mutual funds that appeared eligible for a breakpoint discount did not receive one, according to a report on the results of a three-month examination of selected broker-dealers.

The results of the report, issued jointly Tuesday by the Securities and Exchange Commission, NASD and the New York Stock Exchange, revealed the average discount not provided was $364 per transaction (all numbers in U.S. dollars). As a result of those findings, about 2,000 broker-dealers are being required to review samples of their front-end load mutual fund purchase transactions and report the results to NASD.

Between November 2002 and January 2003, SEC, NASD and NYSE examiners reviewed thousands of mutual fund transactions by 43 broker-dealers that sell front-end load funds. Examiners found significant failures to deliver “breakpoint” sales load discounts to eligible customers among the transactions reviewed. Typically, breakpoint discounts are applied to front-end load funds to reduce sales loads at the investment levels of $50,000, $100,000, $250,000, $500,000 and $1 million. Industry figures show that less than 7% of all mutual fund sales in 2002 were of front-end load funds.

The limited nature of the examination sweep does not allow regulators to determine the full extent of the breakpoint issue industry-wide. Accordingly, NASD is requiring broker-dealers selling front-end load mutual funds to assess their own compliance using a specified sampling methodology, developed in conjunction with the SEC. That methodology will be forwarded to broker-dealers shortly.

In addition, examiners are following up with the firms already examined to determine whether deficiencies are being corrected and that excessive sales load charges are being refunded to customers.

Major findings of the examination include: nearly one-in-three transactions that appeared eligible for a breakpoint discount or sales charge waiver did not receive one; most firms failed to provide breakpoint discounts in at least some instances; most breakpoint problems did not appear to be intentional failures to apply sales load discounts; breakpoint issues were less frequent in firms that process transactions using paper applications rather than by utilizing electronic order processing; and, many firms can improve their compliance and supervisory systems and controls with respect to breakpoint discounts.

NASD is leading an industry task force to explore and recommend ways that the mutual fund and broker-dealer industries can prevent breakpoint problems and eliminate errors in sales load calculations in the future.