[Federal Register Volume 63, Number 193 (Tuesday, October 6, 1998)]
[Notices]
[Pages 53740-53741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26723]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40500; File No. SR-NASD-98-69]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to Mutual Fund Breakpoint Sales
September 29, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 10, 1998, the National Association of Securities Dealers,
Inc. (``NASD''), through its regulatory subsidiary, NASD Regulation,
Inc. (``NASD Regulation'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by NASD Regulation. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing to amend NASD Interpretive Memorandum
2830-1 regarding mutual fund breakpoint sales to clarify its
application to modern portfolio investment strategies. Below is the
text of the proposed rule change. Proposed new language is italicized.
IM-2830-1 ``Breakpoint'' Sales
The sale of investment company shares in dollar amounts just below
the point at which the sales charge is reduced on quantity transactions
so as to share in the higher sales charges applicable on sales below
the breakpoint is contrary to just and equitable principles of trade.
Investment company underwriters and sponsors, as well as dealers,
have a definite responsibility in such matters and failure to
discourage and to discontinue such practices shall not be countenanced.
For purposes of determining whether a sale in dollar amounts just
below a breakpoint was made in order to share in a higher sales charge,
the Association will consider the facts and circumstances, including,
for example, whether a member has retained records that demonstrate
that the trade was executed in accordance with a bona fide
[[Page 53741]]
asset allocation program that the member offers to its customers:
Which is designed to meet their diversification needs and
investment goals; and
Under which the member discloses to its customers that
they may not qualify for breakpoint reductions that are otherwise
available.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD Regulation included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. NASD Regulation has prepared summaries, set
forth in Sections A, B, and C below, of the most significant aspects of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In the context of mutual fund sales, a ``breakpoint'' is that point
at which the sales charge for quantity purchases of fund shares is
reduced. Although funds are not required under SEC or NASD rules to
offer breakpoint discounts, many funds use reduced fee schedules as a
marketing tool to attract large investors. NASD Rule IM-2830-1
prohibits sales of mutual fund shares in amounts below breakpoints, if
such sales are made ``so as to share in higher sales charges.'' The
application of this standard depends on the purpose, or intent, of the
member recommending the transaction. Accordingly, determining whether a
breakpoint sales violation has occurred depends on facts and
circumstances that provide evidence of intent.
Recently, NASD Regulation considered the application of IM-2830-1
to modern portfolio investment strategies that utilize many different
mutual funds with varying investment objectives. Both the Independent
Dealer/Insurance Affiliate Committee and the Investment Companies
Committee of NASD Regulation requested that the staff consider amending
IM-2830-1 to more precisely identify those facts and circumstances to
be considered by the staff when examining whether trades made pursuant
to bona fide asset allocation programs that miss breakpoints have
violated NASD rules.
NASD Regulation believes that under most circumstances, sales under
a breakpoint pursuant to a bona fide asset allocation program would not
constitute a breakpoint violation. NASD Regulation also believes that
many investors generally may benefit from asset-based investment
strategies, and that such strategies should not be discouraged. Based
on these factors, as well as a review of the NASD's past positions
regarding breakpoint sales, NASD Regulation proposed to amend IM-2830-1
to provide that for purposes of determining whether a sale of
investment company shares for a dollar amount below a breakpoint was
done for the purpose of sharing in a higher commission, the NASD will
consider, among other things, whether the member conducting such sale
retained records that demonstrate (a) that the trade was executed in
accordance with a bona fide asset allocation program and (b) that the
customer was informed that it might not receive breakpoint reductions
that otherwise would be available.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act,\3\
which requires, among other things, that the Association's rules must
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, and, in general, to
protect investors and the public interest, in that the proposed rule
change provides explicit guidance to both members of the NASD and the
NASD Regulation examination staff regarding the application of the
Association's breakpoint selling rules to modern portfolio investment
strategies, such as strategies involving bona fide asset allocation
programs, that can benefit investors.
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\3\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
NASD Regulation has neither solicited nor received comments on the
proposed rule change.
III. Date Of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation Of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies
of the submission, all subsequent amendments, all written statements
with respect to the proposed rule change that are filed with the
Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the file number SR-NASD-98-69 and
should be submitted by October 27, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-26723 Filed 10-5-98; 8:45 am]
BILLING CODE 8010-01-M