[Federal Register Volume 63, Number 222 (Wednesday, November 18, 1998)]
[Notices]
[Pages 64136-64137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30825]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40659; File No. SR-NASD-98-69]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to Mutual Fund Breakpoint Sales
November 10, 1998.
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'') a proposed rule change
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder.\2\ In its filing, NASD
Regulation proposed to amend Interpretive Memorandum 2830-1 (``IM 2830-
1'') to clarify the application of the mutual fund breakpoint sales
rule to modern portfolio investment strategies. Notice of the proposal
was published in the Federal Register on October 6, 1998
(``Notice'').\3\ No comments were received on the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 40500 (September 29,
1998), 63 FR 53740 (October 6, 1998) (File No. SR-NASD-98-69).
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I. Description of the Proposal
Volume purchasers of mutual fund shares often enjoy lower sales
charges when purchases reach certain levels (e.g., $10,000, $25,000,
$50,000, and so forth). Although funds do not have to offer such
discounts under SEC or NASD rules, many funds use reduced fee schedules
as a marketing tool to attract large investors. The term ``breakpoint''
refers to the amount of mutual fund shares that must be purchased
before the volume sales charges are reduced. IM-2830-1 prohibits sales
of mutual fund shares in amounts below breakpoints, if such sales are
made to avoid the reduced volume sales charges. When the Association
reviews a suspected violation, it looks at the facts and circumstances
of a particular below-breakpoint sale to determine whether there is a
bona fide reason for the sale.
NASD Regulation recognizes that the customers of NASD members, to
meet their diversification needs and investment goals, may wish to
allocate their portfolios among different assets, in a way that does
not allow them to get the benefit of volume sales charge
[[Page 64137]]
reductions. Thus, NASD Regulation believes that, under most
circumstances, below-breakpoint sales made pursuant to a bona fide
asset allocation program do not constitute a breakpoint violation.
Moreover, NASD Regulation does not want to discourage its members from
suggesting asset allocation investment options to those customers who
would benefit from such strategies.
To aid in distinguishing between bona fide and improper below-
breakpoint sales, NASD Regulation proposes amendment of IM-2830-1 to
more precisely identify the facts and circumstances the staff will
consider when reviewing a particular below-breakpoint sale.
Specifically, IM-2830-1 will be amended to provide that NASD Regulation
examination staff, in reviewing a below-breakpoint sale will consider,
among other things, (1) whether a member has retained records
demonstrating that the transaction was executed in accordance with a
bona fide asset allocation program and (2) whether the particular
customer involved was informed that volume sales reductions would not
be available for the particular sale due to the allocation of the total
purchase among a variety of funds.
II. Discussion
The Commission has determined to approve the Association's proposal
to amend IM 2830-1. The standard by which the Commission must evaluate
a proposed rule change is set forth in Section 19(b) of the Act. The
Commission must approve a proposed NASD rule change if it finds that
the proposal is consistent with the requirements of Section 15A of the
Act \4\ and the rules and regulations thereunder that govern the
NASD.\5\ In evaluating a given proposal, the Commission examines the
record before it. In addition, Section 15A of the Act establishes
specific standards for NASD rules against which the Commission must
measure the proposal.\6\
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\4\ 15 U.S.C. 78o-3.
\5\ 15 U.S.C. 78s(b).
\6\ 15 U.S.C. 78o-3.
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The Commission believes that the proposal to amend IM-2830-1 to
clarify the application of the mutual fund breakpoint sales rule to
modern portfolio investment strategies such as a bona fide asset
allocation plan is consistent with Section 15A(b)(6) of the Act in that
it is designed, among other things, 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.\7\
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\7\ 15 U.S.C. 78o-3(b)(6).
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The Commission agrees with NASD Regulation that the proposal
promotes just and equitable principles of trade by providing enhanced
guidance to both NASD members and the NASD Regulation examination staff
regarding the application of the Association's breakpoint sales rule.
The Commission further believes that the proposal, by drawing attention
to the importance of (a) maintaining records describing the reasons for
a particular asset allocation plan, and (b) disclosing breakpoint sales
practices and discounts to customers, the rule should help to deter
fraudulent and manipulative acts and practices by NASD members.
III. Conclusion
The Commission believes that the proposed rule change is consistent
with the Act, and, particularly, with Section 15A thereof.\8\ In
approving the proposal, the Commission has considered its impact on
efficiency, competition, and capital formation.\9\
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\8\ 15 U.S.C. 78o-3.
\9\ 15 U.S.C. 78(c)f.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-NASD-98-69) is approved.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30825 Filed 11-17-98; 8:45 am]
BILLING CODE 8010-01-M