[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