NASD Breakpoint Order Could Cost B/Ds Millions

August 28, 2003, 1:00 a.m. EDT 1 Min Read

The National Association of Securities Dealers has made good on its investigation into unpaid fund breakpoints by ordering members to promptly pay investors this money, plus interest, in cash or in cash deposits to their account. NASD wants brokers to pay the amounts plus 2.5% simple interest for overcharges between Jan. 1, 2001 and the present.

For charges before that time, NASD refers brokers to the six-month CD rates on the Federal Reserve Web site. The NASDs order does not specify how far back in time brokers must check their records, but Mike Shokouhi, a spokesman for the NASD, said brokers will have to pay breakpoints "as far back as need be. If someone has been with a firm for 20 years, [the refund owed] could be for 20 years."

NASD is placing the burden to repay this money on the broker/dealers, not the fund companies, said Marc Menchel, executive vice president and general counsel with the NASD. However, "if they, in turn, want to turn back to the broker/dealer distributor at the fund company" to ask them to shoulder part of the refund, Menchel said, brokers have that right. Even if brokers should ask the fund distributor to help them with the refund, however, their selling arrangement with the fund complex could still mean that the broker is responsible for some if not a majority of that cost, Menchel said. "Its possible that 65 cents of every dollar in fees was paid to the broker/dealer and 35 cents was paid to the distributing broker at the fund company," he explained.

Holly Smith, a partner with Sutherland, Asbill & Brennan whose clients include brokerage firms, agreed that at this point, the NASD order is placing the responsibility to make the refunds on brokers, not fund companies. However, some executives have said the fund industry ultimately could be hit with tens of millions of dollars in refunds. The NASD previously calculated that investors would be owed an average $364 refund for each transaction eligible for breakpoints

The NASD order also makes it clear that if a customer asks their broker about a refund, the burden falls on the broker, not the investor, to check their records to see if a refund is due. Failure to comply with the order will result in disciplinary action. NASD issued the order last Monday.