Breakpoints Training Outline

NASD, in conjunction with an industry working group, developed the outline provided below in response to Recommendation J of the Report of the Joint NASD/Industry Task Force on Breakpoints, which recommended that member firms provide enhanced training regarding mutual fund breakpoint discounts.

This outline is intended as a model of the critical topics that firms should address in training regarding breakpoint discounts. FINRA recognizes that every firm has a unique business model, and, as a result, firm element training methods and content may vary. However, every firm that sells mutual funds or anticipates selling mutual funds should cover the topics discussed in parts I and II of the outline regardless of the firm's particular business model. For the convenience of members, FINRA has also provided suggestions regarding topics firms should address in the firm-specific portion of their training. Firms should feel free to tailor these sections to reflect their particular business models and record keeping practices.

The primary purpose of this outline is to ensure that registered representatives understand the specific issues that govern breakpoint eligibility, which, in turn, will assist them in determining the appropriate sales charge for Class A share mutual fund transactions. However, understanding the availability of breakpoint discounts is also an important factor in determining which share class is the best investment choice for a customer. Accordingly, registered representatives must understand breakpoint discounts not only to ensure that customers are properly charged, but also to ensure that, in recommending fund purchases, that they perform an appropriate suitability analysis. Thus, this outline also touches on the relationship between breakpoint availability and share class choice.

Although FINRA believes that this outline will assist in educating registered representatives regarding breakpoint discounts and the need to deliver all available discounts, the use of this outline to develop training programs does not diminish members' obligation to provide proper training and supervision to registered representatives that sell mutual funds. Likewise, use of this outline does not constitute a "safe harbor" with respect to a member firm's obligation to comply with all applicable rules and regulations.

I) General Breakpoint Information

Mutual fund breakpoint definition
Location of breakpoint-related information
1. Prospectus
2. Statement of Additional Information (SAI)
3. Mutual fund web sites
Breakpoint rules vary across mutual fund families
Impact of breakpoint eligibility on share class selection and suitability analysis

II) Fundamentals of Breakpoint Eligibility

Determining breakpoint eligibility
1. Types of accounts eligible (e.g. 401(k), 529 plan, IRA, directly-held with mutual fund)
2. Account holders eligible (e.g. spouse, children)
3. Fund holdings eligible (e.g. at the firm or away from the firm)
Eligibility based on current purchase amount
Rights of Accumulation (ROA)
1. ROA Defined
2. Types/examples of ROA
  1. Existing customer holdings
    1. Same fund family, same account
    2. Same fund family at other broker/dealer
    3. Other eligible fund holdings at broker/dealer or elsewhere
  2. Other eligible account holders
    1. Same fund family in any eligible account at broker/dealer or elsewhere
  3. Purchases made the same day
3. Obligation to inquire versus customer privacy issues
Letter of Intent (LOI)
1. LOI Defined
2. Appropriateness of recommending LOI
  1. Based on customer's investment plans
  2. Consequences of customer not fulfilling LOI
3. Types/Examples of LOI
  1. Existing LOI
  2. New LOI
    1. Based on plans to purchase over next 13 months
    2. Retroactive LOI based on previous, current, and possibly future purchases
4. LOI held by other eligible account holders
Valuation of eligible fund holdings
1. Current net asset value (NAV)
2. Public offering price (POP)
3. Historical cost
  1. Documentation required for historical cost

III) Firm-specific topics

Types of communications and materials the firm is planning to send or has sent to customers regarding breakpoint issues (e.g. special notices, written disclosure statements, inclusion of breakpoint information on trade confirmations)
How to enter breakpoint information into order entry system; or, how to record breakpoint information on paper application
Where to store account linkage information so that the right breakpoint discount is applied to current and future purchases
Where to record the disclosure of availability of breakpoint discounts
Where to record that registered representative made the necessary inquiry to gather the relevant data to calculate breakpoint discounts before transactions are processed
Supervisory systems and procedures (for registered principals)

IV) Other topics

Understanding opportunities available to customers to move their investments without sales charge from fund to fund within a fund family through reinstatement privileges, and between fund families through NAV transfer privileges
Procedures for handling customer requests for refund of missed breakpoint discounts