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NSCC Adds Breakpoint Transparency, Info Exchange

It's Spring and mutual fund breakpoint initiatives are in full bloom at National Securities Clearing Corporation (NSCC) of New York, a subsidiary of the Depository Trust & Clearing Corporation.

NSCC last week announced it had added a capability to its Networking centralized record-keeping system that allows for accounts held directly at a fund company in an investor's name to be identified and communicated to broker/dealers, banks and other fund distributors. That information, on accounts that brokers and other distributors may have not otherwise been aware of, will allow brokers and representatives to better apply for the proper sales charge breakpoint discounts on behalf of clients when investing their money in mutual funds.

NSCC's Networking mutual fund-to-distributor operational platform launched in 1988. Networking allows for customer account-level information to flow back and forth between fund companies and a variety of fund distributors, allowing each to view the exact same information. The inclusion of direct investor account information required NSCC to amend its record database so that it could accept new information on direct accounts, including directly held fund company account numbers versus an investor's brokerage account number.

By adding the direct account capability, "there is more transparency of information passing between fund and [distribution] firm," said Barbara Simon, vice president of mutual funds at NSCC. The firm expects customers to begin test-driving the new functionality over the next few months.

This is not NSCC's first breakpoint initiative. NSCC has been making changes to the various components of its behind-the-scenes fund operating platforms since 2003. In July 2003, a specially assembled Joint NASD/Industry Breakpoint Task Force released a report and 13 recommendations on ways to assure that mutual fund investors receive the sales charge discounts to which they're entitled

The task force was assembled at the request of the Securities and Exchange Commission after sweep examinations conducted in 2002 revealed that many broker/dealers were not uniformly applying breakpoint discounts to the tune of $86 million in overcharges to customers in 2001 and 2002 alone. In early 2004, fifteen brokerage firms were fined more than $21.5 million collectively, and efforts to solve the breakpoint dilemma kicked into high gear.

NSCC has also been making a series of significant amendments over the past 18 months to its informational Mutual Fund Profile Service, which, like Networking, allows information to readily pass back and forth between mutual funds and fund distributors. But unlike Networking, the fund Profile system provides no transactional information such as trades or current balances. Instead, just information is shared between parties.

There is a trio of underlying databases within the fund Profile platform. NSCC has been making enhancements to its "security issue database" which details each and every participating mutual fund's vital statistics, including various classes and their sales charges, account minimums, fund processing capabilities and all breakpoint characteristics - which were added in 2004.

This centralized location for breakpoint information on the many thousands of mutual funds available for purchase is exactly what the joint task force recommended nearly two years ago in its July 2003 report. At that time, NSCC was specifically identified as having the greatest ability to provide the level of detail necessary to cure the industry's breakpoint breaches.

But Rome was not built in a day. In order to expand the breakpoint information available for each mutual fund by its unique CUSIP number, rules had to be established and common, standard definitions had to be created so that brokers and mutual funds alike were all on the same page, said Simon, who chaired one of the Task Force's subcommittees.

Simon's subcommittee developed a dictionary that provides a detailed explanation of many items, such as the parameters for different types of loads - front-end, back-end, level, hybrid and the like. It also meant defining exactly which family members would be allowed to combine their holdings for breakpoint discounts, and further defining whether "children" also meant stepchildren, and whether "Uncle Joe" would be included, Simon added. This detailed information allowed the 300 new breakpoint data fields that NSCC was creating to be accurately established, she said.

That initiative also meant modernizing NSCC's Profile platform which, when built in 1996/1997 could not have anticipated the later creation of items such as "R" and "I" share classes.

"We looked at this database as a static database," said Ann Bergin, NSCC's managing director, mutual fund services. "But now we see this as something that needs to be dynamically updated by funds so that broker/dealers can rely on information that they know is current."

The biggest challenge now for NSCC is getting its mutual fund Profile participants to update the various breakpoint information fields, Bergin said. Many are actively working on this and some have hired part-time clerks to assist in culling information from fund documents. To assist, NSCC partnered with technology company NewRiver of Andover, Mass. and now offers NewRiver's patented service of extrapolating detailed breakpoint information directly from fund documents filed on the SEC's EDGAR system.