Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Breakpoint Database on NASD Agenda: Also Seeks Regulatory Harmony for Annuities


WASHINGTON - The NASD has set out its agenda and outlined a smattering of projects, including a number related to mutual funds, that are currently in the works. The pronouncement came from Robert Glauber, chairman and chief executive officer of the NASD, speaking at the Investment Company Institute's General Membership Meeting here earlier this month.

Upcoming projects of the NASD include the convergence of regulations for 529 college savings plans; the potential harmonization of rules governing fixed, variable and equity index annuities; the development of a fund breakpoint database; and the development of a point-of-sale disclosure document dubbed Profile Plus for funds and possibly exchange-traded funds and separately managed accounts.

These projects follow on the heels of 2005, which, Glauber noted, was a record year of enforcement actions and fines levied by the regulator of mutual funds and broker/dealers. Many of the cases, which began years earlier but culminated last year, surrounded abuses of the post-bubble era as well as market timing, late trading and directed brokerage. Those abuses resulted in a "significant increase in the investor-protection requirements" the regulator imposed, he added.

The good news for fund advisors, Glauber said, is that the worst of the fund industry investigations and enforcement actions appears to be over. But, he reminded the audience of fund company executives, that this doesn't mean the NASD will be standing down.

"I know the fund industry would rather we went fishing in another pond. But being the king of the hill draws attention to you, requires a high level of diligence and responsibility and subjects you to particularly harsh criticism when you falter," he said. "I hope regulators are not finished with mutual funds because there is still much to do," he added.

Harmonizing Regulations

The NASD is considering the possible integration of regulations for popular financial products. First, with regard to fixed, variable and equity index annuities, Glauber noted that at a public roundtable held earlier this month and co-hosted by the NASD and the Minnesota Department of Commerce, participants agreed that rules and regulatory approaches needed to be better harmonized. But the jury is out on just how to go about doing that, he said.

In addition, having the Municipal Securities Rulemaking Board govern the sales of 529 plans, while the NASD regulates the sales of mutual funds, each with a different set of rules, is not ideal. "This regulatory disparity makes no sense," Glauber admitted. "From the investor's perspective, a 529 plan is a mutual fund with some added state tax benefits." To that end, the two regulators are considering ways to "put both products under one rulebook," he said.

Also on the NASD's agenda is the continued building out of an online-accessible database that would provide brokers with information as to whether customers who buy class A shares of mutual funds qualify for breakpoint discounts. According to Glauber, the building of that online database has "been quite a chore."

So far, 68 large fund groups have provided their breakpoint information to the NASD representing 94% of 2004's new front-end load sales, with another 14 smaller fund complexes also providing data. Not only can brokers look up the information online, but broker/dealers have begun incorporating the information into their trading systems, Glauber noted.

Also of interest to the NASD is the SEC's anticipated re-release of its proposal for a one page point-of-sale disclosure document for mutual funds, which Glauber said could and should also be adapted for annuities, ETFs and separately managed accounts. The document would disclose to investors all costs as well as potential broker/dealer conflicts of interest.

Profile Plus

But Glauber recommended that the SEC take that proposed disclosure document one step further and expand the quantity of information to include a fund's objective, investment strategies, performance and risk. Such a "profile plus" document, originally recommended by the NASD joint task force assembled in the late 1990s, would be a concise two-page summary so as to allow investors to compare funds. It would contain hyperlinks to the fund's longer, regular prospectus.

The NASD is also eager to have such a "profile plus" be actively incorporated into the sales process by way of an Internet access "opt-in" plan, Glauber explained. In this way, when a broker is discussing a particular fund with a client over the phone, the broker could then either e-mail the specific fund's Profile Plus to the client or direct the customer to a particular website to obtain and read it. The broker would then be required to ask the client if they had already reviewed it, or if they would like to review it with the broker while they talk. Once the client has agreed to either, the sales process could then continue, Glauber said.