Customers Who Take Action May Receive Refunds For Mutual Fund Commission Overcharges

rokerage firms must issue refunds to customers for mutual fund commission overcharges, according to a National Association of Securities Dealers (NASD) notice. However, unless a brokerage firm already knows of an overcharge, there is no obligation to investigate. Customers, therefore, must take steps on their own to determine whether a refund is owed and, if so, to file a claim for that refund.

Breakpoints Defined

Preliminarily, the mutual fund commission overcharges resulted when brokerage firms failed to provide customers with the benefit of "breakpoints", which are commission discounts available for larger purchases. For example, a commission or "sales load" of 5% for a $25,000 purchase may be reduced to 3.25% for a $100,000 purchase and 0% for a $1 million purchase.

The key, however, is to know that the breakpoints may be available with investments over time, promises to invest in the future, family discounts, multi-account and multi-brokerage firm purchases. All of these scenarios may be considered in determining a customer's total purchases for purposes of calculating the breakpoints. In its Investor Alert, "Mutual Fund Breakpoints, A Break Worth Taking," www.nasd.com/Investor/Alerts/alert_breakpoint.htm, the NASD detailed these scenarios:

Rights of Accumulation: Combine both current and previous purchases in any of the mutual funds comprising the mutual fund family;

Letter of Intent: Express intent to invest over the next 13 months and do so;

Family Member Accounts: Combine related accounts, such as those of your spouse or children;

Multi-Accounts: Combine retirement accounts and educational accounts; and

Multi-Brokerage Accounts: Combine all brokerage firm accounts.

For specific availability, customers should consult the mutual fund prospectus and/or the Statement of Additional Information, which is available from the mutual fund company.

The Notice and the Claims Procedure

According to the recent notice announcing the commission refunds, the NASD found that most brokerage firms have not "uniformly" delivered appropriate breakpoint discounts. The NASD states that it is "imperative" that firms make appropriate refunds and implies that further regulatory action may follow.

The NASD states that some brokerage firms already are aware of customers who should have received breakpoint commission discounts. For these customers, the NASD has instructed firms to "take immediate steps to make refunds."

Otherwise, customers bear the burden of coming forward to assert that they did not receive breakpoint commission discounts. At that point, the brokerage firm must review its records to determine whether, and to what extent, the customer is entitled to a refund. Firms may require documentation from the customer if they do not possess adequate records.

Additionally, the NASD has provided three refund calculation guidelines that customers should review. First, refunds should be made in cash or through cash deposits made to the customer's account with notice provided to the customer. Second, refunds should equal the amount of the commission overcharge plus interest at a simple rate of 2.5% for overcharges that occurred since January 1, 2001 (prior to that time, firms are to consider historical 6-month CD rates in determining the simple rate of interest). The NASD has a refund interest calculator available at www.nasdr.com/breakpoint_calculator/default.asp. Third, brokerage firms may not argue as a defense that a particular mutual fund appreciated in value; performance is irrelevant.

Unlike many other investor restitution programs, this one will not be spoon-fed to customers. Refunds will come, if at all, only to those customers who act.

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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.