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Asset Management

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Give Me a Break

Breakpoints may give investors a break, but Wall Street's CIOs are working overtime to comply with regulators' wishes.

Market timing and late trading may have dominated headlines in the past few months, but the mutual-fund industry has one more thing to worry about. Regulators are beginning to delve into the assignment of breakpoints, or discounts that mutual funds offer shareholders for investing a certain amount of money in one mutual-fund family.

Breakpoints have come under public scrutiny following a joint inspection conducted by the National Association of Securities Dealers, the New York Stock Exchange and the Securities and Exchange Commission. In an examination conducted between November 2002 and January 2003, of 43 registered broker/dealers that sell mutual funds with a front-end sales load, it was found that, "Most of the firms examined, in some instances, did not provide customers with breakpoint discounts for which they appear to have been eligible," according to the staff report issued by the three organizations.

Common reasons for these failures to provide breakpoints, states the report, were not linking the customer's ownership of different funds in the same mutual-fund family, and not linking shares owned in the same fund or fund family by the customer's relatives.

With the amount of investors, and the amount of funds offered, nearly every broker/dealer leverages some level of technology to manage mutual-fund data. However, the report found that most firms had no automated systems for linking this data. Of the firms examined, only 32.5 percent maintained a database of mutual-fund information regarding breakpoints, while only 25 percent of those firms maintained a database of customer information with linking capability. Just 14 percent of the 43 firms were capable of linking those two databases.

With the report's finding of a lack of efficacy of collecting, organizing and accessing customer information for breakpoint purposes, it is evident that technology needs to play some role in the resolution of the breakpoint dilemma.

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