January 10, 2003

TO: Craig Tyle

FR: Don Boteler

Justine Phoenix

RE: Mutual Fund Purchase Breakpoints

As you know, the NASD last month issued a Notice to Members (NTM) directing each of its member firms that sell mutual fund shares to review the adequacy of its policies and procedures to ensure that they are designed and implemented so that investors are charged the correct sales loads on mutual fund transactions. The NTM noted that, as a result of recent and ongoing examinations, the NASD and SEC staffs are concerned that some member firms have not been charging investors the correct sales loads in many instances, particularly for mutual fund transactions involving letters of intent (LOI) and rights of accumulation (ROA). The SEC sent the NTM to its broker dealer registrants on December 23, 2002, underscoring in its cover letter the importance of these issues and directing firms to take immediate action. The SEC letter states that the Commission staff will follow up with each registrant early in the new year to ascertain the results of their assessments and current levels of compliance, and to gain assurances regarding future compliance.

The NTM points out the importance of entering breakpoint data correctly into automated order processing and settlement systems, such as Fund/SERV. In recent days, we have heard speculation that Fund/SERV may in some way be a part of the problem. We want to briefly explain for you why Fund/SERV is wholly unrelated to any problems of compliance with purchase breakpoints or LOI and ROA privileges.

Fund/SERV, which was implemented in 1986 to standardize mutual fund transaction processing, in fact facilitates the processing of mutual fund share purchases at reduced sales loads. The record structure for a Fund/SERV order includes fields specifically dedicated to sales charge rate and ROA or LOI values. As long as the originating party (i.e., the dealer firm) properly completes the Fund/SERV order, the correct sales load will be applied to the order.

It should be noted that while Fund/SERV is the industry standard by which financial intermediaries transmit to funds their clients' mutual fund orders, it is by no means the only method utilized by intermediaries. Many intermediaries still operate manually, sending orders through the mail or by telephone. Still others utilize proprietary systems or web-based services operated by third parties.

All mutual fund transfer agent systems in use today include logic that ensures the proper application of sales load breakpoints and LOI/ROA privileges, irrespective of how those orders are submitted (e.g., whether through Fund/SERV or other methods). So long as the dealer firm's own system that accumulates fund transactions from sales personnel and branch offices also accounts for such fund privileges, and the correct data are entered by sales personnel for submission to the fund, proper load charges will be assessed.