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SEC Aims To Dump 12b-1 Fees

July 21, 2010 • Jeff Schlegel

The Securities and Exchange Commission on Wednesday voted unanimously to propose a new framework for marketing and selling mutual funds, including replacing 12b-1 fees.

The agency said it wants to improve the regulation of mutual fund distribution fees and improve disclosure for investors. 12b-1 fees are charged by some mutual funds and are paid to financial professionals to cover the marketing, distribution or service costs for selling their product.

The fees have mushroomed since they were first created in 1980, and the SEC said they totaled $9.5 billion last year.

"Despite paying billions of dollars, many investors do not understand what 12b-1 fees are, and it's likely that some don't even know that these fees are being deducted from their funds or who they are ultimately compensating," said SEC Chairman Mary L. Schapiro. "Our proposals would replace rule 12b-1 with new rules designed to enhance clarity, fairness and competition when investors buy mutual funds."

Specifically, the SEC proposes new rules to limit fund sales charges, improve transparency of fees for investors, encourage retail price competition, and revise fund director oversight duties.

Regarding fund sales charges, the SEC proposal would restrict ongoing sales charges and would allow funds to keep paying 0.25% per year from their assets for distribution as marketing and service fees to cover expenses such as advertising, sales compensation and services.

New rules would also require funds to more clearly disclose distribution fees, particularly regarding ongoing sales charges and marketing and sales fees in the prospectus.

In addition, the SEC proposes letting funds sell their shares through broker-dealers who can set their own sales compensation in the open market. Under the current system, brokers must sell fund shares under the terms established by the fund. In theory, the new system would encourage price competition, much like how commissions are charged when it comes to selling securities.

Finally, new rules would set automatic limits on fund fees and charges. The goal here is to enable fund directors to focus on other matters.

There will be a 90-day public comment period after the proposal is published in the Federal Register.

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Comments

Htowner 13 years ago

Fees/Comissions-Evil??

As one who worked with 300+ school employee/customers and who felt pushed away from working with the smaller/average American-I can tell you that you/we, by demonizing fees and commissions as somehow "evil" and wrong, the industry is doing a HUGE disservice to the average wage-earner. Rationalize and justify all you want-then I'll take you to the 84% of Houston area public school employees who don't save a DIME for their retirement. You are being led and just like Lemmings, you will also find yourself on the edge of a cliff soon.
fundinvestguru 13 years ago

The SEC should keep its eye on the broker's fees

"Under the current system, brokers must sell fund shares under the terms established by the fund."Well, not exactly. The SEC should take a good look at "No Transction Fee" programs to see if the brokers are adding trading restrictions, minimum holding periods and extra charges to investor accounts that are not required by the funds themselves.
13 years ago

Obviously there are thousands of brokerages and many thousands more registered persons. Our firm has put ceilings on the dollar amount that can be invested into a class B or Class C fund account without firm approval. For the most part registered persons use class C fund accounts for "shorter term" investments since as discussed if a Class C investment is held for a longer term the overall cost to the client would be much higher since the higher 12B1 fee is charged forever similar to a RIAs asset fee. Even though our firm has made the use of share classes with higher 12B1 fees a point of interest it begs the question "If the registered person is providing similar service to his client as the Registered Investment Advisor (who charges 1% or more)and has discussed the ongoing fees with his client what is the difference other than the 12B1 fee is not a taxable event like withdrawing assets from an account in RIA fee cost". The other key point is it is more likely that the registered person's client does not have as many investable assets as the RIA with their minimum asset requirements. If the SEC is going to look at 12B1 costs they need to expand the effort to evaluate what the RIA's client is getting for their 1% or higher taxable fee.
[email protected] 13 years ago

explain your comments

@regurley: How, exactly, is "fee based" a cancerous misnomer? We charge wrap fees because we do monitor our clients investments, have regular reviews, occasionally make changes, etc. Wrap fees are more transparent than 12b-1 fees, so seems like they are the preferred way to go. Perhaps we should work for free? I can't figure out what would be a better way to get compensated for our services, perhaps you have some ideas? Up front sales charges don't incentize the advisor to keep paying attention to the client, wrap fees mean that we have to keep working to earn a clients business because we get paid over time.
regurley 13 years ago

12b1 is the flea.

I think it's just fine for the SEC to require more full disclosure of 12b1 fees. They should also require Reps. to give every client a statement of the services to which they are entitled from the Rep. in exchange for paying the fee. Too many Reps. think they're entitled to their "trail" with no obligation to service their clients. However, it is the "wrap fees" which are far larger and the most egregiously misrepresented by Reps. and B/Ds. This is the area Ms. Shapiro should take on if she wants to be a true investor advocate. "Fee based" is a cancerous misnomer.